default scenario. Depending on the industry sector or individual com- pany’s financial strength, a company may be better or less able to withstand macroeconomic shocks or other country-related risks. In considering corporate ratings vis-à-vis the sover- eign rating, we consider how exposed a company would be to a typical sov- ereign stress scenario, which, in the past, has included: sharp currency movements, credit shortages, a weak- ened banking sector, higher govern- ment taxes and fees, late or partial payments from the public sector, a more difficult regulatory environment, economic contraction, and rising inflation and interest rates.
Corporate entities that we would typ- ically consider the most exposed to country risk include firms with mainly domestic customers, highly cyclical companies or companies for which profitability is highly correlated with the general condition of the economy, and companies with high exposures to government sector customers. Corporate entities that typically are least exposed to country risk include globally diversified companies and export-oriented companies. Local eco- nomic conditions have less of an effect on such companies, and they generally benefit from currency depreciation.
Given the global and diverse busi- ness lines and significant financial strength of Exxon Mobil, Johnson & Johnson, Microsoft, and General Electric, the sovereign downgrade of the U.S. does not affect our ratings and rating outlooks for these U.S. domiciled corporate issuers. They enjoy “excellent” business risk pro-
files (see “Business Risk/Financial Risk Matrix Expanded,” published May 27, 2009), with end-market diversity, diversity of product and service lines, and a track record of solid profitability, along with “min- imal” or “modest” financial risk, with significant cash flow from var- ious businesses and substantial liq- uidity. In addition, the U.S.’s transfer and convertibility assessment remains ‘AAA’ following the sovereign down- grade. (See “Methodology: Criteria for Determining Transfer and Convertibility Assessments,”pub- lished May 18, 2009—“Ratings Above the Sovereign’s” section. Also see “2008 Corporate Criteria: Analytical Methodology,” published April 15, 2008—“Country Risk” sec- tion.) Although there is no direct effect on our credit ratings on these companies from the U.S. sovereign rating action, a weakening macroeco- nomic scenario would negatively affect the U.S. segments of their busi- nesses to some degree.
There is also no current effect on our ratings or rating outlooks for ADP and W.W. Grainger from the rating action on the U.S. Although most of these companies’ revenues come from within the U.S. and they are less diversified by product line and geographical business mix than the previously mentioned companies, ADP and Grainger enjoy high customer and end-market diversifi- cation and have revenue bases that held up well during the recent recession. In addition, they have minimal reliance on the public sector, with a set of products for which demand is relatively inelastic.
We Did Lower Ratings On The Government-Related Entitites In conjunction with the sovereign downgrade, we lowered our ratings on the three government-related entities (GREs): Army & Air Force Exchange Service (AAFES), Marine Corps Community Services (MCCS), and Navy Exchange Service Command (NESC) to ‘AA-’ from ‘AA’, in keeping with Standard & Poor’s criteria on GREs. The rating outlook on AAFES is
features special report
The U.S. sovereign downgrade also had an effect on the credit ratings of certain
specific debt instruments.