From a corporate treasurer’s perspective, building good relationships with rating agencies takes a long-term, time-intensive process. To do this, the corporate treasurer has to have a deep understanding of market factors affecting their company and industry, their business both currently and in the future, and a strong sense of what the business will bring to the market over time. They also need to view their own company from the outside, making educated assumptions of the types of glasses the agencies will be viewing them through.
“Rating agencies have long memories and have considerable impact on the financial future of a company for a very long time,” said Catherine Stone, assistant treasurer of Boston-based Cabot Corp. “Missteps from years ago are not forgotten easily and a consistently solid corporate reputation is very important to working well with any agency. There may be fluctuating corporate results that pose particular challenges, but that should not detract from the trust that is built up.” Agencies have their pressures to reflect accurately to the investor community and this must be supported by the corporate treasurer in providing transparency and trustworthiness.
Treasurers and CFOs have to deal with challenges such as staff turnover at both the company and at the agencies, and build sufficient trust between them through a solid track record. To build that track record, you need to be conservative in your estimates both on the upside and downside, always thinking like an outside bond-holder who is trying to determine the risk of their investment in your company’s debt instrument. Be clear about the risks and challenges you see ahead and be very clear about your financial position, regardless of whether it is from a position of strength or weakness.
“In approaching your rating agencies, you need to be conservative in your estimates, always thinking like an outside bond-holder who is trying to determine the risk of their investment in your company’s debt instrument,” said Marci Lerner, treasurer of Massachusetts-based Hologic Inc. “Be clear about the risks and challenges you see ahead and about your financial position. Know your facts and tell the whole story, not just what will gain a higher rating. It is important to focus attention on cash flow and leverage metrics and always building that trust without any surprises to the agency.”
When it’s time for review meetings with your rating agencies, it’s a good idea to put together a slide deck to use as a discussion guide. According to Lerner, “80 percent should be about business strategy and 20 percent about your financial plan. The deck should cover your industry overview, whether it is growing, stable or declining; who your competitors are and your strengths and weaknesses against them. Describe your company’s history and future plans, detail your financial policy and liquidity situation, your capital structure and your financial projections. And if there are any possible transactions coming, summarize them.”
Additional resources are available for treasurers contemplating debt issuance and the need for a rating. First, rating agencies may offer assessment services separate from their rating services. They can provide you with different scenario ratings, which can help you understand the implications on the ratings of each scenario. Ratings agencies offering these services will maintain a ‘Chinese wall’ between the two groups to avoid any perception of any conflict of interest. Large banks also may have rating agency experts on staff who can assist with crafting the different scenarios and actually help with the slide presentation for the corporation to use in the meeting. A third resource would be independent rating advisory firms who provide very objective advisory services but are not tied to any existing relationship with the company, which may be desired over the other options.
Overall, any corporate treasury professional should have an understanding of rating agencies. You need to understand what ratings are, why they are used, and why building good relationships with rating agencies is so important.
Michael Lenihan is president of TMXpert Group.