BAA asked for ratings withdrawal to avoid Crossover, reports Financial Times

The Financial Times today reported on a “fascinating rumour” doing the rounds that UK airports operator BAA has asked Standard & Poor’s to withdraw its rating, which was downgraded to junk-status in November last year, specifically to help the company avoid being included in iTraxx Crossover when the next series is constituted in March.

If true, says FT, “the tale would show a sophistication in understanding by BAA of the workings of the modern credit world that has been conspicuously absent among so many of its corporate peers in recent years”. FT says that by avoiding inclusion in the Crossover BAA would likely be able to save BAA money if it decided to issue new bond debt, as CDS protection acts as a proxy for borrowing costs. It would avoid inclusion because it is still rated investment grade by Moody's.

Fishknife says:

From reliable market sources, Creditflux is informed that this discussion of BAA’s inclusion in iTraxx Crossover actually took place prior to the September roll last year. BAA was a test for the rules of inclusion in Crossover, which stipulate that a name must be rated below triple B minus equivalent by at least two of the three main rating agencies.

At the time Moody’s was one of two agencies that had BAA as an entity rated below investment grade. Some dealers argued that this made BAA suitable for inclusion in the forthcoming Crossover index. But the problem was that BAA had guaranteed obligations outstanding that were rated Baa3 by Moody’s.

On 11 September the issue was resolved when Moody's withdrew the entity's Ba1 long-term issuer rating. BAA was therefore not eligible for Crossover and instead was included as a constituent of iTraxx Europe and HiVol.

It is most likely that Moody's withdrew the high yield ratings at BAA's request. But it not clear how much consideration the airports operator gave to CDS contracts on its debt. There are, after all, many other good reasons for the company to wish to remain investment grade. Either way, BAA saw its spreads rally after Moody's withdrew the troublesome high yield ratings.