COMMUNICATING EFFECTIVELY

WITH RATING AGENCIES

1. Ratings
g defined
2. Communicating with Rating Agencies

This presentation is a short summary of the presentation held during the

World Forum for Communication Top-Managers
p g in Davos.

! Note that this presentation is of general character and does not relate
specifically to one rating agency.
You may use this presentation for personal use.

Communicating with Rating Agencies World Forum for

By Thomas Missong DAVOS – February 2010 Communication Top-Managers
1- RATINGS DEFINED

Communicating with Rating Agencies World Forum for

By Thomas Missong DAVOS – February 2010 Communication Top-Managers
RATING IS …

• … a general evaluation of creditworthiness.

Repayment Capacity Fitch & S&P Moody's • … a general measure for probability and severity of
Extremly strong AAA Aaa
default.
Very strong AA+ Aa1
ment Grade

AA
AA-
Aa2
Aa3
• … is an opinion on the ability and willingness to pay
Adequate A+ A1
back the debt on time and in full.
A A2
•
Investm

A- A3
… a forward-looking
f d l ki th through-the-cycle
h th l opinion
i i /
Adequate but vulnerable BBB+ Baa1 prediction about relative creditworthiness (Moody’s)
BBB Baa2
BBB- Baa3
Vulnerable
u e ab e BB+
BB
Ba1
a
Ba2
• „Obligations
Obligations carrying the same rating are not claimed to
BB- Ba3 be of absolutely equal credit quality. In a broad sense,
High Yield

Currently vulnerable B+ B1 they are alike in position, but since there are a limited
B B2
B- B3 number of rating classes used in grading thousands of
H

Highly vulnerable CCC+ Caa1 bonds the symbols cannot reflect the same shadings of
bonds,
CCC Caa2 risk which actually exist“ (Moody‘s)
CCC- Caa3

Communicating with Rating Agencies World Forum for

By Thomas Missong DAVOS – February 2010 Communication Top-Managers
PURPOSE AND ADVANTAGES OF A RATING

Rating Agency

Issuer Bank

Credit Pension Funds

Issuer institutions

Insurance UCITS
Reinsurance

• For investors:
- Independent credit risk evaluation as benchmark
- Risk premium evaluation
- From December 7th, 2010 ratingsg from registered
g rating
g agencies
g may
y be used of capital
p requirement
q p
purposes
p

• For Issuer: extension of the number of potential investors.

- Through ratings, borrowers can achieve higher deal volumes, longer maturities and lower overall costs or
y Ratings
enhance the financial flexibility. g are required
q by
y many
y international institutional investors - depending
p g on
your rating, your will address different types of investors.
- Name recognition, which attracts direct foreign investment is achieved through ratings.
- Ratings are also used in Supply chain decisions (eg Automotive industry)

Communicating with Rating Agencies World Forum for

By Thomas Missong DAVOS – February 2010 Communication Top-Managers
DIFFERENT TYPES OF RATINGS AND THEIR MEANINGS

A+ / Stable / F1

Long Term Rating (“LT”):

( LT ): Outlook: ShortTerm Rating (“ST”):
( ST ):
Time horizont up to 3 years How will the rating evolve in the Time horizont up to 1 years
next 18 months (positive, stable,
negative, Credit Watch)
Global Scale National Scale
AAA
AA+ Foreign Currency and National currency:
AA
AA- Given that transfer and exchange risks do not exist for national currencies, National
A+
A currency ratings tend to be higher than the Foreign Currency ratings.
ratings
A
A- The international benchmark is the Foreign Currency long term rating
BBB+
BBB
BBB
BBB- Global versus National scales: Other Financial ratings:
BB+
BB In countries having a low sovereign rating, • Solicited / Unsolicited rating
BB- rating agencies migth provide national • Financial Strength rating / Stand
B+ AAA ratings in order to better distinguish alone
a o e rating,
at g, Support
Suppo t Rating
at g
B AA between the credit qualities.
B- A • Corporate Family Rating
CCC+ BBB
CCC BB • Issuer versus Issue Rating
CCC- B
CC+ C

Communicating with Rating Agencies World Forum for

By Thomas Missong DAVOS – February 2010 Communication Top-Managers
RATING PROCESS ISSUER - RATING AGENCY

ƒ Basic research ƒ Meeting with ƒ Rating

ƒ Analytical team ƒ conducted
Development committee
Management ƒ Publish rating
assigned ƒ DevelopCredit
of Story
of specific meeting and ƒ Surveillance
ƒ Receive rating and rating
ƒ questions
Due Diligence handbook rating decision commentary

ƒ Packaging of
Rating
Handbook

The rating process depends from Agnecy to agency. The process here is illustrative and shows only the main
steps:
• Analytical
y team consists of a Lead Analyst
y and a Secondary
y Analyst
y
• Treatment of all information available including Rating Handbook
• Meeting between Rating Agency and Management, on-site visits
• Rating assignment in the rating committee
• Publication of rating (you may ask for a confidential rating)

Communicating with Rating Agencies World Forum for

By Thomas Missong DAVOS – February 2010 Communication Top-Managers
Fields of Analysis

Local/ Industry Financial Segment Financial Financial Rating

national Methods Strength Analysis Flexibility Projections Committee
issues

Improving information and analysis base

Peer Dependance Corporate Strategy

Analysis Governance

Rating Agencies distinguish between: Rating Methodologies Fields of analysis requiring

-Quantitative
Quantitative and qualitative factors needd to
t be
b published
bli h d by
b Meeting with Management
-Business Risk and Financial Risk the agencies.
Note: The elements shown here are
illustrative and depend on each agencies
methodologies and terminology!

Communicating with Rating Agencies World Forum for

By Thomas Missong DAVOS – February 2010 Communication Top-Managers
INFORMATION PACKAGE

Credit
Rating Agency quality
Issuer

• Standard documents Current

profile
¾ 3 yyears of historical, audited annual financial
statements
¾ Latest interim/quarterly statements
¾ Recent offering documents / information
memorandums
time
¾ Selected research reports, if available
As Ratings are forward looking, a comprehensive
¾ Recent press releases
management presentation ((“Rating
Rating Handbook
Handbook”)) needs
¾ Any relevant public presentation made to the to be prepared:
financial and business community
¾ strategy, market and competitive environments, review
¾ Sample marketing materials and brochures of operations, segmental results and projections,
¾ financial policies,
policies review of financial performance with
projections (3 years at least) and key underlying
assumptions,
¾ background, history, ownership, governance, corporate
and management structure / profile,
profile

Communicating with Rating Agencies World Forum for

By Thomas Missong DAVOS – February 2010 Communication Top-Managers
COMMUNICATING WITH
AGENCIES

Communicating with Rating Agencies World Forum for

By Thomas Missong DAVOS – February 2010 Communication Top-Managers
FLOW OF INFORMATION

Rating Agency
1
2
2
1

Issuer Bank Issuer 3 Investors

2

Relationship unrated issuer – banks:

Relationship rated issuer – rating agency – investors:
1. The issuer provides information to the bank
1.
1 Issuer provides information to the rating agency
2. the bank grants the financing and sets the terms
2. Rating agency decides on ratings and provides
based on an internal rating
report to Issuer and public
3. Investors may use the rating agency in the
decision to provide financing to the issuer

Please note
• Information provided to rating agency is confidential
• Information requirement is high

Communicating with Rating Agencies World Forum for

By Thomas Missong DAVOS – February 2010 Communication Top-Managers
SOURCES OF INFORMATION

Own sources External sources

Issuer
•Industry reports
Peer Group
Issuer
•Research
R h papers
•National statistics
Issuer Methodologies •Newspaper

Rating Agency

Issuer Investors

In order to have a full picture on the Issuer, Rating Agencies will not only rely on information from the Issuer, but will
use own sources of information as well as external sources
The new EU Regulation foresees that the rating agencies need to disclose the information used in the context of the
rating assignment. Rating Agencies should also evaluate the quality of information received as well as their
reliability.
Providing information from external sources to the Rating Agency might be viewed positively.

Communicating with Rating Agencies World Forum for

By Thomas Missong DAVOS – February 2010 Communication Top-Managers
SOURCES OF NOISE

Terminology: Issuer
Peer Group
• financial ratios and key indicators are not always Issuer
properly defined.
defined Some agencies adapt the financial
figures received according to their own methodologies – Issuer
ratios might therefore substantially deviate!
• Rating Methodologies are applied for assessing an
Methodologies
entity. None the less, the Agency might consider
additional factors or change the weighting assigned.
Next to the main sector methodology, Agencies might
apply further methodologies. Issuer Rating Rating
Iss er
Issuer Employee
Emplo ee Agency
Agenc committee
• Although the Rating scales are widely used, their employee
terminology is not uniform. Difference relate to:
- Probability of default
Intercultural issues
- Time of reference of the ratings S
Semantic
ti issues
i

- Loss given default / Recovery rates

Intercultural issues:
Understanding local circumstances and business model
In order to achieve the optimal rating, you may envisage
engaging a rating advisor. This might reduce the :
9The issuer gets a better in-sight into methods and
peer-group information
9The rating agency receives the information according
to their own standards

Communicating with Rating Agencies World Forum for

By Thomas Missong DAVOS – February 2010 Communication Top-Managers
RATING AGENCIES AS OPINION LEADERS

Rating Agencies are Opinion Leaders for financial

Credit investors:
Rating Agency institutions
• Ratings are an Opinion per definition

Pension Funds • Agencies treat the information and provide

summaries and their views on the Issuer’s credit
quality
lit
Issuer
Insurance UCITS
Reinsurance

Investors may be Opinion Followers: = All-in Cost

Interest Rate
+ M&U / Expenses
Article 4.1 on the „Use of Credit Ratings” of the Regulation on

gin
st
+ “Credit
Credit Spread
Spread”

Interes
Credit rating agencies sates that financial institutions “may
may

Marg
Rate
e
use credit ratings for regulatory purposes only if they are + Return in Capital
issued by credit rating agencies (…) registered in accordance
Reference Rate (Euribor, Libor )
with this Regulation”
Financial institutions tend to us external ratings if they are + Liquidity
Li idit Costs
C t
better than the internal ratings. The on-going revision of the
Maturity
Basel 2 framework tackles the so-called cliff-effect

Communicating with Rating Agencies World Forum for

By Thomas Missong DAVOS – February 2010 Communication Top-Managers
 FACTORS AFFECTING THE COMMUNICATION

• Degree of complexity of an agency:

- The bigger an agency gets, the less people you will know!
- Number of methodologies
• Degree of transparency:
- Although EU regulation requires Rating Agencies need to publish their rating methodologies

Identtifying Key Assessment and measurement Mapping of Key

ƒ Weighting of
Rating Factors: of key Rating factors: Factors to Rating Other Factors:
Factors to
Categories: Rating Committee
• Business Risk •Q
Qualitative & Quantitative
Q derive • Regional
and decision on
• Historic (5y indicative considerations
• Management Risk • Historic & Projected Rating
averages) Rating • Event risk..
• Financial Risk • Peer
• Projected

• Moody‘s introduced so called „Mapping Methodologies“:

- Can be used as a guide how to assign ratings as key rating factors by sector are identified and explained
- The rating process is quantified as much as possible using Mapping grids, credit metrics and weigthing
- Note: these new methodologies were impelemented only in the last couple of years and did not lead to any
immediate rating changes. When using the methodology, have a carefull look onto the outlayers.
• Degree of openness and accessibility:
- How easyy can you
y clarifyy open
p issues with the Agency?
g y
Rating agencies are a dynamic social system changing over time and adapting to new circumstances

Communicating with Rating Agencies World Forum for

By Thomas Missong DAVOS – February 2010 Communication Top-Managers
FACING A RATING ACTION

Sovereign specific reasons A change in the outlook of the rating is a clear signal from
• The Long term Foreign Currency rating of an issuer is the agency:
constrained by the rating of the Sovereign. • It might take the rating action within a period of 18
• A downgrade of the sovereign leads directly to the months
downgrade of the issuer, an upgrade not necesarily. • In times of stress, a rating agency might take several
• Note
N t that
th t Sovereign
S i ratings
ti ttend
d tto be
b more stable
t bl ratings within a very short time frame
frame.
than Corporate ratings. • Rating agencies may use “credit Watch” or “evolving”, in
this case it is hard to guess the rating action.

Industry specific reasons

• Revision of methodology (Request for Comment) Relationship between business, financial, and distress risks

• Macro-economic environment Volatility/Risk

Issuer specific reasons:

Business
• Change in strategy / management risk

• Financial performance deviating from agencies

expectation Financial cushion
(Determined by financial risk profile and metrics)
• Material change in ownership, government related
issuer’s
issuer s approach no longer applicable Time/Cycle
Distress level

Communicating with Rating Agencies World Forum for

By Thomas Missong DAVOS – February 2010 Communication Top-Managers
RATING AGENCIES ACT

80 Risk Premium (“Credit Spread”)

1 Year 5 Years
70 Expected Loss = Expected Default
frequency * (Exposure – Security) *
60
Loss Given Default.
50

40 A downgrade impacts on the

Expected Default Frequency (or
30
Probability of Default) and on the Loss
20 Given Default. The Risk Premium for
the same issuer therefore
10
substantially increases and the banks
0 need to set more money aside.
Baa1

Baa2

Baa3
A1

A2

A3

B1

B2

B3
Aaa

Aa1

Aa2

Aa3

Ba1

Ba2

Ba3

Caa-C
C
Some loan documentations contain rating triggers or margin grids linked to ratings. A downgrade could lead to
higher interest payments, the provision of additional securities, partial mandatory early prepayment or even to the
acceleration of the loan. This circle might further accelerate the downgrade cycle.
According to EU Regulation, Rating Agencies need to act as soon as they become aware of new information. Rating
Agencies should monitor on an on-going basis the performance of the Issuer and make an update at least
annually.

Communicating with Rating Agencies World Forum for

By Thomas Missong DAVOS – February 2010 Communication Top-Managers
A WORD ON UNSOLICITED RATING

Credit
Rating Agency institutions

The EU Regulation states:

Pension Funds
An unsolicited credit rating, namely a credit rating
not initiated at the request of the issuer or rated Issuer
entity, should be clearly identified as such and should Insurance UCITS
be distinguished from solicited credit ratings by Reinsurance
appropriate means.

A credit rating agency shall disclose its policies and • Rating

R ti A Agencies
i might
i ht assign
i UUnsolicited
li it d R
Ratings
ti as:
procedures regarding unsolicited credit ratings. - It corresponds to their business model
- It is keen to enter into a market and assign reference
When a credit rating agency issues an unsolicited g
ratings
credit rating, it shall state prominently in the credit
- It is keen to convert an unsolicited rating into an
rating whether or not the rated entity or related third
solicited one (against a fee)
party participated in the credit rating process and
whether the credit rating agency had access to the
accounts and other relevant internal documents off the • Note: an Unsolicited Rating is not necessarily below a
rated entity or a related third party. Solicited rating

Communicating with Rating Agencies World Forum for

By Thomas Missong DAVOS – February 2010 Communication Top-Managers
CONTACT

Mag. Thomas Missong, M.A., CRA (BdRA)

Währingerstr 61 / Top 4
Währingerstr. 4.07,
07 AA-1090
1090 Wien
Wien, Austria
Email: thomas.missong@aon.at
Mobile: +43 676 380 73 44
F +43 1 25 33 0 33 49 59
Fax:+43

Communicating with Rating Agencies World Forum for

By Thomas Missong DAVOS – February 2010 Communication Top-Managers