Moody's Downgrades Chrysler: "C" Does Not Mean "Average"

Moody's Investors Service today cut credit ratings for Chrysler even lower into junk status, and indicated it may cut them further. The latest cut lowered Chrysler's ratings one level, to "Caa1." (Finance company Chrysler Financial got cut to B2.)

That doesn't sound like a big deal, but it's more significant than it looks. Everybody knows the auto industry is in trouble, especially Chrysler. Daimler dumped Chrysler last year. Chrysler is more dependent than either Ford or GM on truck sales, and it's way more dependent than they are on the slumping U.S. market.

The reason why Chrysler's downgrade is more important than it looks is that unlike a report card, a "C" credit rating does not mean "average."

The fine print on the Moody's web site says that a rating that starts with "C" is the lowest category. There are several flavors of "C," since Moody's is good at splitting hairs. A "Caa1" like Chrysler's is the highest possible "C," but it's still a "C." There is no "D" or "F."

Below "Caa," there's "Ca" and just plain "C." The number 1, 2 or 3 indicates how high a rating is, within that sub-category. No. 1 is the highest.

Moody's says, "Obligations rated Caa are judged to be of poor standing and are subject to very high credit risk." Ouch, but so what?

"Ca" means, "Obligations rated Ca are highly speculative and are likely in, or very near, default, with some prospect of recovery of principal and interest." Really?

And plain "C" means, "Obligations rated C are the lowest rated class of bonds and are typically in default, with little prospect for recovery of principal or interest." Holy cow!

That means, Moody's believes Chrysler is only a couple of rungs above the category that says, in my terms, "not only is it probably in default, there's not even much hope you'll get any money back."

That sounds pretty serious. If I were a corporation, I wouldn't want any rating with a "C" in it, no matter how many suffixes it had.