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How One Treasurer Got a Credit Rating Upgrade Without Asking

By July 10, 2024No Comments

One NeuGroup member’s subtle but direct campaign to enable an analyst to see the necessity of an upgrade pays off.

Frustration over a split credit rating prompted one treasurer to seek guidance from several bankers who said tech sector weakness, rising inflation and widespread counterparty credit risk concerns made the timing of seeking an upgrade poor. They said the company would therefore have to directly request that the rating agency raise the investment-grade credit rating one notch to the same level of the other major agency. But the treasurer did not want to ask for an upgrade.

  • So instead, he launched an unabashed yet unaggressive campaign of persuasion where he let the company’s record of conservative financial policy, key metrics relative to peers and other data-driven arguments do the talking and convince the analyst an upgrade was the only logical move.
  • “This campaign was about digging into details and presenting them in a way that the analyst would realize by himself that an upgrade was justified. I wanted him to recognize that on his own,” the treasurer said. He shared his insights and success at getting the upgrade on his terms at the spring meeting of NeuGroup for Tech Treasurers sponsored by Societe Generale.

Why not ask? A banker who encouraged the treasurer’s approach told NeuGroup Insights that although asking directly is at times necessary and effective, getting an upgrade without requesting it is the smartest way—especially in cases like this where the company has a track record that argues in favor of the upgrade.

  • One advantage of not asking is avoiding the risk of damaging the credibility of the treasurer or CFO if they request and receive an upgrade but, later, the company needs to deviate from its financial policies and commitment to the higher rating to pursue, say, a large acquisition that pushes its leverage ratio higher.
  • “Asking can be potentially harmful to the relationship with the agencies, even though it is supported by a strong credit narrative, including a financial policy commitment,” said Jacques Ouazana, head of US Ratings Advisory at Societe Generale. “You can gain credibility over a number of years, but you can lose it extremely quickly, so this is something to always bear in mind.”
    • Treasurers and CFOs also risk losing credibility within the company if a rating agency denies their request for an upgrade.
  • There is also a perception among some treasurers that in receiving an upgrade after asking, they give up leverage in their relationship with the rating agency, potentially restraining to some degree how the company allocates capital and crimping its financial flexibility.

Accelerating an overdue upgrade. The treasurer’s strategy of persuasion to convince the agency to raise a rating that had stood for more than a decade came down to both tactics and timing. On the latter, he decided to move up an annual meeting with the analyst from the fall to the spring—months before the ratings committee met. “I wanted to get there before they did their review,” he said.

  • Tactically, the treasurer’s campaign featured questioning and challenging the analyst’s conclusions as well as providing his own analysis of the company’s data and performance. “I started questioning more and more,” he said. A key element was highlighting specifics about how the company compared to competitors that already had the rating the company desired.
  • This fact-based approach sped up what Mr. Ouazana at Societe Generale anticipated would happen eventually—an upgrade. “What we did well and effectively here was giving the right arguments to accelerate something that I believed was coming,” he said.
    • “There was no need to go with a formal ask here, because the analytical arguments were themselves strong enough to communicate, to convey the message that the company was actually a high triple-B credit.”

Leveraging success. At the end of their meeting, the analyst told the treasurer he was feeling the pressure to upgrade the rating, which is exactly what the agency did following the ratings committee meeting. The member’s satisfaction at achieving his goal was magnified by the circumstances and timing of the accomplishment.

  • “If you get upgraded at a risk-averse, scary time when it’s less likely because of the economy and inflation, that means that an agency is seeing your credit as very good, very stable and resilient,” the treasurer said. “It’s more impactful.”
  • The treasurer said the benefits of the agency recognizing that the company deserved the higher rating showed up in the CP market as well as the bond market—where the corporate’s spreads relative to a key competitor narrowed—and the insurance market, where its renewal rates improved.
  • “That was a palpable message that I leveraged everywhere I went for six months,” the treasurer said with a smile. “It really paid off.”
Justin Jones

Author Justin Jones

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