I think in retrospect, this move will prove to have been smart. If FFH's stock price volatility is reduced and the Company puts a bid under the market as it tries to re-purchase its shares, FFH may enter a virtuous cycle of multiple expansion, which would improve the financial rating (ie. higher market cap to outstanding debt) of the Company and potentially lower its cost of doing business.
Are the mice finally roaring? The credit crunch showed that ratings firms missed huge swaths of risk embedded in the economy and markets. But, recently, Standard & Poor's, Moody's Investors Service and Fitch Ratings have produced research or made decisions that exhibit an encouraging level of independence.
If the trend continues, ratings firms could become a valuable counterweight to corporate management, Wall Street analysts—and even government regulators.
Take a recent S&P report that calculated the firm's own measure of capital levels at large banks. Using its own approach, S&P calculated risk-adjusted capital ratios that were substantially lower than ratios determined by official regulatory approaches. This, of course, raises questions about the reliability of the official measures. Granted, the widely used Basel II capital regime is being made stricter. But even after such changes, S&P's approach could still be tougher, the ratings firm estimates.
Moody's also caused a stir this month with research showing that banks face a high level of debt coming due over the next three years. And a separate Moody's piece on heightened credit distress at companies involved in private-equity transactions drew ire from the industry. Meanwhile, Fitch made few friends, and perhaps lost revenue, by declining to rate repackaged securitizations of Alt-A mortgages. It cited volatility in the amount of past-due loans.
Will the ratings firms continue in this vein? That partly depends on whether enough independent-minded people have been drafted into top positions. On that score, S&P's hiring last year of Mark Adelson as chief credit officer has likely added rigor to the firm's ratings, says Joseph Mason, a professor at Louisiana State University and a frequent critic of ratings-firm practices.
Welcome changes could be entrenched and extended if a tough ratings-firm bill in Congress becomes law.
In easy-money times, investors will tend to ignore skeptical research. But if the ratings firms' new-found rigor had been in place in 2005, the credit bubble may not have become as dangerous as it did. — Peter Eavis