Comment by grumpymouse
3 days ago
From the article:
>However, Anthropic’s disclosure to KBRA excluded several important financial metrics, including free cash flow and earnings before interest, taxes, depreciation and amortisation. Credit rating analysts had to come up with their own estimates based on assumptions, the documents show.
>Given the limited information, KBRA produced a “risk score” to assess Anthropic’s creditworthiness rather than the traditional full financial models.
This and the fact they went to a small ratings agency does not inspire confidence in the rating.
No, but a trillion dollar company going to a ratings agency to get an assessment of its credit rating and not giving that ratings agency enough information to do that doesn’t inspire confidence in that trillion dollar company, either.
Why didn’t they give them the info? They either withheld it or don’t have it. Both make them look bad.
>they went to a small ratings agency
that's a bigger red flag. there may be reasons (bad) to not give them all the info, but going to a smaller agency is the largest of red flags when you are that big of a company.
> a small ratings agency
If you look at 10-year default rates for BBB-rated paper from the big three plus EJR, AM Best, KBRA and DBRS, you find everyone tightly clustered in the 1 to 2% range except KBRA, who was up at 4% [1]. That suggests they've historically rated junk bonds as barely investment grade. I'm assuming that's what Anthropic was hoping for.
[1] https://www.ft.com/content/d97e1e86-1e90-4c5c-b972-052d43a36...
1-2 percent seems so tiny that it's incredibly low risk. Am I misreading that stat?
You’re not. That’s why BBB is investment grade. (When you get to A, the default rate falls to 0.1 to 0.5 percent, AA only DBRS with a 1% default rate and AAA with none in that period.)
Go a step down to BB and you’re talking like one in twenty offs of default. (Unless it’s DBRS, in which case it’s one in three.)
Note that default doesn’t mean you lose everything. Conventional recovery estimates are 40%. But the idea of investment grade is you can basically assume that after taking into account interest paid on a portfolio, you should never lose capital.
KBRA is tasked with producing a rating. Insufficient information won't stop that task. The rating has the confidence it deserves: Anthropic is hiding the bad data and as such no one can rate them highly.
> KBRA is tasked with producing a rating. Insufficient information won't stop that task.
Rating agencies will absolutely refuse to rate if provided insufficient information.
so Antropic hid all the bad info, went to more loyal agency...
...and score still showed "high probability of being junk"?
No, the title is poorly phrased, I think you misunderstood.
All ratings agencies have their own scales, but broadly all ratings fall into one of two overarching categories, investment grade vs. junk.
The article explains that the rating ANT received was the highest within the junk range. So “highest junk rating” means within the junk category, it’s in the best sub-area. In other words, it’s just scratching below the investment grade rating.
This is important for institutional investors who can only buy investment grade, meaning if they can improve even one single grade up, they get access to a lot more debt.
ie: it's almost not rated as "junk" and for that, we should be scared.
> This is important for institutional investors who can only buy investment grade, meaning if they can improve even one single grade up, they get access to a lot more debt.
I believe some institutional investors have policies allowing some purchasing of 'highest junk' as well. Depends on the fund, etc.
honestly not changing my overall feeling that credit ratings are junk science
> not changing my overall feeling that credit ratings are junk science
Then you have been misinformed. Rated bonds by and large fail at the rating predicted by the big three [1].
[1] https://www.ft.com/content/d97e1e86-1e90-4c5c-b972-052d43a36...
I know absolutely nothing about this, but it does strike me it might be self-fulfilling? Companies that have access to more investment tend to win more often, and thus become 'investment grade', while junk-rated firms fail because they don't have the runway?
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You can hold both things in your mind and they aren't contradictory. It can be a bad system but it can still be suspicious if someone behaves outside the norm inside it.
Other posts made me understand what it actually measures and why is it meaningful - it tells you if you lend this entity money at the govt bond interest rate, will this entity be able to pay back more or less eventiually?
Obviously a financially rational person wouldn't lend money with worse returns it can get from the government risk-free as that would be charity, hence these are considered 'junk'.
I agree but I think both things can be true . Like in this case.
"This and the fact they went to a small ratings agency does not inspire confidence in the rating."
...
"If we don't work with them they will go to our competitors. Not our fault. Simply the way the world works."[1]
[1] https://www.youtube.com/watch?v=mwdo17GT6sg @ 3:31
but, but... HN told me that Anthropic is profitable. Their margins are supposedly insane!