Hanging over the debt ceiling negotiations in Washington has been the threat that the United States could lose its AAA credit rating, a coveted measure of the federal government?s financial strength. But in corporate America, the top rating long ago became an anachronism.
Scores of big corporations have lost their AAA status in recent years ? only four non-financial companies continue to hold the rating ? as it became seen in board rooms as more of a straitjacket than a path to riches. Just as many consumers relied on their credit cards to finance a higher standard of living, companies took on more debt to reap bigger returns. The choice did not appear to hurt them. The borrowing costs of companies with AAA ratings and those one level below are not that far apart. Investors, in other words, do not see much difference in quality.
?It?s like you are going from a Rolls-Royce to a Mercedes ? not from a Rolls-Royce to a Yugo,? said Chris Orndorff, a senior portfolio manager for the bond giant Western Asset Management. ?That?s nothing to be ashamed of.?
More and more, in fact, companies have found that a AAA credit rating is not something worth aspiring to if a more conservative approach means lower profits.
Today, markets often render credit judgments before the rating agencies can take out their pens, so a downgrade has a less noticeable effect. By that time, many of the traditional benefits of being deemed AAA, like lower borrowing costs and reputational glow, have evaporated. In the early 1980s, around 60 companies had AAA credit. By 2000, the number of AAA companies was about 15. Today just four corporations? Automatic Data Processing, Exxon Mobil, Johnson & Johnson and Microsoft ? can claim the three initials.
Analysts say corporate buyouts and acquisitions accelerated the trend. Many AAA companies lost their ratings when they were taken over and their new owners loaded them with cheap debt to help pay for the deal. Other strategic decisions also triggered downgrades. Today, with borrowers enjoying ultra-low interest rates, the bond yields are back to their levels in late 2007. Meanwhile, the financial crisis and deep recession laid into several of the sturdiest pillars of American capitalism. Berkshire Hathaway, General Electric and Pfizer all lost their AAA ratings.
Still, a funny thing happened when these companies were sent down to AA. Investors shrugged off the change; the markets had already rendered their verdict. Borrowing costs for General Electric and Berkshire actually fell in the weeks after they were downgraded in spring 2009, amid a broader market rally.
?The rating agencies were late to the party,? said Orndorff, the bond investor. Ratings for companies and countries are viewed differently, even if they are evaluated in much the same way.
Even as the government maintained its AAA grade, the markets suggested long ago that the United States was no longer deserving of such a high rating.
The credit-default swap market provided one clue. During the financial crisis in early 2009, the price of insurance that would pay off if the United States government defaulted on its debt was similar to that offered for companies ranked just above junk. Even today, the price of insurance on a government default has been higher than that for Colgate Palmolive, which has a rating two notches below AAA. Today, the US debt as a percentage of the nation?s economic output is 75%. The typical AAA-rated country has a ratio of about 11.4%.