Wednesday, February 02, 2005

If you dont want to loose the game ..change the rules

If you are not a bond geek you may not have been paying attention to this but according to the Wall Street Journal
  • "Lehman Brothers said it will change the way it calculates the ratings of companies whose bonds are included in its benchmark indexes. Lehman plans to add Fitch Ratings to its basket of rating services from July 1, and it will use the middle rating from the three ratings companies -- Moody's Investors Service, Standard & Poor's and Fitch -- when assigning issuers ratings. Currently Lehman uses the lower of the two ratings assigned by Standard & Poor's and Moody's to determine whether to include an issuer's bonds in its indexes. The inclusion of Fitch ratings will bring some respite -- at least in the short-term -- to beleaguered auto bonds and the precarious ratings position of the top two U.S. auto makers, Ford Motor Co. and General Motors Corp. Adding Fitch to the ratings basket is likely to buy the two corporate-bond giants more time in the Lehman Brothers Investment-Grade Aggregate Index, stemming a tide of forced selling that would otherwise have ensued in the event of further credit downgrades. In the investment-grade corporate-bond landscape, Ford and GM stand to gain the most with their precariously poised triple-B-minus ratings -- a notch away from speculative grade -- from S&P. Adding Fitch to the mix prevents their exclusion from the Lehman Brothers Aggregate Investment-Grade Index, a widely used benchmark for portfolio managers, even in the event of a downgrade to junk by S&P. Ford and GM are the second- and third-largest issuers of debt, respectively, in the Lehman Brothers U.S. Credit Index, accounting for nearly 5% of the index. Their drop to speculative-grade ratings would have marked a significant change for bond investors." The move to include Fitch ratings is "part of the evolutionary process of indices becoming more inclusive," said Steve Berkley, global head of the Lehman indexes.

Now, maybe this is a fairer way to evaluate credit quality but it certainly makes one wonder whether market self preservation was an objective as well. At a minimum, buying the investment grade bond market just became riskier.

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