By: Phil Kernen
To be awarded a triple-A credit rating was once a priority for some of the biggest and best-known U.S. companies. Only the financially strongest companies, organizations, and governments can earn a triple-A credit rating. It typically bestows the lowest borrowing rates and suggests the highest ability to repay bondholders. Due to many factors, the triple-A club has been shrinking over the last four decades, but Apple recently became only the third current member of this exclusive club.
The list of companies holding triple-A credit ratings was once much longer. In 1980 nearly 60 companies carried a triple-A credit rating. These companies prioritized solid balance sheets and enjoyed the lower borrowing costs that flowed to financially robust borrowers. But starting in the 1980s, the U.S.’s business landscape began to change. Business issues, a buyout and acquisition binge, and evolving financial policies conspired to create a willingness for more debt.
Competitive business issues removed Ford and General Motors from the listing, losing their triple-A ratings in 1980 and 1981, respectively. Rising interest rates designed to fight inflation, high fuel prices, and growing competition from Japan damaged their finances so much they couldn’t maintain their financial strength and compete effectively. In 1986, Coke lost its triple-A rating when it took on debt to create a new bottling network. Competitive issues led to Sears being downgraded in 1980, followed by AT&T in 1984, drug-maker Schering-Plough in 1985, Eastman-Kodak in 1986, and IBM in 1993.
Buyouts and acquisition took their toll, too, ushering in a dramatic rise in the use of debt to increase shareholder returns and fund takeover activity. Companies with large cash balances became attractive targets. After being acquired, many targets lost their triple-A rating, and the new owners used that cash plus more debt to pay for the deals. Getty Oil experienced this outcome in 1984, Gulf Oil in 1984, Sterling Drug in 1988, and Amoco in 1999.
Changes in financial policy were the final nail in the coffin for many triple-A-rated companies. In a bid for higher risk and higher profits, some companies decided to deemphasize building large cash balances in favor of more debt in exchange for (hopefully) greater profits. In response to this shifting business environment, DuPont lost its triple-A rating in 1981 following a change in financial policy. Macy’s, Kraft Foods, and General Foods lost theirs in 1981, Kellogg’s and Chevron-Texaco in 1984, and Procter & Gamble in 1987.
By 2011, the list of triple-A-rated companies narrowed to four after General Electric, Berkshire Hathaway, and Pfizer lost their triple-A ratings after the Great Financial crisis in 2008. However, monetary policy was so easy, interest rates were so low, and bond demand was so great that interest costs for a triple-A-rated credit were hardly different from the lower levels. Suddenly the cost savings from a higher credit rating mattered less than ever. After taking on more debt, payroll processor ADP was downgraded in 2015 and Exxon in 2016, leaving only Microsoft and Johnson & Johnson.
Apple’s triple-A credit rating resulted from programming, design, production, and marketing decisions, leading to billions in excess cash and a solid balance sheet. They didn’t achieve a triple-A credit rating because that was the goal. They didn’t sacrifice other business initiatives to prioritize credit strength. They made loads of money by competing, executing, and winning. Credit rating agencies are routinely late to realize what markets have already seen. Eventually, Apple’s business success made it impossible not to give them the top rating.
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