How to deal with a downgrade

Author: | Published: 1 Jul 2009

Many banks in the US and Europe have had their credit ratings downgraded in the past year. These downgrades have consequences for any financing transaction that relies on the credit of a bank, in particular structured transactions involving secured borrowing against bank-issued standby letters of credit. It is very important both to plan ahead by anticipating possible downgrades and to think creatively in dealing with their consequences.

Bank credit rating downgrades have continued throughout the financial crisis. On December 19 2008, Standard & Poor's downgraded 12 large US and European banks. It then downgraded Citigroup on January 15 2009, with Moody's following suit on February 27. S&P then downgraded Bank of America on March 3, Moody's on March 25. More recently, on May 4, S&P placed 23 banks on its CreditWatch list with negative implications, then removed some, including both Bank of America and Citigroup. However, on June 18 it...