Compuware, an application development, testing and management company, filed suit against the debt ratings company last month, claiming that in August 2002 Moody’s unfairly downgraded its debt rating. The analyst firm had at that time downgraded Compuware’s debt status by two notches from Baa2 to Ba1, a reduction from investment grade to junk status.

The main plank of Compuware’s argument is that there was a clear conflict of interest at Moody’s at the time the debt downgrade was issued. Earlier in 2002, Compuware had filed a suit against IBM Corp seeking damages based on a variety of claims including copyright infringement. Compuware claims in its suit against Moody’s that at the time that Compuware was taking action against IBM, the same analysts at Moody’s were performing credit ratings for both Compuware and IBM.

But Moody’s SVP communications, Fran Laserson, said that there was absolutely no conflict of interest. She said that Moody’s deliberately insists that analysts cover more than one company in a particular sector, so that their analysis of a particular company is always taken in the context of the sector as a whole. It makes much more sense for an analyst to have an industry context, so they can take the company in question in the context of their peers, she said.

But Laserson added that no analyst makes a debt rating judgment on their own. She said that analysts work a committee system, with the chairman of each committee banned from also being the lead analyst in that sector. Each committee consists of four or five analysts, she said, and a vote is taken before a debt rating is given. Laserson also said that analysts are prohibited from holding securities in either the companies they give ratings on, or any other companies in the sector.

Laserson claimed that there is no commercial incentive for Moody’s to rate one company’s debt better or worse than any other company. She also insisted that the reason for downgrading Compuware’s debt in August 2002 was not based primarily on Compuware’s case against IBM. The first and biggest reason was revenue and profit weakness at Compuware in the 12 months ending June 2002, she said, and the second reason was the continued weak environment for software and services. The third reason was the strained relationship with IBM, given that Compuware sells products related to IBM mainframe operating systems. Compuware’s lawsuit against IBM created certain pressures.

We deliver to investors an independent assessment of a company’s future credit worthiness, said Laserson. We did exactly that, we put out our opinion.

Laserson said Moody’s has only had a suit of this nature filed against it on one other occasion, by the Colorado Schools District in the 90s, and she said Moody’s won that case. It’s not surprising that companies don’t like it when we lower ratings, said Laserson, and some complain when we do. This lawsuit is evidence in itself that we deliver an independent assessment.

Compuware recently published third-quarter figures which saw cash flow from operations of almost $85m. Its cash and cash equivalents came to $301.7m, up from $81m in the same period a year ago, while investments came to $127.8m, down slightly from investments of $138.4m in the year-ago period.

Compuware’s suit against Moody’s states that Given the fact that Compuware at the time of the downgrade had over $475m in cash equivalents and liquid investments, that Compuware was expected to generate free cash flow for fiscal 2003, that the credit facility matured in August of 2003 and that Compuware had borrowed no amounts against the credit facility, Moody’s downgrade of Compuware’s credit rating with respect to the bank facility had no factual basis.

Laserson said she had not seen Compuware’s latest results, but added that the debt downgrade was an opinion issued in August 2002, and based on Compuware’s results to June 2002.

Source: Computerwire