The two biggest rating companies, embarrassed by their failure to anticipate the collapse of Enron Corp., are demanding companies disclose credit and trading agreements.
Moody's Investors Service and Standard & Poor's are sending e-mail questionnaires to about 800 companies seeking the details of contracts that can force them to immediately pay obligations. Regulators, including the Securities and Exchange Commission, currently don't demand reporting of such repayment triggers.
Worries that other firms have unreported debts and may have misstated earnings have contributed to a 6% drop in Nasdaq this week. The failure of the rating firms to warn of the problems drew a rebuke from SEC Chairman Harvey Pitt.
"Clearly, it seems like the market needs better disclosure," said Clifford Griep, chief credit officer at S&P.
The rating companies are focusing on clauses--in bank credit lines, derivative contracts and third-party trading agreements--typically linked to credit ratings, earnings or share prices. Companies agree to put up collateral, pay back debt or forfeit access to credit lines if any of these triggers fall below an agreed level.
Enron, once the seventh-biggest company in the U.S., had borrowing agreements that required instant repayment of $3.9 billion in debt once its credit ratings fell below investment grade.
In the months before Enron's failure, investors in companies including Pacific Gas & Electric Co., Southern California Edison Co. and Xerox Corp. were blindsided by ratings drops related to triggers in companies' credit agreements.
Now, S&P is "contacting every investment grade company we rate," said Griep. The companies say they are acting separately.
Pitt told Congress this week that the ratings companies were too slow to react to Enron's collapse. The SEC may propose tighter federal oversight of rating companies.
The rating companies have begun to emphasize faster disclosure. Moody's, for instance, required only 38 days on average to cut ratings in the fourth quarter, down from an average of 90 days.
If companies have too many conditions on their loans, derivative products and other deals, their ratings will be cut to reflect added risk, the rating companies said.
"The presence of rating triggers will take on higher profile in our analysis of credit risk and liquidity," Moody's spokeswoman Fran Laserson said in an e-mail. "We will incorporate the serious negative consequences of those triggers in our ratings and research."
Halliburton Co. already felt pressure from the ratings companies. Moody's cut its ratings Jan. 23, citing in part the presence of ratings stipulations in credit deals.
Halliburton, the second-biggest oil services provider, has clauses in its $700 million of credit lines that demand the company retain an investment-grade rating. If the rating falls to junk, banks will deem it in default.
Moody's cited that clause as a reason for cutting the firm's rating to "Baa2" from "A3." Moody's said the ratings, two levels above junk, may be cut further.