Monday, June 23, 2008

BCE Lessons Ratings Redux

BCE (BCE) shareholders were allowed to exhale on Friday when Canada’s Supreme Court told financial markets to return to sanity and allowed the largest LBO to proceed. On Monday everyone is writing why this was destined to happen. On Friday the market did not have a clue as to what was going to happen. How did all these really smart and incredibly well paid people become confused? Are they still confused but just working on another file this week?

The debt holders felt aggrieved because their investments suddenly achieved junk status. Until very recently BCE was considered one of the best corporate covenants and a must have in all bond portfolio’s. Bond investment managers who had peddled their product promising to stay in the investment grade range did have a serious problem.

Lets not talk about the persistent market talk about BCE being a takeover candidate that should have tipped off the bond investors to at least start thinking about being careful. What are the real lessons?

The debt market is ratings driven. Just take a quick glance at the sub prime slime on Wall Street before you argue that one. The ratings allow bond investors to go to sleep. Between the actual rating and the covenants they enjoy enormous advantages. Frequently they become part of the problem and are surprised when an LBO shows up promising to change the landscape.

Bond investors need to become more pro-active when relating to corporate circumstances. Until now they focus predominantly on interest rate and yield. This may no longer be enough.