DOWNGRADED RATINGS OF EXCHANGES DUE TO GREATER UNCERTAINTY AND AGGRESSIVE FINANCIAL POLICIES, S&P STAFF SAY

Posted June 16, 2008

NEW YORK – Increasingly aggressive policies by exchanges and clearinghouses concerning leveraging balance sheets to either return capital to third-party shareholders or finance mergers and acquisitions could cause rating instability for the industry, say executives of Standard & Poor’s (S&P).

S&P recently changed its outlooks on NYSE Euronext and LCH.Clearnet Ltd. to negative, saying LCH.Clearnet faced more uncertainty about its business and increased competition, and NYSE Euronext’s increasingly aggressive financial policy with a buyback of $1 billion in common shares, was cause for concern, observes Charles Rauch, Managing Director, S&P.

“While we admit that both business risks and financial risks are increasing, the overall risk profile of the exchange industry is still considerably less than those of other financial institution sectors like banks and brokers,” he says.

Ratings changes in the next few years for exchanges and clearinghouses will be event-driven, according to Rauch, through actions such as issuance of debt-to-finance extraordinary dividends, share repurchases or acquisitions, causing higher debt-to-capitalization ratios.

Growth in trading volume would lead exchanges to cut fees, according to Diane Hinton, Analyst, S&P. “We're looking for the exchanges to increase the scalability on the cost side to take care of some of this inherent high operating leverage, and that's going to be very difficult, because it's a very high-tech business,” she says.