Chief financial officers and their bankers once may have regarded their relationships with ratings agencies as amiable but essentially passive.
But with the explosive growth in the ratings of syndicated loans, and the introduction of prospective rating evaluations, companies now look to ratings agencies for strategic insight into how they are perceived in the capital markets, and especially how they can influence that perception.
The strategic message is simple. As corporate appetites for acquisitions and megadeals have grown, so has management's recognition that its ability to raise capital on optimal terms is key to executing the transaction. A company's credit, which determines its ability to access capital markets, is a valuable, albeit intangible, asset. And like other valuable assets, it must be actively managed.
Capital markets have long required a credit rating on public bonds or other widely distributed debt. Yet most issuers have tended to wait until the deal was imminent before obtaining the rating. And in private markets, especially the loan market, companies bypassed ratings entirely, relying on their banker to evaluate their credit and price the transaction.
CFOs of companies planning billion-dollar acquisitions now realize that they cannot afford to have their pre-acquisition estimate of the capital costs of the deal be off by millions of dollars because their post- acquisition credit rating is not what they counted on.
To avoid this risk, corporate managers confer with rating agencies early in the planning process, to ascertain the impact of major acquisitions, recapitalizations, or restructurings on their rating. They often bring multiple scenarios and have the rating agency evaluate them all, so they can compare and contrast the alternatives.
This evaluation goes beyond the traditional rating relationship. It goes a step further by formalizing the opinion and taking it through the analysis and committee process, to give the client an official and confidential rating that it can quite literally take to the bank.
A few years ago some bankers might have seen this service as an encroachment on their own relationship with their borrowers. But as the role of so many bankers has shifted from lender to corporate finance adviser, such concerns tend to disappear.
Bankers used to focus primarily on one basic yes-no credit question: Do I want to lend my bank's money to this company? Now that the functions of commercial and investment bankers have become so intertwined, bankers realize that virtually every corporate client, whatever its credit standing, is eligible for financing in some form, from some investor.
For top credits it may be commercial paper at thin spreads. At the other end of the credit spectrum it may mean venture or vulture financing.
Bankers realize that their value to clients is not so much in determining a client's place on that credit spectrum, but rather in helping the client-regardless of its credit - tap appropriate capital sources in an optimal manner.
Having an objective, disinterested outsider such as a rating agency determine the company's credit level frees bankers from being judges of the client's creditworthiness and instead allows them to focus on playing the role of adviser and, ultimately, financial agent or underwriter.
The syndicated loan market has come to resemble traditional securities markets where the lead bank is an agent for the issuer, not for the lenders. With syndicate lenders' own interests more directly aligned with those of their issuer clients, they now have every incentive to use ratings to help those clients obtain the best financing terms to which they are entitled.