If the recent series of corporate blowups has taught us anything, it's that ratings triggers can be hazardous to a company's health. Now, some corporates are trying to get rid of some of the most troublesome.
Ratings triggers are provisions in financial agreements that dictate a change in terms if the company's credit rating falls. The most common type requires a company to pay more on a loan if it's downgraded. And while triggers had been "a growing trend," says Richard Lehmann, publisher of the Income Securities Investor Newsletter, "we now see companies starting to resist it."
For credit rating agencies, the dangerous triggers are those that make big demands–that a company pay back a loan, for example, when it's already in trouble. Their effect can be powerful: Enron Corp. sought bankruptcy protection in part because triggers required it to repay investors after its ratings fell below investment grade.
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