SEC Staff Monitoring Group Considers COVID-19 Market Impact

The COVID-19 Market Monitoring Group (an SEC-formed group of senior staff) considered issues when analyzing the pandemic's impact on rating actions, procyclicality and financial stability.

The group observed that:

1. comparisons of rating agency actions with the 2008 global financial crisis should be "approached with caution," as economic conditions and stresses, in addition to analytical methodologies used by rating agencies, are "substantially different" from what they were in 2008. The group noted that SEC staff is focusing its efforts on understanding (i) how rating agencies are responding to the pandemic, including monitoring ratings actions and public disclosures, to understand market impact, and (ii) rating agencies' adherence to their own policies, procedures and methodologies for determining ratings;
2. the cost of debt is driven by many factors, and ratings downgrades "are generally lagging indicators" of the cost of debt capital. However, staff also recognized that this generally has exceptions, noting in particular "collateral-based financing such as a receivables facility";
3. "bunching" above and below investment grade levels may be attributable to a number of factors, and "examining ratings and ratings actions in isolation from [more general factors] is unlikely to provide meaningful insight";
4. when considering the effects of credit ratings, the "broad spectrum" of credit markets and participants must be considered. Staff noted that it is monitoring leveraged loans, collateralized loan obligations and exchange-traded funds;
5. "the procyclical effects of credit ratings used in bilateral specialty finance are appropriate areas for continued monitoring."