World and Nation

US worries about AAA, a rare rating in business

Hanging over the debt ceiling negotiations in Washington has been the threat of the U.S. losing its AAA credit rating, a coveted measure of the federal government’s financial strength. But in corporate America, the top rating long ago became an anachronism.

Scores of big companies have lost their AAA status in recent years — only four continue to hold the rating — as it became seen in board rooms as more of a straitjacket than a path to riches. Just as many consumers relied on their credit cards to finance a higher standard of living, companies took on more debt to reap bigger returns.

The choice did not appear to hurt them. The borrowing costs of companies with AAA ratings and those one level below are not that far apart. Investors, in other words, do not see much difference in quality.

“It’s like you are going from a Rolls-Royce to a Mercedes — not from a Rolls-Royce to a Yugo,” said Chris Orndorff, a senior portfolio manager for the bond giant Western Asset Management. “That’s nothing to be ashamed of.”

More and more, in fact, companies have found that a AAA credit rating is not something worth aspiring to if a more conservative approach means lower profits.

Today, markets often render credit judgments before the rating agencies can take out their pens, so a downgrade has a less noticeable effect. By that time, many of the traditional benefits of being deemed AAA, like lower borrowing costs and reputational glow, have evaporated.

In the early 1980s, around 60 companies had top-flight AAA credit. By 2000, the number of AAA companies was about 15. Today just four organizations — Automatic Data Processing, Exxon Mobil, Johnson & Johnson and Microsoft — can claim those once-coveted three initials.

Analysts say corporate buyouts and acquisitions accelerated the trend. Many AAA companies lost their ratings when they were taken over and their new owners loaded them with cheap debt to help pay for the deal. Other strategic decisions also triggered downgrades.

UPS, for example, struck a long-term agreement with its union workers in fall 2007 that raised pay and benefits but froze certain pension obligations. Soon after, the ratings agencies started knocking down the company’s credit rating to AA because of the new pension arrangement.

“Maintaining a AAA rating is not a financial goal of this company,” a UPS spokesman said at the time. Investors barely reacted. In the three months after the downgrade, yields on UPS bonds responded by increasing about 0.4 percentage point from 5.32 percent. Today, with borrowers enjoying ultra-low interest rates, the bond yields are back to their levels in late 2007.