Ratings Inflation Is Back, Subprime Style

A decade after the triple-A failures of the subprime era, grade inflation is back on Wall Street.
This time, Moody’s Investors Service and S&P Global Ratings Inc. are cutting companies slack on mergers and acquisitions, an analysis of credit-ratings data by Bloomberg News found.
Over the past year and a half, both have bumped up their ratings by two, three or even six levels on a majority of the biggest deals, the analysis found.
Moody’s and S&P don’t dispute those findings, which are based on ratings guidelines posted on their websites. But the firms say a by-the-numbers approach overlooks one of their most valuable assets: human judgment. Both make clear that their analysts have leeway to nudge ratings up or down, based on a company’s track record and their confidence in management’s commitment to reduce indebtedness.
‘We want our analysts and committees to get behind the story and make their judgments about what they think the organization will look like in the next couple of years,’ says Mark Puccia, a chief credit officer at S&P. Says Stephanie Leavitt, a spokeswoman for Moody’s: ‘The evaluation of financial metrics alone provides an incomplete view of credit risk to investors.’

This post was published at bloomberg