Moody’s announced it was dropping its unpaid for and unsolicited rating on WeWork’s bonds saying

it believes it has insufficient or otherwise inadequate information to support maintenance of the ratings.

The bonds are still rated by S&P Global Ratings and Fitch Ratings.

This announcement doesn’t seem like much until you realize if Moody’s doesn’t have enough information to grade the company’s creditworthiness, what makes anyone think investors have the information they need to assess the risk of the investment?

Of course, investors don’t have the necessary information.

The WeWork’s bond is a classic example of a security that does not qualify for a label from the Transparency Label Initiative.  It is opaque.  Buying opaque securities is the equivalent of betting on the unseen contents of a paper bag.

The fact is Moody’s didn’t have enough information when it offered its unsolicited rating either.  It was simply rating the unseen contents of the WeWorks’ security.

This fact leads to a very important observation.  Rating firms still try to imply they have access to material, non-disclosed information when the publicly disclosed information is inadequate to assess a security’s creditworthiness.  As shown in 2007 with their admission they didn’t have the necessary information to rate subprime securities, this isn’t true.

What is really troublesome is even in the absence of the information needed to rate a security, rating firms continue to be more than willing to provide a rating.  This is particularly true if they get paid for it.  But it also applies if the rating firms thinks its unsolicited rating will generate future business.

So what can an investor do to protect themselves from rating firms rating opaque securities?

Look to see if the security qualifies for a label from the Transparency Label Initiative.  If the security doesn’t, it belongs in the opacity asset class.  Then, if you are going to blindly bet on this opaque security, the potential return needs to be very high so as to offset the strong likelihood of losing 100% of the investment.