From Investment-Grade to Bankruptcy in 4 Months: Why Ratings Agencies are Still a Joke

by Wolf Richter • June 21, 2016

American Fitch Rating Service 

The largest bankruptcy in Brazil’s history occurred on Monday when telecommunications carrier Oi SA threw in the towel. On Tuesday, it also filed for Chapter 15 bankruptcy protection in the US. A euro-denominated debt payment is coming due in less than a month, and it doesn’t have the money.

Those downgrades over the past four months should have been spread over two or three years! But this is why ratings agencies are still a joke, despite the bitter lessons learned during the Financial Crisis when they slapped tripe-A ratings on subprime mortgage-backed securities shortly before they imploded. Of course, ratings agencies still being paid by the issuer and thus are reluctant to bite the hand that feeds them. Investors are on their own, always eager to get fleeced in their search for yield!

DYI Comments:  With the zeal for yield still in full force desperate investors will leap before they look.  This is one of many consequences of sub atomic low interest rates average investors would normally stay with CD's at the bank or move into short to medium term maturity Treasury bonds.  We're at the point all of the quality bond deals are long gone and to satisfy insatiable appetite for yield quality continues to move lower and lower. Yet the rating agencies are under pressure by the corporation who are paying for the rating so grade inflation rules. They also know that higher the rating for a new issue the easier it is to sell the bonds.  When the next recession arrives many investors who thought of themselves as conservative will be badly burned.  This also includes institutional investors.

DYI