It’s the equivalent of Groucho Marx and his observation that he wouldn’t want to belong to a club that had him as a member. So it is with treasurers and ratings agencies: if you are happy with your rating, then there must be something wrong.
At a recent meeting of The NeuGroup’s Treasurers’ Group of Thirty Large Cap (T30 LC), members and meeting sponsor Société Générale discussed this puzzling viewpoint, with SocGen offering insights and members reacting with their own thoughts on the rating environment.
One of several key takeaways from the session generally speaking, was that ratings as a concept is in flux. Not only have the major rating agencies been overhauling rating methodologies in recent years, but they are being forced to re-think the traditional notions and practices surrounding ratings amidst historically abrupt rating transitions and regulatory scrutiny of rating agency practices. This has also led to and been exacerbated by increasing analyst turnover.
And while raters are refurbishing their methodologies, treasurers should address the company’s financial policies. That’s because as more and more corporates drift into the BBB range of investment grade, financial policies are becoming more critical. Rating agencies are more nervous because growing cash balances are often offshore and activist investors are pressuring corporates to become more aggressive with their balance sheets and subject to event risk—in a world where event risks are prevalent. Meanwhile, more and more companies are getting stuck fluctuating between distributing more cash to shareholders and a pause in distribution.
In response to this, treasurers need to evaluate their financial policies around four factors: leverage, liquidity, shareholder distributions and capex/M&A. They should evaluate these four factors against all scenarios and articulate how financial policies and strategy will respond with them to rating analysts. “Give them the impression that you are running the business for them,” said one meeting participant. Often the rating story will be much different than the story told to equity investors: the rating story should be told in the rating agencies’ language of key stated ratios and fully adjusted metrics.
One related point made during the story discussion concerned communication and the lonely life of analysts. Many rating analysts live fairly solitary lives and if you don’t talk to them, they will be more solitary still. They want to hear your story, too, so you will benefit from telling it to them. Also it’s important to keep in mind that newly minted rating analysts often have very limited sector knowledge, so what they know about your business and its place in the sector will be largely based on what you tell them. Tell them something good.
One final discussion concerned paying the rating agencies. Over the past several years, more treasurers are questioning paying the steady price increases that the rating agencies are seeking to pass off. The approach of just paying a steady rate year over year (regardless of what is invoiced) has growing appeal, particularly as more members reveal they are getting away with it. If you are coming to market with a new issue, you may be inclined to pay what they ask, but certainly there is no reason to accept increases for unsolicited ratings.
While most members would like to see better alternatives to the current rating agencies emerge that did not overcharge for the value they offer, no real alternatives are on the horizon. Indeed, lesser rating agencies appear to be losing their relevance, except where they break a tie in a split rating with the big two: Moody’s and S&P. Given the state of flux in ratings, however, treasurers do have more of an opportunity to seize control of the rating narrative, and doing so can alter perceptions toward a better rating outcome and counter the idea that being happy about your rating means it is about to change for the worse.