By Jonathan Stempel
NEW YORK, Nov 27 (Reuters) - When Enron Corp. disintegrated last year, investors lost more than their shirts. Many lost their faith in the three big credit rating agencies charged with keeping close tabs on the energy giant's health.
Since then, Moody's Investors Service, Standard & Poor's and Fitch Ratings have worked to rebuild the trust essential to the credibility of the ratings that companies pay them to assign. If investors lack confidence in those ratings, they lose an easy way to weigh the risk involved in buying corporate debt.
A year after Enron, the results are mixed. The agencies have stepped up their analyses to give early warnings on the "next Enron" or WorldCom Inc. , the phone company that sought bankruptcy protection in July.
But many say more reform is needed. The agencies faced a barrage of criticism from investors, Congress and potential rivals after stripping Enron of its investment-grade ratings in three hours last Nov. 28, just four days before the energy trader slid into bankruptcy. The U.S. Securities and Exchange Commission this month held two hearings on possible reforms.
But for the agencies -- whose alphanumeric grades from "triple-A" to "D" are sometimes called "the world's shortest editorials" -- evolution is slow, and revolution nonexistent.
"Specific structural change has been absent," said Glenn Reynolds, chief executive of CreditSights Inc., an independent fixed-income research service in New York. "They still do a bad job with volatile credits and a better job with more stable credits. When things really start to move, their lack of clear criteria has been a problem for everyone."
In the last year, the agencies have boosted staff and focused far more on such Enron bugaboos as off-balance-sheet financing and liquidity, the ability of companies to raise cash fast. The latter sank Enron after the Nov. 28 downgrades forced it to find $3.9 billion it didn't have.
FASTER MAY BE TOO FAST
While market participants welcome these efforts, many say the agencies, especially Moody's, now downgrade too fast or too aggressively, often slashing a rating two or three notches on a seeming absence of "new" credit-related news. Downgrades have outpaced upgrades for four years, now by about 5-to-1.
An illustration of the rating agencies' power came on Tuesday, when a Moody's downgrade of El Paso Corp. to "junk" status sent the pipeline giant's shares skidding 19 percent and bonds down 10 percent.
El Paso wasn't happy. "Regrettable," is what Chairman William Wise called the downgrade.
Cliff Griep, S&P's chief credit officer, said markets are volatile because investors are very sensitive to credit risk. "That puts even more of a premium on timeliness," he said.
Up to a point. Bond investors faulted Moody's, for example, in January for cutting Ford Motor Co.'s ratings five days after warning a cut was possible. Yet those investors balked a month later when Moody's floated an idea to change ratings more often. Investors feared that would make prices too volatile.
"It's fair to say we have been more aggressive in the last year," said Christopher Mahoney, who chairs Moody's credit policy committee. He said that results in part from large numbers of investment-grade companies including Enron, WorldCom and two big California utilities, that quickly defaulted, or fell to "junk" status -- the so-called "fallen angels."
"Most of the rating volatility and fallen angels are hopefully behind us, so the aspects of our behavior that have been annoying the buyside should diminish," Mahoney said.
MORE DISCLOSURE, BUT IS IT FAIR?
Agencies are also exempt from SEC Regulation FD, or Fair Disclosure, which gives them information the market lacks.
Glen Grabelsky, managing director in Fitch's credit policy group, said: "The perception that we have intimate private details of corporate transactions grew. That is not the reality."
He said agencies are not accountants, and that variability in companies' audited financial statements can inhibit rating consistency from company to company.
Still, Stephanie Petersen, a senior vice president who helps invest $120 billion in fixed income at Charles Schwab & Co. in San Francisco and testified before the SEC, wants agencies to make their rating methodology more "transparent," even if they don't disclose specific confidential information.
"Knowing what information they get, and how they use it, would be helpful," she said.
The other big thorn is that Moody's, S&P and Fitch remain the only rating agencies with an SEC seal of approval.
The SEC designates them Nationally Recognized Statistical Rating Organizations. Companies need ratings from at least two before they sell debt. The agencies derive up to 90 percent of revenues from ratings, and some believe that causes conflicts.
"Investors need firms that solely represent their interests," said Sean Egan, managing director at Egan-Jones Ratings Co. in Philadelphia, which wants NRSRO status and is not paid by companies it rates. "The form of compensation is as relevant on the fixed-income side as on the equity side."
Some are less concerned. Payments are not a "huge conflict," said H. Kent Baker, a finance professor at American University in Washington who also testified before the SEC. "Ratings are done by committee, and it's a different world from an individual putting buy or sell recommendations on stocks."
Experts said agencies will at a minimum try to rate companies better, and disclose more of what underlies their thinking.
"At the end of the day, you need pressure on the agencies to improve their performance," CreditSights' Reynolds said. "That can best come internally from the agencies themselves."
Moody's is part of Moody's Corp., S&P of McGraw-Hill Cos. and Fitch of France's Fimalac .