A credit rating brings a number of benefits including increasing the pool of investors and reducing the cost of borrowing. In a year where cash management has been critical, we have seen an increased focus on liquidity and debt repayment capacity, and as a result there has been a focus on ensuring a company has access to diverse funding sources. The key to accessing these funds is a credit rating. Credit rating agencies, who provide these ratings, therefore hold a critical role.
The Future Leaders in Treasury virtual event on credit ratings looked at how to get a credit rating for the first time and how to change agencies. Our guest speaker was Will Cuthbert, a senior finance leader and former Group Treasurer at Eversholt Rail.
What is involved when you get your first rating?
The key things to do when looking at getting your first rating are:
1. Research the rating agencies.
The first place to start is to really understand what the rating agencies do and what methodologies they use – different agencies will use different methodologies. Remember that this will be a long relationship, so you have to choose the right agency for you and it’s important to do your research and to understand the differences between the agencies. Once you understand their methodologies, you should look at which companies they rate within your sector and what the ratings are.
2. Decide how many ratings you would like.
Depending on the funding sources you want to access (e.g. US funds, European funds) you may want to have 1, 2 or 3 credit ratings. Your internal governance documents may also dictate the need for a set number of ratings.
3. What is your story?
Look at how you will present yourself to the rating agencies. Get early buy-in from internal and external stakeholders so that everyone is ‘on message’.
Relationship management is key to ensuring you get buy-in internally and externally. What advice would you give on managing these relationships?
Internal relationships
If you are a listed company, you are opening yourself up to external scrutiny and your management team will need to be comfortable with this. So, you need to spend time with senior management and key stakeholders to ensure they understand what a credit rating will do for the company and why this is important. Some departments within your company may have a view as to what information is confidential and difficult to share – which is why they need to understand the important role the agencies play.
When meeting/presenting to them, you need to be able to:
External relationships
The key external relationships are with:
What is involved when you move rating agencies?
If you are moving rating agencies the process is very similar to a new rating agency process e.g. you need to understand their methodologies and what that would mean for your company. The added dimension is that you need to manage the relationship with the agency you are leaving as well as with the one you are joining as you want a smooth transition.
The key aspects once you decide who you want to go with are:
What do you need to think about in terms of pricing?
The key pricing considerations are:
Tips for getting your first rating.
Will provided a few tips for those who were looking to get a rating for the first time:
We then heard the banker’s perspective about the impact of a rating on financing. Firstly, Ula Malczewska spoke about the importance of working with your banking relationship managers. They are there to help you optimise your capital structure and you can rely on them to guide you and work with you to get your rating. It is important to work with a bank that understands your business so that they can convey your credit rating story. She emphasised the need for close engagement and regular dialogue with the bank and with the rating agencies.
Arturo Lorente, who heads up the ratings advisory team, then spoke about how the bank can help by providing an analytical perspective – for example, by working through the credit ratings methodologies, and can help you to understand what may be missing from a capital structure/liquidity perspective. Obtaining a rating typically takes 2-3 months, with the credit agency engagement aspects normally taking place in the last month, and the bank is there to help with the prep work.
Finally, we heard from Colm Rainey, who runs the investment grade DCM business who spoke in relation to BBB- and above companies. He commented that the vast majority of companies that access the deepest pools of investment are rated and it is rare to come to the market unrated. The companies that do, pay more for their debt than similar companies that are rated. The benefits of obtaining a rating are: access to cheaper funding, gets you in to the indices, gives you access to a broader pool of capital and ensures you get faster execution.
We ended the event by talking to the three credit rating agencies and were delighted to hear from Lynn Maxwell - Head of EMEA Sales, S&P Global Ratings, Colin Ellis - Chief Credit Officer, EMEA & Head of UK Managing Director, Credit Strategy, Moody's and Anjali Sharma - EMEA Head of Corporates, Business and Relationship Management, Fitch Ratings.
Colin described how Moody’s do ratings, processes and methodologies. Fundamentally, credit ratings are about credit risk – will you be able to pay back on time and in full. Moody’s start by looking at the size of the company, revenue, outstanding debt, metrics such as liquidity profiles etc and then bundle all of these aspects together using their different methodologies depending on what your company looks like. They try to be as transparent as possible (they have detailed published methodologies for over 50 different corporate sectors globally) so that you can understand how they weight different aspects of a company’s performance and what matters to them.
Having spoken about the models, it is important to understand that they are a simplification of the way the world works and no one company will fit in to a particular model perfectly so it is important for the rating agency to:
Lynn spoke about sustainability in the context of ratings. Increasingly investors and issuers are asking about the ESG profile no matter what type of bond is being issued. Things to look at include:
Anjali spoke about the importance of relationship management between the company and the agency. Once you have published your rating, you now have a new stakeholder in your credit relationship. This is either handled within the treasury team or by the investor relationship team or a mixture of both. Similar to your relationship with other stakeholders, it is important to provide information to the agency and much of the information you provide to banks and investors will also be provided to the rating agencies. The main difference is in the detail the credit rating agencies require and go in to.
The relationship process consists of an annual review with your analyst and you typically provide an update on the company’s performance, business plan and strategy, financial results, goals and objectives around net debt etc. and address changes to the rating drivers that were presented last time.
Your analyst will monitor your company throughout the year. Analysts are keen to know about any changes to the company or marketplace and it’s good to provide information directly to them, such as results and key press releases. If there is a change to the rating view or even an affirmation following an annual review or material event the analyst will provide a rating action commentary for the company to review. You will have 24 hours to review this and then the agency will publish the pack.
Insider status is an important part of your relationship with the agency. Most issuers will normally provide information to the agencies they may not provide elsewhere, for example, specifics around disposals.
And finally, it is important to understand that you will have two relationships with the agencies – one is with the analytical team and the other with the commercial team.
Remember that your relationship with your credit rating agency is a long-term relationship. Be open and transparent with them and ensure you allow time to discuss things and work with them.
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Thank you to all the speakers for taking part in this event and for providing practical guidance and insight into the credit rating process. The ACT would also like to thank Citi for sponsoring the event.
