Fitch recommends companies revisit/update investment guidelines so as not to miss opportunities
Companies who have let their investment policies go stale are missing out on “high quality and short-term opportunities.” So says a study from Fitch Ratings.
One recommendation from the credit ratings agency is to include all three of the major ratings agencies – Fitch, S&P and Moody’s – in their guidance. “As the supply of cash investment options falls, maintaining outdated investment policies increasingly puts firms at a competitive disadvantage,” Fitch said in its report.
While recommending ratings from one’s own company (and that of one’s peers in the industry) can be seen as self-serving, the larger point Fitch is alluding to is that companies should employ as many opinions on counterparty credit risk as one can.
And many treasuries are doing just that; some are doing so internally after the financial crisis compromised the integrity of the big raters. With that in mind many companies have created their own risk models. Certainly a barrage of bank downgrades during the last few years has forced them to do so.
“Ratings for the top 25 financial institutions in 2012 compared with those of five years earlier highlight the diminishing availability of debt to corporations,” Fitch said. “Banks rated ‘A’ or higher fell to 46 percent at the end of 2012, down from 92 percent in 2007.” This has forced more and more companies to look for something besides credit ratings to assess counterparty risk.
Some companies have employed the “CAMELS,” approach. Regulators use the CAMELS rating system to indicate the safety and soundness of banks. The acronym stands for: Capital adequacy, Asset quality, Management expertise, Earnings strength, Liquidity and Sensitivity to market risk. It’s been suggested at several NeuGroup peer group meetings that treasurers consider the CAMEL approach as an added tool for evaluating counterparty risk. They also have been encouraged to hire third-party providers that can assist with the collection and analysis of CAMEL data. Still others have monitored CDS spreads as a leading indicator of how the market is viewing a financial counterparty. Along with CDS spreads, some companies use stock prices as a leading indicator of financial stress within an institution.
“The credit crisis only served to reinforce the importance of utilizing many different sources of information to guide investment decisions,” Fitch said. “A key lesson from the events of 2007-2009 was that an over-reliance on any one opinion or agency was a flawed approach. At the same time, the crisis fostered a change in the coverage of short-term instruments by the three major agencies. Now, there is a relatively wide variation of coverage between the agencies in the various segments of the fixed-income market.”
This isn’t to say raters should be excluded. As Fitch points out, rating agencies’ coverage of short-term assets has evolved, which has resulted in a “growing diversity of ratings across the investment universe. Accordingly, corporations who have failed to update their guidelines stand to miss out on attractive options for investing their cash.”
Companies shouldn’t seize this opportunity, using the “vastly increased” availability of credit ratings, research and insight, to change outdated guidelines, Fitch said. This will help them to make “more informed investment decisions.”
See Fitch’s report here.