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S&P rules on power crisis debt Bloomberg 17/01/2001

Rated money market mutual funds that are still holding short-term debt sold by California's beleaguered electricity utilities or their subsidiaries are not in danger of losing money or being downgraded, credit ratings agency Standard & Poor's has said.

California's two biggest utilities, PG&E Corporation and Edison International, have run out of electricity and are facing bankruptcy.

The US banking sector has also been hit by the crisis. Bank of America and JP Morgan Chase arranged a combined $US4.2 billion ($7.7 billion) of loans for the two utilities. Since banks that arrange credit typically retain 10 per cent of the loans, the country's two biggest lenders could be on the hook to the power companies for as much as $US400 million if the utilities fail to repay their debts, analysts say.

S&P and fellow ratings agency Moody's Investors Service both downgraded the debt of PG&E Corp and Edison International and their subsidiaries last week as debts mounted and the cash ran out.

Mr Peter Rizzo, a director in the fund services group at S&P, said there wouldn't be any change to share value even if the utilities "tanked overnight", the debt was worthless and the money funds couldn't recover anything.

Money funds holding any affected debt had "exposure so minimal" it wouldn't make a difference, he said.

S&P and Moody's monitor and rate money funds regulated by the US Securities and Exchange Commission's Rule 2a7. There are 534 taxable money funds with $US1.185 trillion in assets, which purchase top-rated commercial paper. Commercial paper accounts for 53 per cent of weighted assets, according to Mr Peter Crane, a vice-president and managing editor at iMoneyNet Inc in Westborough, Massachusetts.

S&P and Moody's receive weekly portfolio holdings, review credit ratings, exposure to a single borrower, and term. While the two companies know how much of the utilities' commercial paper and other debt is held in money funds, they won't disclose the amounts.

Under Rule 2a7, a money fund can't invest more than 5 per cent of its assets in the debt of any single borrower, or in debt with short-term ratings below the top ratings of "A1" and "P1" by S&P and Moody's respectively. The Californian utilities' commercial paper had top ratings when money funds purchased it.

If a money fund purchases commercial paper with top ratings that are subsequently downgraded, it isn't required to sell holdings, Mr Henry Shilling, a senior vice-president in the managed funds group at Moody's, said.

Money fund portfolio managers "evaluate those holdings and take a course of action that in their own minds serves the best interests of their shareholders," he said.

PG&E and Edison and their subsidiaries' debt was downgraded to "A3" and "P3" by S&P and Moody's on January 5, and may be further downgraded to junk status.

http://afr.com/cgi-bin/textversions.pl?storyid=FFX07R6G0IC&date=2001/01/17&pagetype=printer§ion=personalfinance

-- Martin Thompson (mthom1927@aol.com), January 16, 2001

Answers

This sounds like a guarantee of your investment in these companys by standard and poor's, if they don't rate them as they as the market conditions change, what are they, complicitous liars?

-- Lee Blocher (cblocher@northernway.net), January 16, 2001.