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 "The business plan that we showed them in 1999 is obsolete, because we blew away the expectations.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."

"Certainly, size is a factor in our ratings," agrees Tom Marshella, S&P's managing director for corporate finance. "But does it correlate perfectly? No. Look at the Four Seasons Hotels. That's a small company that is a niche player in an upscale market. But the fact that they dominate that market outweighs their lack of financial mass."

Given the obstacles, how does a strong midsize company get the word out? In the wake of the lackluster markets in 2001 and 2002 and scandals at the likes of Enron and WorldCom, Lou Thompson, CEO and president of the National Investor Relations Institute (NIRI), says middle-market and small companies are waking up to the need to pay full-time attention to demands of increasingly inquisitive investors, analysts and regulators for information and more frequent updates. "It's essential to have a programmatic approach to investor relations, as well as to dealing with ratings agencies," Thompson says. "It's essential that the investment community understand a company's strategy and have confidence in its ability to execute that strategy. If you don't have such an approach, companies are often misunderstood and are not properly valued in the marketplace."

But there's a long way to go for many companies. Thompson estimates that as many as half of the mid-cap companies in the country are still without a formal IR department. "There are some pretty large companies with no IR person, and often even those that do have an IR department are making do with a staff of just one or two people," says Thompson. "I think companies are just beginning to realize that they need an IR operation, and with an economic turnaround coming, we may see a number of them adding them."

Ryan Snow, senior analyst for the Wasatch Advisors Inc., agrees. "We're even finding that more small-cap and even micro-cap companies are starting to set up IR operations," he says. "It's definitely a cost, but an educated investor base is better than an uneducated one. When there are problems, people understand the business."

Mark Aaron, vice president for investor relations at high-end jewelry retailer Tiffany & Co., says his company was early to recognize the importance of that outlay. "We started up our IR operation in 1987, when we did our initial public offering," he says. "It sent a strong message to Wall Street that we were going to take being public very seriously. We said we wanted to know who our shareholders were and to let them know how our company was running." Back then, Tiffany's was a $287 million business; today, its annual revenues are $2 billion.

Keeping Costs Manageable

So you decide that you really need an IR department. Can you afford it? The good news: There are ways to keep the cost down. Both S&P and Nasdaq, as well as organizations like Hoover's, offer products that can help get a company's story out. David Blaszkowsky, managing director for capital markets and investor relations products at S&P, says that his firm offers companies what it calls "factual opinion reports," put together by its own staff of analysts, for a fee of $12,500. The price includes quarterly updates and licensing for use as publicly distributed IR material. He says demand for this product, which does not carry any buy, sell or hold recommendation, has been rising at a 15% annual rate. Nasdaq, for its part, is offering a service that provides executive profiles and a company Web site for investors, but it did not provide its fee structure.

One reason for the increasing popularity of such contract IR services is that investment banks, a traditional source of research analysis and reports for investors, have been dramatically scaling back their coverage, particularly of smaller and mid-cap names. This cutback has been driven in part by diminished brokerage and investment banking business, but also by recent research department scandals, and regulatory concerns about a breach in the wall between the research and banking sides of the companies. For the smaller company that no longer gets covered by any analysts, however, these cutbacks are a disaster.

Fortunately, at least one company is picking up the slack: S&P, which has seen a business opportunity in expanding its equity research department. "We saw the investment bank cutback of the last few years as an opportunity," says Sanford Bragg, executive managing director for equity research at S&P, "and we've already expanded our coverage from 1,000 to 1,200 companies. We expect to add coverage of another 300 names over the next 18 months."