rating trigger

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Rating Trigger

A provision in a loan agreement or bond indenture allowing one party or the other to take a certain action if the borrower's credit rating changes for any reason. For example, if a bond issuer's credit rating falls, a rating trigger may release bondholders from certain obligations specified in the indenture.

rating trigger

A provision in a loan agreement that initiates a specific action in the event of a change in a firm's credit rating. For example, a downgrade in a firm's credit rating may set off accelerated debt repayment in a backup credit line.
Case Study Selling in a regulated market and buying in an unregulated market caught up with California electric utility PG&E in 2000 and 2001 when wholesale electric prices skyrocketed on the West Coast. Unable to raise the price of its product in the face of rising wholesale electric prices, the firm began defaulting on its debts when rating triggers from a rating downgrade allowed financial institutions to stop funding the company's commercial paper. The lack of funding for PG&E's commercial paper caused the company to default on its pollution-control bonds and a variety of short- and medium-term notes. The importance of the rating trigger in PG&E's subsequent bankruptcy caused one major rating agency to indicate that it would consider the negative consequence of triggers in evaluating whether a company would be able to survive a rating downgrade. Some corporations began to reconsider the inclusion of rating triggers in borrowing agreements when they discovered the rating agencies would consider these triggers in evaluating the credit quality of corporate debt.
References in periodicals archive ?
Key rating triggers that could result in an upgrade include:
Negative rating triggers could include prolonged adverse operating results that are exacerbated by a series of large catastrophic events.
Significant deterioration in the company's risk-adjusted capitalisation or net operating results falling short of the agency's expectations would be negative rating triggers.
Other negative rating triggers include Cegedim's lower operating prospects, substantial increase in leverage and inadequate liability management, particularly inability to refinance its revolver maturing in May 2012, the service added.
RATING TRIGGERS in financial and insurance contracts were down 9% in 2007 compared with 2006, reducing incremental risk for both life insurers and, in particular, reinsurers, according to a report issued by Moody's Investors Service, New York.
Specific areas requiring close attention in the due diligence process were the asset/liability measurement tests, income acceleration, hedge identification, tax indemnities and gross ups, acceleration clauses, and rating triggers.
Key rating triggers that could result in a downgrading of the ratings include a precipitous decline in the companies' risk-adjusted capital strength.
The swaps do not have rating triggers or collateral posting requirements, which limits some financing risks.
Sustained strong budgetary performance with operating margins above 15%, close to balanced budget and containment of direct risk at manageable levels would be considered positive rating triggers, Fitch said.
Key rating triggers that could result in positive rating actions would be TP Re meeting and/or exceeding its business plan over the long term.
The negative rating triggers for the country were the intensification of the euro area crisis and risks to the fiscal consolidation effort due to the budgetary performance of some regions, which, according to Fitch, may lead to risks of fiscal consolidation.
The following upgrade and downgrade rating triggers for Allstate's insurer financial strength and debt ratings remain in place.