How to Work With Credit Rating Agencies

At many companies, dealing with rating agencies is a core responsibility of the treasury function. Here’s how to do it right.

A credit rating brings a number of significant benefits to most corporate borrowers: It increases the field of investors who are willing to buy a company’s debt, and by expanding the investor pool, it usually reduces the cost of borrowing. It also increases the level of confidence that the company’s other stakeholders—including derivative counterparties, customers, shareholders, and regulatory bodies—have in the company. However, from the moment a company embarks on the path toward obtaining a credit rating, whether it’s getting a rating for the first time or getting an additional rating, someone needs to carefully tend to the relationship with the rating agencies. That someone is usually the treasurer, and it’s not a job to take lightly.

A credit rating is a very public opinion on the creditworthiness of a company, so it’s vital for the organization to take a systematic and comprehensive approach to managing relationships with the agency or agencies developing those opinions. Even the decision of whether to pursue a rating in the first place is a significant responsibility. Most large companies—especially multinationals—tend to have one or more public ratings in order to access the debt and capital markets, but in some cases the costs of pursuing a credit rating may outweigh the benefits.

The company can also evaluate which agencies its peers use and look at the rating levels that they have been assigned. Investors and other market participants may question a company’s selection if it uses a rating agency that is not common among peers in its sector. However, organizations should not use popularity among their peers and investors as their sole criteria for choosing a rating agency. A business’s competitors may have selected a particular agency for reasons that made sense in the past but are no longer valid—for example, some agencies’ rating methodologies may have been opaque in the past but may have become more transparent over the years.

Once it’s narrowed its choices to a shortlist of rating agencies, a company needs to do its due diligence using publicly available information. At the end of this process, the company will meet with each of the rating agencies. The goal should be to uncover as many strengths and weaknesses of each agency as possible prior to meeting with any of the agencies, as well as to investigate the suitability of the rating agencies’ methodologies and processes.

Questions for Prospective Rating Agencies

A company should meet with each of the rating agencies it’s considering before it appoints one or more to provide a credit rating. Although the agencies will bring marketing materials to the meeting and will have their own agenda, the company should prepare its own list of questions. The purpose of the questions should be to clarify the agency’s methodology and its rating process, and the company should send its list to the agency prior to the meeting so that the agency can provide answers with an appropriate level of detail.

Making the Appointment

After carrying out all this preparatory research and then meeting with its prospective rating agencies, a company will be in a good position to make an informed decision about how many ratings it needs and which agency or agencies should issue them. It will also be well-prepared to work with its rating agencies on an ongoing basis. This process requires time and focus from the organization’s senior management, so the company needs to ensure that it has sufficient resources. The company can reduce the burden on its top executives by assembling a project team and appointing one person as the project leader. The project leader will be responsible for gathering the information required by the rating agencies; preparing the company’s presentation for the management meeting; and managing all communication with the rating agency.

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