Corporate debt ratings are wierd. Today Moody’s called Level 3 Communications’s (LVLT) new debt deal a default and cut their ratings, following on similar S&P move last week. As many have noted, this is by the book, it happens almost anytime a company tenders for its own debt below par – and certainly every time Level 3 has. But that doesn’t mean it makes any sense at all. Cogent bought back half its debt below par last month but it wasn’t in ‘default’ according Moody’s and S&P because, I assume, the company didn’t ask first.
Why is this insane? They’re downgrading LVLT debt because the company is making it safer to own, reducing the chance of an actual default by incuring the wrath of credit ratings agencies. Had the company not acted to refinance this debt, it would have been more likely to actually default and hence, apparently, would have merited more highly rated debt. After all, Moody’s rated Lehman debt at A2 right up until Sept 15 and they didn’t utter a peep while LVLT debt actually *was* at greater risk before their refinancing deal. Great job estimating the risk! And we wonder why Wall Street never saw this crisis coming?
To top it all off, Level 3 actually wants its debt to be downgraded – at least temporarily. The downgrade actually helps Level 3 complete the deal by making their tender look better, assuming a few people in the world actually care what Moody’s and S&P have to say on the subject. Not that the company needed much help, its debt is still trading 10% or more below the prices they are tendering for it. Which is actually rather odd and seems to mean one of two things. Either the market thinks LVLT can’t get the 50% of its 2010 debt that it needs to complete the deal because its offered prices are too too low, or people are so desperate to sell that they can’t wait three weeks. Given that the first is self-contradictory (the offer is too low and nobody wants to sell, so they prefer to sell even lower?), is the latter true? Opinions welcome.
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