Why Would You Trust The Rating Agencies?

Several months ago, I wrote about the fact that companies would be soon be hitting the wall.  To survive, they would have few options.  Some of those options include merging with another company, rolling over their debt at much higher rates (which they can’t really do), issuing more stock dilluting shareholders, or selling off their prized possessions for less than their real value out of necessity.  One example was the merger between Centex and Pulte a couple of months ago.  Today, we had another example.

Today, we saw the sale of Barclays Global Investors to Blackrock (BLK).  Barclays, which was in real trouble a few months has stabilized and I’ve actually done some business with them as of late.  But, to raise more capital, they had to sell one of their prized possessions for $13.5 billion.  With this purchase, Blackrock (BLK) becomes the world’s largest money management firm.  In fact, it almost doubles the assets they manage (now $2.8 trillion).  In addition, it gives Blackrock an interest in the exchange traded funds world, a very profitable business.  Whenever there is a crisis, there’s somebody there getting great deals.  Right now, that’s Blackrock (BLK).

The terms of the deal are $6.6 billion in cash and the rest in stock.  So, there is some dilution.  In addition, Standard & Poors downgraded Barclays debt from AA to A.  The stock went down from $182 to $170 at one point during the day I think not because of the dilution but because of the downgrade.  On http://www.twitter.com/karleggerss, I mentioned midday I thought Blackrock (BLK) was a buy the dip stock on this deal.  It strengthens their position and they buy a very valuable asset from a distressed seller.  And yet the stock was down because of the debt downgrade.  In a normal world, this would be an upgrade.  In S&P’s world, this is a downgrade.  And, investors went for it.  They sold the stock because of what a rating agency said? Aren’t these the same rating agencies that were rating toxic assets as AAA/aaa?  I’d rather do my own homework thank you very much.  In addition, I’d rather be on Larry Fink’s (CEO of Blackrock) team rather than on some suit’s team at S&P.

I’m an owner of Blackrock and would have bought the dip today if I didn’t own it.

Disclosure:  I own shares personally as well as the funds I manage for individuals.

This post published at www.karleggerss.com

None of the content on this page can be reproduced without the permission from Karl Eggerss & www.karleggerss.com


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June 2009
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