Credit ratings agencies (CRAs) are being prised open as they
respond to increasing pressure from governments and the emergence of
competition. But for some finance directors, this is not happening fast enough.
The ratings oligopoly of Standard & Poor’s, Moody’s, Fitch and AM Best is
under pressure amid the birth of the European Securities and Markets Authority,
set up by the European Union, to monitor the agencies’ activities and
methodologies in their approach to sovereign debt. It follows the US Senate’s
vote to establish a government-appointed panel to decide who can rate any
individual asset-backed security. And on the corporate side, the launch of a
big-name rival to the established rating agency kings, K2 Global – the
brainchild of security specialist Jules Kroll – has given issuers more choice.
These factors have already led to CRAs improving the transparency of their
rating methodologies, according to industry observers. If FDs are looking into
issuing bonds, they are now more able to look across their particular industry
sector and see what their likely credit rating would be.
That said, many mid-cap companies, including those in the FTSE-250, still
regard the process of using a ratings agency and issuing bonds on the public
markets as too expensive. They also see the ratings and issuance process as far
And not all UK companies require their services if they want to issue bonds.
Davis Service Group, a London-based, FTSE-250 industrial textile cleaning
company that does not have a credit rating, last year announced it had issued
$300m (£203m) in private placement loan notes to US insurers. The notes are not
publicly-traded as bonds are, but give Davis the funding flexibility the effect
its expansion plans.
“We wouldn’t necessarily welcome going through the credit rating process.
There is someone else out there having a view as to our company’s prospects;
another voice in the market,” finance director Kevin Quinn tells Financial
Director. “Also, credit ratings agencies tend to give a premium for scale.”
For companies that are registered with the Securities & Exchange
Commission, for whom ratings agencies are a fact of life, working with them and
using the bond markets instead of banks is turning out to be an attractive
option in the wake of the financial crisis. In the past three years, Virgin
Media has flipped its funding from 75 percent derived from banks and 25 percent
bonds, effectively refinancing more than £6bn of debt. It is a move that chief
treasurer Rick Martin says has lengthened the company’s debt maturity profile
and, he adds, has been made possible because of his company’s good relationship
with Fitch, S&P and Moody’s.
“In the worst days of the credit crunch, we were given positive marks for
transparency around operating and financial performance,” says Martin. “So they
have supported our move.”
Jason Green, a director in the leveraged finance advisory at
PricewaterhouseCoopers, says that despite the work needed to satisfy a ratings
agency, companies looking to raise more than £100m should consider the public
debt markets. “Issuers with more than £100m of debt should consider it,” he
says. “If you’ve got £60m, forget about it.”
Tapping into public markets
Green adds that it is worth using a ratings agency and issuing corporate bonds
because of the need to go back and tap public markets for more cash. Even though
the markets appear to be on temporary shutdown amid concerns around eurozone
stability, if companies are looking to access it in the autumn, or over summer,
“they need to get the credit story right for the ratings agencies”.
That inevitably involves a financial and time investment. But British
companies that are not locked into relationships with credit ratings agencies,
and who might consider issuing bonds in the future, may take heart from a
European level of regulation of ratings agencies – even if our recent online sur
vey of FD sentiment showed that 50 percent of respondents said “no” when asked
if they thought it would make ratings more accurate in future.