The bond ratings agencies rate a lot of companies right at the dividing line between investment grade and non-investment grade (“junk”) because if they downgrade a company into non-investment grade, even if the company deserves it a lot of institutional holders of the bonds must sell, and the rating agencies worry about a cascade of sales and financial panic. From Tyler Durden at zerohedge.com:
Over the past two years, a key event many bears have cited as a potential catalyst for the next market crash, is the systematic downgrade of billions of lowest-rated investment grade bonds to junk as a result of debt leverage creeping ever high, coupled with the inevitable slowdown of the economy, which would lead to an avalanche of “fallen angels” – newly downgraded junk bonds which institutional managers have to sell as a result of limitations on their mandate, in the process sending prices across the corporate sector sharply lower.
As we discussed in July, the scope of this potential problem is massive, with the the lowest-rated, BBB sector now nearly 60% of all investment grade bonds, and more than double the size of the entire junk bond market in the US, and 3.4x bigger than the European junk bond universe.
Venezuela is not the only country with “problems” in its oil company. Mexico’s appears to be going down the drain, too. From Don Quijones at wolfstreet.com:
US rating agencies pressure Pemex and the new Mexican government. But Pemex is too big to fail.
The financial pains and strains continue to grow for the world’s most indebted oil company, Petroleos de Mexico (Pemex). Standard & Poor’s became the latest in a succession of rating agencies to downgrade the company. Pemex is state-owned. So S&P has two credit ratings for the company: One, as if it were a stand-alone company; and one for the company as part of the Mexican state.
S&P slashed its stand-alone rating of Pemex three notches to ‘B-‘ from ‘BB-‘ on growing worries that financial support pledged by the government might not be enough to prop up the company and might not be enough revive declining production. Anything below ‘BBB-‘ is non-investment grade, or “junk.” ‘B-‘ is six notches into junk (see our corporate credit rating scales by Moody’s, S&P, and Fitch).
S&P left unchanged its rating of Pemex-as-part-of-the-Mexican-state, at ‘BBB+’, the same as its rating of Mexican government debt, but lowered its outlook for both to negative from stable, and warned that Mexico faces a one-in-three chance of being downgraded in the coming year. This, in turn, triggered a cascade of outlook downgrades for many of Mexico’s biggest corporations and 72 financial institutions, including the country’s biggest banks and insurance companies.
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Abengoa is a Spanish firm in the renewable energy business that slurped up numerous subsidies, including $230 million from the US government, before it filed in November for preliminary protection from creditors. Absent a last minute lifeline, if will file for bankruptcy, the largest ever in Spain. Now check out the following:
Only weeks before the company hit the wall, Standard & Poor’s upgraded its long-term rating on the company, saying it expected it to “execute various actions to reduce debt over 2015.”
So once again a ratings agency didn’t know what was going on. How about the auditors?
And the company’s auditor, Deloitte, didn’t express any alarm about Abengoa’s financial situation until November 13, just two weeks before the company announced that it was seeking preliminary protection from creditors.
How about Pepe Baltá? Who? Pepe Baltá, a 17-year-old secondary school student in Barcelona who examined Abengoa as his economics project last year.
Baltá noticed serious flaws in the company’s accounting. “If it does not act soon, there is a strong risk Abengoa will go into bankruptcy,” he wrote in his 18-page paper, titled “Analytical Report on Abengoa, 2012 and 2013.”
“I have some accounting knowledge,” Baltá, now 18, told the Spanish daily El Mundo, “and Abengoa’s accounts did not seem to add up. There was a lot of debt and few active assets compared to fixed ones. The big surprise was that negative profits were being converted into positives. I didn’t understand how they could do that.”
All excerpts from: http://wolfstreet.com/2015/12/15/spains-biggest-bankruptcy-ever-hits-banks-mexico-brazil-descends-into-bitter-farce/
Evidently the good folks at S&P and Deloitee did understand how negative profits could be converted into positives. They must have been graduates from Spain’s equivalent of the Ivy League.