Something is wrong when a credit rating agency such as Standard & Poor's
downgrades the debt of a company six notches in one day. That's what happened
to the short-term ratings of London-based British hedge fund Cheyne Capital
Management (UK) LP's $10 billion commercial note program on Tuesday, when it
was downgraded to A-2 from A-1+. Did something go awfully wrong in a matter of
days to warrant this downgrade, or was the rating agency asleep behind the
wheel in issuing a warning of such massive proportion to make up for missing
issuing downgrades before Tuesday?
The downgrade occurred after the securities underlying a fund of Cheyne
Capital's special investment vehicle run by Cheyne Finance quickly fell in
value, forcing it to liquidate some assets in order to repay its creditors. A
New York Times article pointed out that S&P in a statement said that
Cheyne Finance had failed to meet tests measuring the value of its investment
portfolio against its debt obligations and “may begin an orderly liquidation
of assets.”
Critics argue that the rating system of a company's debt should be changed
because of the slowness or even failure of agencies such as S&P, Moody's
Investors Service and Fitch Ratings to react to the financial health of a
company. Companies such as Enron Corp. and MCI Inc. have imploded without any
timely warning from these credit agencies. The problem partly lies in the
conflict of interest these agencies have, receiving a fee to rate the debt of
these companies. Maybe it all comes down to simply: Would you bite the hand
that feeds you?
See
New York Times article
Tags: S&P, Cheyne
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