April 26, 2007

We need some new derivatives!

Sir, Paul J Davies reports that Moody’s warns on change of control clause”, April 26, with respect to a clause that is supposed to protect the investor from the risk that a company suddenly gets swallowed up in a highly leveraged takeover and leaves him with a much riskier investment that he had originally intended. As it seems some of these clauses when the credit rating agencies downgrade the company but, if the credit rating agency did, as it should, downgrade the company before the formalization of the takeover event then, as no further downgrading should be necessary, the investors could be left out in the cold. As I read it, this seems to be just another example of a derivative market that needs to be developed in order to cover the changes in credit rating methodology and timing of announcements applied by the credit rating agencies. And, after that, perhaps the only remaining risk we need to cover before we can sleep calm under our blissful protective cover, is the regulator risk but, come to think of it, there might not be pockets deep enough to guarantee the counterpart risk on that.