Stellar Corporate Credit Ratings Are So 1980s
RACHEL MARTIN, HOST:
A good credit rating allows a company to borrow cheap and easy money, which is why big American corporations used to work really hard at keeping themselves in top-notch financial condition. But these days, most American companies are happy to let their fiscal fitness slide. Here's Stacey Vanek Smith and Cardiff Garcia from The Indicator podcast.
CARDIFF GARCIA, BYLINE: A company's credit rating is a lot like a person's credit score. So, like, if you have a super high credit score, the bank will lend you a bunch of money really easily. They know you're good for the money.
STACEY VANEK SMITH, BYLINE: But if you have a low credit score, it's a very different story, right? I mean, the bank might not lend you money at all. And if it does, it will probably charge a really high interest rate.
GARCIA: And it works in a similar way with companies. When companies borrow money, they issue bonds, and those bonds have a rating. Those ratings are generally determined by three ratings agencies - S&P, Fitch and Moody's. And the highest grade is a AAA, then down to AA and A, and then it goes all the way down to D.
VANEK SMITH: So AAA is basically the bond market's version of swimsuit ready, you know, like the guy who's always ripping off his shirt. Basically, there are only two companies that are in a position to do that - Microsoft and Johnson & Johnson. Those two companies have a AAA rating; nobody else does.
GARCIA: Now, if you're a company, seems like you would want to be AAA, right? John Lonski is the chief capital markets economist with Moody's Analytics, which is owned by Moody's Corp., one of the firms that gives out these ratings. John says back in the 1980s, there were dozens of AAA-rated companies in the U.S.
JOHN LONSKI: The days have long since passed where companies strove to have the highest rated, the AAA rating.
VANEK SMITH: So what happened?
GARCIA: John says that the number of AAAs has been sliding for years, and the reason has everything to do with interest rates.
VANEK SMITH: So you know how the Federal Reserve has kept interest rates low for years.
GARCIA: Because interest rates are so low and have been super low for so long, even if you are a company with a not-awesome credit rating, you can still get loans for super cheap. Loans are super cheap for pretty much everybody, for all companies. So there's basically no reason to go to all the trouble of getting a good credit score.
VANEK SMITH: Meanwhile, more and more companies are sliding by with their barely passing BBB grade. Big, wealthy companies like McDonald's, Fox, Verizon - they're all issuing bonds that are just above the junk rating. And why not? So you get a little belly. No one will see it under your sweater. Have a cookie. Have two cookies. Have the box.
GARCIA: Yeah, it's totally fine until it's time to jam yourself back into a swimsuit, says John Lonski.
LONSKI: Let me put it this way - with a higher level of debt to income, the economy will have more difficulty handling an unforeseen drop in business activity.
VANEK SMITH: So if the economy turns south, things could change fast in a bad way, says John. Companies will have a ton of debt. Suddenly, they're making less money. They might not be able to pay back that debt.
GARCIA: Claire Boston with Bloomberg says investors have gotten worried about this.
CLAIRE BOSTON: Companies have basically said, OK, we're going to go on a debt diet. Like, we're going to make our priority paying down this debt.
GARCIA: Yeah, I guess spring's not that far away.
VANEK SMITH: No, it never is. Stacey Vanek Smith.
GARCIA: Cardiff Garcia, NPR News.
(SOUNDBITE OF LAKKER'S "A JUGGLING OF NUMBERS") Transcript provided by NPR, Copyright NPR.