Standard & Poor's, Moody's Investors Service and Fitch Ratings are refusing to let their client bond issuers use their credit ratings because they fear the landmark financial reform law will expose them to new legal liability.
Unlike many other mandated changes in the Dodd-Frank bill, this one, which makes ratings firms liable for the quality of their ratings decisions, goes into effect immediately, The Wall Street Journal reported.
Ratings companies say they will continue to issue bond ratings, but won't allow those ratings to be used in formal documents that accompany bond sales.
The law is already is affecting bond markets, and sales of some bonds, especially those comprised of consumer debt, have halted in response to the request.
Several companies are withdrawing their bond offerings "indefinitely," according to Tom Deutsch, executive director of the American Securitization Forum, which represents the market for bonds backed by consumer assets like auto loans and credit cards.
Because some bonds are required by law to include ratings in their official documentation, the $1.4 trillion market for mortgages, autos, student loans and credit cards could effectively shut down.
However, bond owners could sell their bonds privately, with ratings that can be used in private transactions but not in sales to the general public and registered with the SEC.
Securities linked to vehicle debt in the United States represent about $34 billion of the $55 billion in bonds tied to consumer and business lending this year, according to data compiled by Bank of America, Bloomberg reports.
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