Financial executives at the major investment houses have concluded their most recent meetings with the bond rating agencies amid growing concern over Wall Street's exposure to swings in the troubled fixed-income markets.
The meetings, which took place during the past few weeks, were not unusual; Wall Street officially discusses credit issues with bond raters often on a quarterly basis, and less official dialogue occurs more frequently.
But several Wall Street financial officers said bond raters are concerned over the recent volatility in the fixedincome markets, its potential impact on revenues, and the firms' ability to generate funds from other businesses.
"Any time you have an industry going through what we're going through, the raters get concerned," said an executive at one firm, adding that bond raters have expressed increasing anxiety over exposure to the troubled mortgage-backed securities market. "When you start seeing people loose millions of dollars at a clip, that gets people excited."
Analysts say signs of trouble in the fixed-income business began during the first quarter of 1994, as interest rates began to rise. Higher interest rates have their most direct impact on the profitability of fixed-income products by making companies less willing to issue debt, and causing volatility in other market segments, such as the markets for mortgage-backed securities and derivative products.
So far this year, issuance in the fixed-income market, which includes the sale of corporate bonds, convertible debt, asset- and mortgage-backed bonds, and tax-exempt securities, has fallen 26.6% compared with the same period a year ago, according to Securities Data Co.
Volume in the municipal market has fallen even more dramatically. According m Securities Data, volume is down 42% during the first eight months of 1994, compared with levels from the same period a year ago. Municipal analysts expect volume to lag 1993 levels for the remainder of the year.
"In this environment, we have concerns about firms that do business in the fixed-income market," said Haig Nargesian, a senior analyst at Moody's Investors Service. "We are visiting a number of firms as part of our ongoing review of any company.
"One question we ask all of the firms is how diversified their revenues are," Nargesian said. "We want a sense of what happens with their revenues in a slower-growth environment."
At Standard & Poor's Corp., associate director Jake Newman echoed similar concerns. "I don't think any firms we rate are experiencing particular competitive pressure above and beyond what others are feeling given the market conditions," Newman said.
Nargesian and Newman would not discuss which finns they met with, the potential for rating changes, or which firms would come under closer credit scrutiny if current market conditions prevail.
Both analysts also said the ratings that Wall Street companies now hold for their long-term debt and short-term paper reflects possible downturns in the market, and that ratings don't automatically change even when business turns sour. "The ratings are meant to cover the Cyclical environment the industry operates in," Newman said.
But Nargesian, for his part, said some firms are better equipped than others to successfully operate in a depressed fixed-income market. He singled out Merrill Lynch & Co.; Goldman, Sachs & Co.; Morgan Stanley & Co.; and Dean Witter Reynolds Inc. as among the "most diversified" firms on Wall Street.
According to the New York Stock Exchange, total revenues among member broker-dealer firms fell to $18.5 billion during the first quarter of 1994, from $19.5 billion during the fourth quarter of 1993. After-tax profits also fell, to $852 million in first quarter 1994 from $1.2 billion in fourth quarter 1993. The exchange is scheduled to release second-quarter data sometime this week.
"The rating agencies are justifiably concerned," said Perrin Long, an analyst for the First of Michigan Corp. "I wouldn't say an firm is tin trouble], but I can understand where the raters are coming from.
