S&P cuts Morgan Stanley, Lehman Brothers, and Merrill Lynch ratings, spares Goldman Sachs

03 June 2008

Standard and Poor's rating services has cut the ratings of Morgan Stanley, Lehman Brothers, and Merrill Lynch. Though it left Goldman Sachs ratings untouched for now, it revised its outlook to negative. The ratings agency said the revision was done in conjunction with its global securities industry review.

Merrill Lynch downgraded
In a statement, Standard and Poor's credit analyst Scott Sprinzen said that in the case of Merrill Lynch, the downgrade reflected concern that the pace and extent of earnings improvement could be considerably more muted than previously anticipated.

Merrill Lynch's financial performance during the past three quarters has been amongst the worst of any company in the broker-dealer sector, primarily reflecting write-downs on its outsized holdings of asset-backed collateralised debt obligations, sub prime mortgages, other mortgage-related exposures, and leveraged-finance commitments, as well as on its hedge positions with mono-line insurers, said the rating agency.

S&P said under new management, Merrill Lynch has sought to downsize notional positions and hedge remaining net exposures; however, its ability to do so has been hampered by persisting difficult market conditions, leaving the company exposed to further write-downs, including as the result of counterparty risk related to its hedges. S&P also revised its outlook to negative, as there were many uncertainties that could affect the future financial performance of the broker-dealer sector.

S&P also warned that Merrill's ratings could be lowered further if it incurred additional large losses, either as a result of depressed business conditions or additional large write-downs; they could also be lowered if additional concerns arise regarding the company's ability to sustain potential liquidity stresses. S&P said that it could revise the outlook to stable if Merrill Lynch's operating performance rebounds to more normal levels.

Lehman Brothers Holdings Inc. Rating Lowered To 'A' From 'A+'
S&P says Lehman's earnings performance in recent quarters has held up relatively well under current market conditions despite write-downs on troubled assets. However, with a first-quarter end in February, the effects of a particularly difficult operating environment in March will only be reflected in Lehman's second-quarter performance.