Market: Can we really say that Microsoft’s debt is better rated than the US’s?

(BFM Bourse) – In very rare cases, it happens that companies on paper have a better credit rating assigned by the bureaus than in their reference country. However, the comparison is not correct, the method and especially the associated risks are very different.

Will LVMH soon be as well rated by Moody’s as Belgium or the UK? The question – very theoretical – arises. The renowned rating agency recently upgraded the outlook associated with the group’s “A1” rating from “stable” to “positive”. This means that in the future Moody’s can raise the rating of the world leader in luxury a notch.

According to the agency’s rating scale, LVMH will then achieve the grade “Aa3”, which corresponds to the sovereign rating of Belgium and the United Kingdom, provided, of course, that Moody’s does not raise the rating of these two countries. LVMH’s rating will of course remain lower than France’s, which is rated “Aa2” by Moody’s.

Apart from this example, which we agree is somewhat virtual, there are very few cases where a company is rated “better” than the country it is associated with (see our box below for some examples).

Microsoft has “AAA”, not US

“It is rare for a corporate issuer to have a better rating than the country it is associated with – we currently have 92 (corporate and financial institutions and local and regional authorities)”, emphasizes a spokesperson for S&P Global Ratings. .

Case in point: Microsoft has, on paper, a better credit rating than the US, with the computer giant rated “AAA” by S&P Global Ratings, unlike the world’s largest economy.

But does it really make sense to compare the rating of a company and a country? According to the general opinion of the interlocutors we surveyed, the answer is clearly “not really”.

“There is little relevance in comparing a sovereign rating with a company’s. First of all, let’s remember that there is a difference in terms of methodology. There is a transparent and freely available, but distinct analytical approach depending on the type of unit. assessed”, emphasizes the spokesperson for S&P Global Ratings.

For example, S&P Global assesses the powers of a state to determine the currency it uses as well as the fiscal and political legal framework within which it operates, which is obviously not the case for a company.

Different risks

In addition, “the risk associated with a country’s debt is not comparable to that of a company,” adds the spokesperson for S&P Global Ratings.

“Some investors may compare a company to a state, but the nature of risks is different. On a corporate issuer, there may be an industrial risk, which is not the case for a country”, says Christine Kam, analyst at Octo Finance. .

For Céline Antonine, economist at the French Observatory of Economic Affairs (OFCE), “we are not looking at the same parameters for a state and a company”.

“For a state, it is the sustainability of long-term debt that counts, with the development of interest rates, the ability to honor its obligations, but also the level of tax revenues and the rationalization of public expenditure. a company’s horizon is shorter, and the structure of ​​the indebtedness (bank debt, market debt, etc.) as well as the generation of cash will be monitored”, develops the expert.

Different realities

Thus “if the assessment scale is the same, the assessments cover different realities”, continues Céline Antonin. This even though “there is a connection” between countries and companies, she remembers. The downgrading of a country’s credit rating can thus affect that of national companies. The reverse is obviously very rare.

“There are exceptions, especially when it comes to emerging countries, where a country’s debt is closely linked to that of a large company. This is, for example, the case of Petrobras with Brazil”, observes Christine Kam.

It is worth pointing out as another limitation that states have many fiscal and legal instruments that companies do not have at their disposal, such as levying new taxes.

Furthermore, a country never disappears in the event of default – unlike in many cases companies, which can also be bought out by their creditors via debt-for-equity swaps – but sees its debt restructured. Sometimes at the expense of tough negotiations with lenders, as it e.g. was the case for Argentina.

BOX: some examples of companies with a rating higher than in the country where they are present, according to S&P Global ratings (as of the end of October)

USA (AA+)

Microsoft (AAA) Johnson & Johnson (AAA with negative outlook)

Italy (BBB)

Enel (BBB+) Eni (A-) Hera (BBB+) SNAM (BBB+) Terna (BBB+) BNL (BBB+)

The local branches of BNP Paribas, Barclays, Bank of America and Deutsche Bank

Japan (A+)

Fujifilm (AA-) Osaka Gas (AA-) Tokyo Gas (AA-)

Spain (A)

Banco Santander (A+)

United Kingdom (AA)

Wellcome Trust (AAA), a UK-based charitable foundation.

India (BBB-)

HCL Technologies Limited (A-) Infosys (A) Reliance (BBB+) Wipro (A-)

Julien Marion – ©2022 BFM Bourse

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