downgrading

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Downgrade

A change in the rating of a bond or other security in a downward direction. For example, a bond that had previously been rated AAA may be downgraded to AA. Downgrades are considered detrimental because they mean the ratings agency believes that the issuer of the security is less likely to be able to fulfill its obligations, such as coupon payments. A downgrade increases the cost of funds for the issuer because investors expect a higher return in exchange for the increased risk on the security. See also: Upgrade.

downgrading

A reduction in the quality rating of a security issue, generally a bond. A downgrading may occur for various reasons including a period of losses, or increased debt service required by restructuring a firm's capital to include more debt and less equity. For example, takeover targets that engage in stock buybacks to prop up the price of their shares are subject to debt issue downgrading by the rating agencies. Compare upgrading.
Case Study In late 2000 Moody's Investors Service, a major bond rating agency, downgraded the debt of Imax Corportion, the well-known big-screen movie company. The downgrading occurred amid bad times for the movie industry. Carmike Cinemas, a major theater company, had recently filed for bankruptcy, and Regal Cinemas, America's biggest theater chain, announced it might follow Carmike's lead. Concerned about Imax's financial viability, Moody's reduced its rating for the firm's senior notes from Ba2 to B2. It also lowered the rating for Imax's convertible subordinated notes from B1 to Caa1. The downgrading of Imax debt made it more difficult for the firm to obtain additional financing.

downgrading

the re-classification of a product as sub-standard or second quality. See QUALITY CONTROL, TOTAL QUALITY MANAGEMENT.
References in periodicals archive ?
When bond downgradings occur, can the stock market distinguish between those companies that later file for Chapter 11 and those that do not?
3) They find that although the upgradings of bonds have no effect on stock prices, downgradings do have a significant effect.
These results are interesting in light of the empirical findings of our study, which show that the market, on average, is able to distinguish between firms experiencing identical downgradings where one subsequently files for bankruptcy and the other does not.
Downgradings are at their highest level since the depression.
The record levels of downgrading are due, in part, to high levels of unemployment, eroding tax bases, and collapse in real estate values in many cities.
The downgrading significantly impacts Detroit's cost of capital borrowing - forcing either local tax increases or reductions in city services.
Because bondholders were dissatisfied with losses occasioned by downgradings in the wake of unanticipated restructurings, many corporations included protection against this special risk in their new bond issues to reduce borrowing costs.
With the rise in debt, many measures of corporate financial condition deteriorated: Interest expenses claimed a significantly higher share of corporate cash flow; downgradings of debt accelerated; and bond default rates, while still relatively low, began to climb.
The secular erosion in corporate credit quality accelerated in the last half of the 1980s, an erosion evidenced by the increase in downgradings of corporate bonds relative to upgradings.
one of the largest rating agencies for municipal debt, last week reported that downgradings of such debt reached a record $53 billion in 1991.
According to the agency, one of the most serious categories of downgrading directly affected the nation's cities and towns.
A downgrading adversely impacts a local government by forcing it to pay higher interest rates to investors.