Moody's to step up scrutiny of rating triggers

New York, Dec. 7 - Moody's Investors Service said it will step up analysis of the impact of rating triggers included in borrowers' debt securities and other contracts after such clauses resulted in the "mutually assured destruction" of the two California utilities and Enron Corp.

"The loss of liquidity when a downgrade occurs may be stressful for the borrower, precisely at the time when the company is least able to deal with an associated loss of investor confidence," Moody's said in a news release. The rating agency added: "Rating triggers can be highly destabilizing because all parties may not behave in a rational fashion."

However Moody's noted that not all rating triggers have such severe impacts. For example, the pricing grids widely used in credit facilities are "relatively harmless," as are requirements to post extra collateral in the event of a downgrade, the rating agency noted.

But triggers contributed to the defaults by Southern California Edison and Pacific Gas & Electric early in the year, with the latter filing for bankruptcy, and more recently to the meltdown of Enron.

Moody's is particularly concerned about triggers which, when the issuer's rating falls below a certain level, cause a default, acceleration of debt or a put in back-up credit lines, bond indentures and counterparty agreements.

These are most common for companies rated at the low end of investment grade or on the cusp, Moody's noted, adding that it is at those rating levels "where they are most lethal."

In its heightened scrutiny of these devices, Moody's analysts will ensure that companies have the resources to survive a downgrade to the trigger level and the consequences of the trigger.

Moody's also pointed out that rating triggers can backfire on creditors who think they are protected because the trigger could result in a default or bankruptcy affecting all creditors.

Triggers can also result in "a precipitous decline in confidence and liquidity," Moody's said, citing as examples the loss of a back-up revolving credit or a large bond that becomes putable in the event of a downgrade.

Also perilous are triggers tied to springing liens, collateral releases, releases of guarantees and covenant fall-aways in indentures, as well as third-party agreements, Moody's said.

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