My word is my bond

10 March 2006

The agencies draw insufficient attention to leverage event risk from LBOs and large share buybacks. They could deflect the rising threat of regulation by reviving the practice of rating bond covenants.

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On March 7, Senator Richard Shelby, chairman of the Senate Banking Committee, accused the five federally recognized credit rating agencies of being uncompetitive and of conflicts of interest. Shelby is proposing regulation to open up the ratings business.

On the very same day, Fort Lauderdalebased car retailer AutoNation announced a $1bn debtfinanced share repurchase. Hedge fund manager Eddie Lampert, who is a director of the company and controls 29% of its stock, agreed to tender 77m shares. AutoNation's shares rose 7%. In response, Fitch Ratings cut its rating to BB+. Standard & Poor's placed AutoNation's BBB rating on CreditWatch, stating that after the recap it will be lowered to BBB.

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