Corporate GovernanceInvestor RelationsRisk Management
With investors and ratings agencies, midsize companies often find themselves overshadowed by dominant multinationals in their industry
Within months of going public in February 2000, wireless provider Nextel Partners Inc. set up its investor relations operation—although the word 'operation' may be a little bit of an exaggeration. Today, as it did four years ago, the "operation" consists of one person—Alice Kang Ryder, who serves as both director and staff for a department that spends about $1 million a year. "I also do other things, like financing transactions and so on," she laughs.
Kang Ryder and Nextel are hardly unique. For midsize companies, even a staff of one and a budget of $1 million can seem like luxuries. When it comes to fielding investment community inquires or disgruntled investor calls, many middle-market companies are forced to rely on their treasurer (if they have one), CFO or even CEO. "We try to be efficient, but at the end of the day we realize we're a cost center," says Kang Ryder. And for companies with less than $1 billion in revenues, it is a cost center that many have reluctantly decided that they must live without.
Feeling Neglected
The result: Midsize companies get less than their fair share of attention and ultimately investment capital. According to finance executives and outside experts, mid-cap companies in their dealings with Wall Street, investors, credit rating agencies and even regulators often are eclipsed by the successes of their large-cap brethren, but end up paying for their sins.
Take, for example, Kang Ryder's company, Nextel. In a tortured telecom market, Nextel has managed to pull off respectable growth and build a solid cash position. Yet, the two dominant credit rating agencies—Moody's Investors Service and Standard & Poor's—have graded it below investment grade; Nextel earned a BB minus at S&P and a Ba3 at Moody's. "We beat our heads against the walls dealing with them," Kang Ryder says. "The business plan that we showed them in 1999 is obsolete, because we blew away the expectations. Yet, at one point, Moody's actually downgraded us, even though we had exceeded the plan they'd based our rating on. Why? They were worried about the wireless industry."
Companies almost always have a few gripes about their credit rating or their interaction with the agencies. But in the case of midsize companies, some can actually point to evidence that suggests they may have a case. While S&P and Moody's still mark Nextel as junk (although both recently moved the telecom up to high-end non-investment grade), Egan-Jones Ratings Co., a smaller but respected corporate ratings agency, moved Nextel into investment grade in mid-January with a BBB-minus rating. "Just compare WorldCom and Nextel," says Sean Egan, a principal at Egan-Jones, who believes mid-cap companies suffer because they aren't sizable sources of income for the large agencies. "WorldCom's senior management did a terrific job of endearing themselves to Wall Street and the ratings firms. In fact, just a year before they went bankrupt, everyone was drooling over their $11-billion debt offering. And look what happened to them. Meanwhile, it was a different story for Nextel Partners. They have a solid company, but their debt has junk bond status."
For Egan, the problem boils down to the tens of millions of dollars that ratings agencies derive from their work for Fortune 500 companies. First of all, there is a flat fee to get rated. For example, Fitch Ratings, the No. 3 of the better-known agencies, charges $30,000 to rate a company. Then, the companies are charged a fee based on a percentage of the total debt issue. Even here, the big guys get a break since that percentage drops on larger issues. "We hear lots of complaints from smaller and midsize companies that ratings fees are outrageous and they are being underrated," Egan says.
He says the bigger agencies make a mistake by giving a higher grade just because a company is big. "While large size can mean that a company has access to a wider range of credit markets, it doesn't necessarily follow that a large company is more creditworthy," says Egan. "At the end of the day, the underlying credit quality of the company is what matters. Look at Enron."
Egan can provide a list of some 42 firms, with sales ranging from ShoLodge Inc.'s $28 million to Primus Telecom's $1 billion, where his firm's ratings are significantly higher than either S&P's or Moody's. Sometimes, as in the case of Nextel, Nuevo Energy Co. or Coeur D'Alene Mines Corp., the difference can be as much as three or even four ratings categories. "There really is no excuse for giving Coeur d'Alene such an extremely low non-investment grade rating," says Egan. He notes that the stock of Coeur D'Alene Mines, a precious metal mining company, rose from a low of $1.20 to over $6 a share between March 2003 and January 2004, and its debt was a manageable $99 million in March, which it "clearly could pay off."
The Big Three agencies confirm that size can play a role in ratings. "I wouldn't say that there's a size bias among companies that are bigger than $1 billion a year in sales," says Nancy Stroker, Fitch's group managing director for corporate finance, "but it is true that we think market size in and of itself is a measure of success."