Wall St. puts bet on debt
Credit seers exerting more influence to shareholders
With the stock market highly volatile and the markets more focused on debt than ever before, major credit rating agencies Moody's, Fitch, Standard & Poor's and Duff & Phelps are increasingly in the spotlight and their word -- like a rediscovered Wall Street gospel -- is moving stocks.
A credit rating downgrade on a company's public debt used to mean simply that future borrowings would be more expensive, but in these hypersensitive times, a downgrade seems to be a siren's call to sell. More and more, panicky investors are dumping stock on a dime when these arbiters of credit question a firm's near-term ability to meet its debt payments.
Fitch Ratings on Monday downgraded $14 billion in Disney senior unsecured debt to BBB+, resulting in a 16¢ share price drop on the same day its media peers enjoyed a rally. Fitch's one-notch reduction was based on a host of strategic concerns, including falling cash flows to cover Disney's rising debt load (the core of a credit rating determination), a 20% audience share slide over the past year at ABC and a sluggish live-action film slate. Fitch is equally concerned about attendance at theme park Disney World. Moody's and S&P also are reviewing Disney's debt ratings.
Credit watch status
Earlier in the month S&P put Disney bonds on credit watch, with analyst Heather Goodchild dryly noting Disney's earnings trends "do not suggest that restoring total debt to EBITDA of 2.5 times by the end of its fiscal year will be possible under prevailing trends."
Those words may lack analytical flare, but the raw data speaks volumes. Viacom bonds, by contrast, have consistently maintained their strong credit ratings on the back of steady revenue and profit growth. Its stock has paralleled that debt trading strength.
And while the stock market and many analysts last week cheered AOL Time Warner's settlement with AT&T over Time Warner Entertainment, Fitch and S&P both put AOL TW on negative outlook, citing the additional $2.1 billion in debt the company will have to carry in order to pay off AT&T.
"That might not seem like a lot more, given the amount of debt the company is already carrying," said Fitch analyst and senior director Brendan Buckley, "but we see their operating performance at the AOL business unit trending downward. The negative outlook means the company needs to stabilize in order to avoid a downgrade."
So are equity analysts simply not wired to be bearish?
Suspicious investors
Certainly many equity analysts are being taken with a grain of salt these days, due to their eternal optimism and some high-profile scandals. This has bred suspicion among many investors, who are increasingly looking to less sexy debt analysts and ratings agencies for their opinions.
Credit raters say they offer a fully independent opinion on a company's health and moneymaking prospects -- untainted by investment banking considerations. Credit analysts are typically forbidden from owning debt or equity securities in the companies they track, and their firms are involved in no part of the bond issuing or brokering process.
Fitch and S&P, in particular, seem to be moving to fill the perceived analytical void. S&P recently launched its own equity research unit (it recently downgraded a handful of broadcaster and station stocks citing concerns about a slower-than-expected ad recovery) while Fitch is getting more proactive in talking to investors.
Following the Disney downgrade, the agency will take the unusual move of a hosting telephone conference call Wednesday to discuss its findings regarding the Disney decision. The call will be hosted by Fitch media analysts Buckley and Albert Turner, who will also field questions regarding Fitch's overall media company coverage.
Reaching out
Buckley said the agency is doing more of these kinds of calls to better communicate with a larger audience of investors about specific concerns they may have about a company.
Buckley, who normally reviews his portfolio of media and technology companies on a quarterly basis, will keep a more active eye when he perceives a particular problem. As a result, Fitch and the other agencies are having a field day given the current economic climate and the stresses on company debt loads.
Credit raters are still a modest bunch, preferring not to pit themselves against their equity analyst peers over their respective methodologies or public profile. Fitch's Buckley put it succinctly and without pointing any fingers: "Our job is to assess a company from a financial and operating point of view."
Just the facts
A credit rating agency effectively forces a company to put its money where its mouth is, but sticks to the black-and-white fundamentals of its business, in addition to its own meetings with senior management.
While this can frustrate executives who feel "wronged" by a downgrade, fixed income and, increasingly, equity investors are giving more weight to this "by-the-book" approach of assigning letter grades (AAA to D) to a company's ability to meet its financial commitments.
