Y2K bug still legitimate credit concern-Moody's

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NEW YORK, Nov 3 - Moody's Investors Service is cautioning capital market participants that ``the Y2K millennium bug is a legitimate credit concern which - although not catastrophic in nature - can hurt a debt issuer's creditworthiness if not adequately addressed.''

That assessment comes in recent report based on a speech by Moody's Chief Credit Officer Kenneth J. H. Pinkes to The President's Council on the Year 2000.

Pinkes told the Council that ``it is our assessment thus far that Y2K will not lead to a significant number of downgrades; nevertheless, rating changes at some stage later on this year or early in 2000 cannot be ruled out.''

Moody's does expect that some investors are likely to experience ``short-term technical payment delays'' due specifically to Y2K glitches. For example, ``a hidden bug in a computer system or an embedded chip might prevent an issuer from making a debt payment on time.''

Pinkes stressed that ``if we determine these delays are temporary, they will not be considered rating events.''

Nevertheless, one area of concern that Moody's will be closely examining at the turn of the year is maturing commercial paper. ``Repayment delays would normally be considered a default, since these instruments are typically treated as cash equivalents,'' Pinkes explained.

Rating adjustments (if any) are most likely occur where a missed payment is structural in nature or where a Y2K-related disruption will have a long-term structural impact on such things as an issuers' franchise, its supplier or client confidence, or its production processes.

``In light of the extent of linkages in our globalized economy, and the importance of timely information flows and just-in-time manufacturing and logistics, we are concerned that a potentially broken 'weak link' could lead to a credit event,'' Pinkes told the Council.

In the U.S. municipal sector, Moody's expects that some state service disruptions are inevitable, but Pinkes ``does not anticipate the disruptions will significantly affect the basic credit quality of states or municipalities.'' One area of concern in the public sector, though, is ``the potential for termination of liquidity facilities and standby bond purchase agreements supporting variable rate debt.''

Pinkes stressed further that the Y2K bug presents a ``unique credit challenge,'' in that there is limited experience in how businesses, governments, and individuals can cope with such a challenge. Furthermore, ``the true test of Y2K readiness will not be obvious before the beginning of the year. So there is, necessarily, an inherent element of uncertainty in everything before that time.''

Looking ahead, Pinkes believes that ``Y2K-type risks'' will become more common in coming years. He explained that ``technical advances and interconnections have contributed greatly to our economic and financial progress. But they have also created a vulnerability in our economic and financial infrastructure, which in turn contributes to the greater volatility of credit risk in the future.''

Moody's has been actively researching the credit implications of the Y2K bug for nearly two years. Over that period, said Pinkes, it has been an important element in Moody's discussions with debt issuers' senior management. In addition, Moody's has published some 25 special reports on the likely effects of Y2K in industries including banking, insurance, utilities, industrials, and municipalities.

-- Sysman (y2kboard@yahoo.com), November 03, 1999


Gee, it almost sounds like Moody gets it. Could this be a sign of things to come?

Mr.Happyface :)

-- Mr.Happyface (toobad@so.sad), November 03, 1999.

Interesting post Sysman...... I would be interested in hearing what this guy really thinks. The words used hear are carefully chosen,but with some concern nonetheless.

-- kevin (innxxs@yahoo.com), November 03, 1999.

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