Interest Ratio Coverage (from WSJ)

What Is the Interest Coverage Ratio?

It measures a company’s ability to make its debt payments. Why it matters

The ratio can be calculated by dividing operating income—typically defined as earnings before interest and taxes, or EBIT—by its interest expense. (There are variations, but this is the simplest.)

“If your coverage ratio is 1, then you have no cushion,” says Dan Gode, accounting professor at the New York University Stern School of Business. Simply: When a company’s operating earnings are equal to its borrowing costs (giving it a coverage ratio of 1.0), there is no margin for error. If the business meets a rough patch and earnings drop, then the company might not be able to pay the interest on its loans. “If the ratio is north of 3 or 4, then you have some cushion,” Prof. Gode adds.

Speculation over the Federal Reserve’s interest-rate intentions comes into play. Higher interest rates for corporate borrowing will push coverage ratios down unless profits increase. For some companies, that won’t matter much; for others, it will make an already heavy debt burden harder to bear.

“Overall corporate debt might not be high, but that masks great variation” among firms, Prof. Gode says. He points to Apple Inc. as a cash-rich company with relatively little debt. “And then there are plenty that have huge levels of debt,” including some energy companies and hospitals.

Mr. Constable is a writer in New York. He can be reached at reports@wsj.com.

Downgrade: Miami Municipal Bonds (Miami Herald)

Posted on Thu, Jun. 17, 2010
Standard & Poor's downgrades Miami bond rating by two notches
BY PATRICIA MAZZEI
pmazzei@MiamiHerald.com

A key agency has downgraded cash-strapped Miami's bond credit rating, a shift that will leave the public footing a higher bill for big-ticket projects, including parking garages for the new Marlins ballpark.
Standard & Poor's Ratings Services dropped two of the city's critical bond credit ratings by two notches, making it more expensive for Miami to borrow money at a time the city is scrambling to keep its budget afloat.
``That will have a significant impact on the cost of projects,'' said Tom Tew, a Miami securities attorney who has represented the city in the past. ``This is just another straw on the camel's back.''

Standard & Poor's lowered the rating for general obligation bonds -- usually backed by property taxes -- from A+ to A-, and the rating for bonds backed by other revenues from A to BBB+. The rating agency cited the city's climbing employee pension costs and unwillingness to raise taxes as reasons for its negative credit outlook.

``They have skepticism of the ability of the city to reduce expenses,'' City Manager Carlos Migoya said Thursday.

``I feel very confident that we'll be able to do that,'' he added -- possibly through employee union negotiations or layoffs.

The most immediate fallout: Funding for the city to build surface parking lots and four garages at the Marlins' new home in Little Havana.

Miami plans to float $104 million in bonds next month to finance the garages. Because of the lower bond rating, it will cost the city $15 million more to pay off those bonds over the next 30 years, the city manager estimated.

Migoya said that is about $15 million less than the garages would have cost over three decades if the city were building during boom times with higher construction prices.

The bonds will be paid off with money from a variety of sources, including a convention development tax generated by hotel sales and the average $10 the Marlins will pay the city to buy almost all of the parking spaces.

The manager said the credit downgrade should not delay construction. Work began this month after the city borrowed $3 million from a capital fund and received a $20 million bridge loan. The Marlins hope to begin play at the new ballpark on Opening Day in April 2012.

The rating downgrade is the latest dark financial cloud over the city.

Two months ago, another agency, Moody's Investors Service, shifted the city's credit outlook from a stable to a negative position, an indication that Miami's bond rating was poised to take a hit.

Miami leaders have had to raid the city's reserves to plug budget holes, including using $54 million from the rainy-day fund earlier this year to balance the 2009 budget.

The U.S. Securities and Exchange Commission continues to scrutinize whether the city hid its financial troubles from investors over the past three years, a review with potentially far-reaching budget implications.

Last week, city leaders discussed a controversial doomsday scenario: laying off more than 1,100 employees to fill a $100 million budget hole. Commissioners have sounded wary of raising taxes to cover the shortfall.

Against this backdrop, credit agencies are under pressure across the country to redo municipal bond ratings as home sales and property taxes -- local governments' main source of revenue -- tumble in the slumping economy.

Standard & Poor's noted Miami's historical difficulty with cutting expenses, and said cutbacks probably would not be enough without structural changes to labor contracts.

``The city's financial flexibility has been greatly reduced by growing fixed costs and limited tax-raising flexibility and willingness,'' the agency's report said, adding that the absence of ``considerable expenditure reductions could lead to further credit deterioration.''


Read more: http://www.miamiherald.com/2010/06/17/v-print/1687104/standard-poors-downgrades-miami.html#ixzz0rGPlYEtM

Downgrades on Bank of America and Wells Fargo

The big news yesterday outside the economic numbers was a downgrade on Wells Fargo and BoA. Both were expected and the senior-debt rating for Charlotte, North Carolina-based Bank of America was reduced to A2 from A1, according to a statement by Moody’s. San Francisco-based Wells Fargo had its senior-debt rating cut to A1 from Aa3. Both banks have accepted capital and guarantees from the Treasury valued at $163 billion for BoA, including aid to its units; and $25 billion for Wells Fargo, which they followed up and sold $12.6 billion in stock to the public the following month.
Bank of America stock has plunged by about two-thirds since the lender raised $10 billion selling shares for $22 each in October. It advanced 48 cents yesterday to $7.70. Wells Fargo rose 92 cents, or 5.9 percent, to $16.42. The senior subordinated debt rating for Bank of America was cut to A3 from A2, and the junior subordinated debt rating was downgraded to Baa3 from A2, The preferred stock rating is now at junk-level B3. Senior subordinated debt was reduced to A2 from A1 for Wells Fargo, Moody’s said today in a statement. The preferred stock rating was cut to B2 from A2. The bank's bonds in the 5-year sector tightened by 5-7bp yesterday.

WSJ - Ratings Lowered on 11 banks

BUSINESS DECEMBER 20, 2008
S&P Lowers Ratings of 11 Banks

Citigroup, Goldman Among Banks Affected; Agency Gives HSBC Negative Outlook

By LIZ RAPPAPORT
Credit-quality watchman Standard & Poor's slashed the credit ratings of 11 global banks Friday, but the moves were largely ignored by the bond market, which has begun to look positively on the governments' efforts to save these institutions.
The agency reduced the debt ratings on Bank of America Corp., Citigroup Inc., Goldman Sachs Group Inc., Morgan Stanley, Wells Fargo & Co., J.P. Morgan Chase & Co., and on European banks Barclays PLC, UBS AG, Credit Suisse Group, Royal Bank of Scotland Group PLC and Deutsche Bank AG.

RBS was among 11 global banks whose credit ratings were cut Friday by S&P.
S&P left HSBC Holdings PLC's rating pat, but gave the bank a negative outlook. The agency also warned that investors in the hybrid debt offerings sold by several banks may find their payouts cut if the economy and the financial markets remain tumultuous.
The actions "reflect our view of the significant pressure on large complex financial institutions' future performance due to increasing bank industry risk and the deepening global economic slowdown," says S&P in its report. The ratings agency now offers its analysis on the banks with and without the filter of current and expected government support, which it notes will eventually disappear.
Banks continue to feel the pinch from high levels of illiquid and hard-to-value assets stuck on their balance sheets, big appetites for risk, relatively weaker risk-management practices and pressure from regulatory bodies to deleverage, says the agency.
"The market has been viewing the ratings as too high and the ratings agencies wanted to bring them in line with that reality," said David Havens, a credit desk analyst at UBS Securities. "No one is surprised by this."
So some of the corporate bonds of the downgraded banks, including J.P. Morgan and Goldman Sachs, even rallied modestly Friday as investors continue to dip back into this market seeking some safe -- and higher yielding -- investments than U.S. Treasury bonds, whose yields have hit record lows.
The stock market was less positive, as shares of Citigroup fell 5.5% and Bank of America fell 1.2% Friday.
In more normal times, the lower credit ratings would mean that these institutions would pay higher rates to borrow money in the debt markets. But this negative is overshadowed by the government's many programs to give banks access to liquidity and to cheap funding. This means banks are able to issue debt at exceptionally low rates despite their deteriorating credit quality.
That won't last forever, and certainly lower credit ratings are damaging for a bank when dealing with counterparties in contracts and for funding in short- and long-term debt markets once the government programs go away.

For now, several firms, including Citigroup, J.P. Morgan, Morgan Stanley, Bank of America and others have issued tens of billions of debt backed with the "full faith and credit" of the U.S. Treasury through the Federal Deposit Insurance Corp.'s temporary program, which expires in spring 2009.
The FDIC's effort, combined with Federal Reserve liquidity programs and capital injections from the Treasury, is intended to help banks restore their balance sheets to health by stimulating their fundamental business model of borrowing at low rates and lending at higher rates. The market expects eligible issuers to borrow more than $400 billion of these bonds -- money they are required to use to lend to borrowers throughout the economy.
The S&P cuts also come a day after Moody's Investors Service slashed Citigroup's rating two notches Thursday night to A2, from Aa3.

Write to Liz Rappaport at liz.rappaport@wsj.com

What the Ratings Mean (Moody's, Standard & Poors)

BOND RATINGS – What the Grades Mean

When considering a potential investment, investors should compare the credit qualities of available corporate bond issues before they invest. The two most recognized rating agencies that assign credit ratings to corporate bond issuers are Moody's Investors Service (“Moody’s”) and Standard & Poor's Corporation (“S&P”).

In determining the creditworthiness of an issuer, Moody's and S&P focus on a company's overall financial condition as well as that of the industry in which the issuer operates. A rating represents the opinions of the rating agency at a particular point in time. Ratings on individual issues are continuously revised to reflect any industry or company developments, and these ratings changes can have a distinct effect on an issue's market price. Moody's and S&P classify corporate bond issues as either "investment grade" or "below investment grade”, briefly summarized below:

Investment grade bonds are generally more appropriate for conservative clients. These bonds typically provide the highest degree of principal and interest payment protection, and they are generally the least likely to default.

Below investment grade bonds may be suitable for more aggressive clients willing to accept greater degrees of credit risk in exchange for significantly higher yields.




Investment Grade Moody's S&P


Highest Grade: Aaa AAA
Moody's These bonds are judged to be of the best quality. They carry the smallest degree of risk. Interest payments are protected by an exceptionally stable margin and principal is secure.
S&P The issuer’s capacity to meet its financial obligation on the bond is extremely strong.


High Grade: Aa1, Aa2, Aa3 AA+, AA, AA-
Moody's These bonds are judged to be of high quality by all standards. Margins of protection may not be as large as in Aaa securities.
S&P The issuer’s capacity to meet its financial obligation on the bond is very strong.


Upper Medium Grade: A1, A2, A3 A+, A, A-
Moody's These bonds possess many favorable investment attributes. Factors giving security to principal and interest are considered adequate.
S&P Although these bonds are somewhat more susceptible to the adverse effects of changing economic conditions, the issuer’s capacity to meet its financial obligations is strong.


Medium Grade: Baa1, Baa2, Baa3 BBB+, BBB, BBB-
Moody's The bonds lack outstanding investment characteristics and have speculative characteristics as well.
S&P Adverse economic conditions are more likely to lead to a weakened capacity of the issuer to meet its financial commitment.


Below Investment Grade Moody's S&P


Speculative Grades: Ba1, Ba2, Ba3 BB+, BB, BB-
Moody's The future of these bonds cannot be considered as well-assured. B1, B2, B3 B+, B, B-
S&P These bonds face exposure to adverse business or economic conditions which could lead to an issuer’s inadequate capacity to meet its financial commitment.


Highly Speculative Grades: Caa1, Caa2, Caa3 CCC+, CCC, CCC-
Moody's These bonds are of poor standing. Such issues may be in default, or there may be elements of danger with respect to principal or interest. Ca CC
S&P These bonds are vulnerable to nonpayment, and are dependent upon favorable economic conditions for the issuer to meet its financial commitment. C C


Default
S&P These bonds are in payment default. D