NEW YORK -- Standard & Poor's Friday changed its rating outlook on Bear Stearns Cos. to negative from stable, indicating a greater chance of a downgrade over the next two years, as it warned of problems that could hurt the firm's performance "for an extended period."
S&P said issues include problems at some of Bear Stearns' managed hedge funds.
The change pushed Bear Stearns' shares down 6 percent to $108.69 and drove the cost of protecting its debt with credit derivatives nearly 50 basis points higher.
A spokesman for Bear Stearns was not immediately available for comment.
S&P currently rates Bear Stearns "A-plus," the fifth-highest investment grade rating.
Story Continues Below
"Bear Stearns has material exposure to holdings of mortgages and mortgage-backed securities, the valuations of which remain under severe pressure," S&P said in a statement. "It also has exposure to debt it has taken up as a result of unsuccessful leveraged finance underwritings, and it has significant further underwriting commitments."
Bear Stearns is expected to be profitable in the current quarter, but because of its reliance on the mortgage and leveraged finance sectors, profits could be hurt if there were an extended downturn in these markets, the rating agency said.
Bear Stearns has struggled with redemptions at three hedge funds investing in repackaged debt. Two of the funds had made bad investments in bonds linked to subprime mortgages, a sector offering high-interest loans to borrowers with poor credit and where defaults have surged. Bear said in mid-July that the two funds had very little value left for investors.
"We believe Bear Stearns' reputation has suffered from the widely publicized problems of its managed hedge funds, leaving the company a potential target of litigation from investors who have suffered substantial losses," S&P said.
Bear Stearns' liquidity is strong and is expected to remain so, S&P said, noting it has reduced reliance on commercial paper, and cash, and other sources of funding are more than adequate to meet near-term needs.
A rising number of home-owner defaults has cut into underwriting volume in the mortgage bond market, where Bear Stearns is one of the nation's largest underwriters.
The cost to insure Bear's debt with credit default swaps rose to around 163 basis points, or $163,000 per year for five years to insure $10 million in debt, from about 115 basis points at Thursday's close.
Yield spreads on Bear Stearns' 5.55 percent notes due in 2017 widened to 223 basis points, up from 205 basis points on Thursday, according to MarketAxess.
© Reuters 2007. All rights reserved. Republication or redistribution of Reuters content, including by caching, framing or similar means, is expressly prohibited without the prior written consent of Reuters.
Editor's note:
Try Intelligent Options for $99. Our lowest price ever.
12 Ways to Recession Proof Your Portfolio
Buffett: The best book ever written on investing.
