Moody's unveils most-likely-to-default list

Credit rater publishes list of 283 companies that are in danger of defaulting on their debt payments.

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By David Goldman, staff writer

What would happen if the government let some big banks fail?
  • It would devastate the global economy
  • It would send a strong message to the banking industry
  • It wouldn't make a difference

NEW YORK ( -- Credit-rating giant Moody's Investors Service published a list of companies Tuesday that it believes are most likely to default on their debt.

Called the "Bottom Rung," the list is comprised of companies with a B3 credit rating or below, and whose ratings are negative or being reviewed. A B3 rating is the sixth-lowest rating that Moody's offers and is considered "junk" status.

Moody's (MCO), which rates 2,073 companies' debt, will update its list monthly. This month, 283 companies made the cut.

The list includes many companies that have grabbed headlines in the past few months, namely American Airlines parent AMR Corp. (AMR, Fortune 500), Chrysler, Ford Motor Co. (F, Fortune 500), General Motors Corp (GM, Fortune 500). and US Airways Group (LCC, Fortune 500).

But many less-talked-about companies made the list as well, including Dole Food Co., Eastman Kodak (EK, Fortune 500), Univision Communications and Rite Aid (RAD, Fortune 500).

Moody's said that if the list been published last month, 24 companies would not have appeared this month. Of them, 19 companies would have been removed after defaulting, one would have been taken off because of a ratings upgrade, and the other four were no longer rated by Moody's.

Still, an Eastman Kodak spokesman warned that Moody's list may be imperfect.

"Any speculation, however informed, suggesting that Kodak is less than financially sound, is irresponsible," said David Lanzillo, spokesman for Eastman Kodak in a statement. "Kodak is financially solid and we are taking the right actions to ensure that we remain a strong and enduring competitor."

Moody's said it issued the list to give investors fair notice that the number of defaults would likely increase.

"Last year was a really weird year, because the default rate was only roughly 4%," said David Keisman, Moody's senior vice president of corporate finance. "It felt like a garbage year, but the default rate wasn't really there yet. We wanted to get ahead of that cycle."

The default rate measures the percentage of speculative-grade companies that defaulted on their debt in the past 12 months - entailing a wide range of actions, from missing a debt payment to filing for bankruptcy. Speculative grade companies are those with a credit rating of Ba1 or lower.

The rating company believes about 45% of Bottom Rung companies will default in the next 12 months.

"Last year's rate was way below the historic average," said Keisman. "This year, we're expecting the rate to go into the teens, easily."

Saving face or just doing their job?

Moody's has worked to improve its public image after meeting the ire of government officials last year. Congress criticized the $5 billion-a-year ratings industry, particularly the three largest firms -- Moody's, Standard & Poor's and Fitch Ratings (FIM) -- for failing to identify risks in securities backed by subprime mortgages. The agencies are supposed to issue ratings on the creditworthiness of companies and securities so investors can determine the risks of a particular investment.

The Securities and Exchange Commission completed an examination of the credit-rating companies in July, finding a lack of disclosure, improper and inadequate documentation of policies and insufficient attention to conflicts of interest led to their failure to identify risks.

The SEC said the agencies were unable to keep up with the explosion in complex securities, especially subprime mortgage-backed securities.

As a result, the SEC instituted new regulations, which were designed to stem conflicts of interest, expand disclosure in the rating industry and encourage new firms to enter.

But Moody's said public scorn was not the motivation for producing the list.

"We've been envisioning this for a while, and we're only unveiling it now because we were just making sure we got it right," said Keisman. "We want to let people know that bad deals were done, and these are going to come back to haunt the companies that made them." To top of page

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