S&P revises approach to speculative-grade ratings; more emphasis on liquidity, company-specific events

By Jennifer Lanning Drey

Portland, Ore., May 14 - Standard & Poor's has revised its approach to speculative-grade ratings to shift away from generic risks and put more emphasis on potential company-specific near-term events that could trigger a change in ratings, Nicholas Riccio, corporate ratings practice leader for S&P, said during a Wednesday conference call held to discuss the changes.

"If I look at the big picture view, these enhancements are geared to provide a greater level of transparency, improve our timeliness and perhaps enhance the speculative-grade analytics that we use for this area," Riccio said.

"The revisions that we're talking about here do not represent a change in criteria or in rating definition, but rather a shift in emphasis and focus."

The changes are the result of a year-long review of the ratings agency's approach to speculative-grade ratings that included independent market research.

During the review process, S&P determined that investors wanted more transparency into potential company-specific risks, particularly within the secondary market.

Through the revisions, S&P plans to increase its emphasis on the liquidity of speculative-grade issuers and couple it with a more robust analysis of covenants with regard to cushion.

"That's where the transparency comes in, to the extent that we will be communicating much more explicitly how we see the various drivers - each company having its own drivers," Solomon Samson, corporate ratings chief quality officer for S&P, said during Wednesday's call.

"We would plan to communicate what scenarios would lead to changes that could be a breakpoint in the rating."

Samson admitted that the heightened level of transparency is likely to lead to greater volatility within the ratings.

"We're prepared to have greater volatility than in the past in terms of our product. On the other hand, I can assure you that it is not our intention to have ratings yo-yo all over the place," Samson said.

S&P plans to implement the revisions as soon as possible through its normal review cycle as opposed to through a portfolio review.

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