BizJournals Portfolio
Apr 22 2008 12:00am EDT

Is There Still a Premium for Triple-A Debt?

One of the themes running through Roger Lowenstein's NYT magazine magnum opus on the ratings agencies is the idea that debt becomes more valuable when you slap a rating on it, and that the higher the rating, the greater the value that the ratings agency is adding.

From the investment bank's point of view, the key to the deal was obtaining a triple-A rating -- without which the deal wouldn't be profitable...
Credit markets are not continuous; a bond that qualifies, though only by a hair, as investment grade is worth a lot more than one that just fails. As with a would-be immigrant traveling from Mexico, there is a huge incentive to get over the line.

I see two lines which matter: the line you cross when you become investment grade, and the line you cross when you become triple-A. In both cases the universe of potential investors increases, which means that price is likely to go up even if your fundamentals haven't changed.

I'd love to see some empirical research on the amount that yields fall when you gain an investment-grade or triple-A credit rating, holding everything else equal. Is there some way of measuring that? I'd also love to see what's happened to that ratings premium over the past year or so. Is it finally going away of its own accord?

Update: Also well worth reading is Aaron Lucchetti's piece on the culture of Moody's from April 11.


Comments

If you are commenting using a Facebook account, your profile information may be displayed with your comment depending on your privacy settings. By leaving the 'Post to Facebook' box selected, your comment will be published to your Facebook profile in addition to the space below.


Connect With Portfolio.com

Come on, like us—you know you want to.

Follow us and if you're an innovative entrepreneur, we'll return the favor.

Today's top stories, conversation starters, and the back nine business bites.

spotlight on

People & Ideas

Whisky To-Go-Go

Now there's a company that let's you taste your knowledge of fine blended Scotches by mixing a whisky of your own. Read More