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How to Work With Credit Rating Agencies

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

By Gurdip Dhami | Updated on August 18, 2014
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.

Why Get a Credit Rating?

Before starting to pursue a credit rating, a company needs to thoroughly weigh the benefits and costs. Unless the business is very well-established and has very strong brand recognition, it is going to need a credit rating in order to access the bond market. Most investors such as pension funds, insurance companies, and banks can invest only in rated debt. In addition to expanding the group of prospective investors, a credit rating gives a company access to a wider range of debt structures, including those with longer maturities.

However, getting a credit rating has a number of disadvantages as well. The most obvious are the time that staff must dedicate to obtaining and maintaining the rating, and the cost of the rating agency fee. Another consideration is that a credit rating comes with the risk of a rating downgrade, which would bring the company under unpleasant public scrutiny. A particularly weak credit rating may even lead to lower credit scores from bank risk models, and greater public comment, than not having a credit rating at all. Finally, a rated company might find its hands tied in terms of borrowing and other financial decisions if maintaining a certain rating level requires it to adhere to certain limits on financial ratios such as leverage or interest coverage.

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