CREDIT RATINGS & THE DEBT CEILING

There were more than 60 AAA rated companies in the early 1990s. Today, only two remain. As recently as 30 years ago, investors could buy many publicly traded company’s stock or debt that bore the most coveted of all credit ratings: AAA.

According to Standard & Poor’s, the AAA rating signifies that an “obligator’s capacity to meet its financial commitments on the obligation is extremely strong.” continued on page 16 continued from page 14

In determining credit ratings, agencies take several factors into consideration.

In other words, if you bought into a business that had a AAA rating, you were perceived to be buying a company that was viewed as rock-solid.

Unbelievably, virtually no companies, or even the U.S. government, bear the AAA rating any longer. In August 2011, the United States, which was the largest country in the world measured by Gross Domestic Product (total amount of products and services produced), lost its coveted AAA rating.

Standard & Poor’s knocked the United States’ long-term credit rating down one notch to AA+, with the ballooning federal budget deficit following the Great Recession the ultimate culprit of the downgrade.

Less than five years later, in 2016, oil and gas giant ExxonMobil would also lose its AAA credit rating for the first time since 1949. Plunging oil prices and the amount of debt on ExxonMobil’s balance sheet made the company riskier. Many other blue-chip companies’ ratings were downgraded soon after: General Electric, drug giants Pfizer and Merck, Coca-Cola and UPS were a few.

There are now only two companies with the highest credit rating: Johnson & Johnson and Microsoft. And remember, the United States is one notch below them.

This segues into a topic you might have been hearing about: the debt ceiling and can this affect the United States’ credit rating yet again?

The debt ceiling is the amount of money the U.S. Treasury is authorized to borrow to pay its bills. Those obligations include Social Security and Medicare benefits, tax refunds, military salaries and interest payments on outstanding national debt.

The current ceiling is about $31.4 trillion. Now that the U.S. has hit that limit, it is unable to increase the amount of its outstanding debt — and paying its bills becomes trickier.

There is a date at which the U.S. Treasury has no more space available to deploy “extraordinary measures” and maneuver to remain under the debt ceiling. At that time, the Treasury would have exhausted its borrowing authority and not have sufficient funds to pay all its bills and legal obligations in full and on time.

Reaching such a date is not necessarily an event of default or the equivalent of missing a debt service payment. Default occurs when a payment of a security is missed.

Under the Constitution, Congress has the power to authorize the U.S. government to issue debt based on the credit of the United States. Since 1960, Congress has raised the debt ceiling, on-time on over 80 occasions.

When the government’s debt reaches the ceiling, the Treasury Department has historically ceased to issue new debt in the market and has used “extraordinary measures” to avoid defaulting on debt and on other government obligations. Such measures largely rely on borrowing through various means from government accounts, including public-sector retirement funds. Once the president signs a new debt ceiling into law, the Treasury can repay the money it borrowed from government accounts by issuing new debt.

Following the 2022 midterm elections, Congress is even more divided than before. The Republicans now have a slim majority in the House and the Democrats in the Senate, setting the stage for a partisan political debate over the debt ceiling. The Treasury Department announced that it might exhaust its room to maneuver from undertaking those “extraordinary measures” after early June. This gives Congress roughly four months to address the issue. Given the current political dynamics in Congress, there is likely to be