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Explaining your business risk to agencies and funders

Presenting your business in the best light to secure a good credit rating can be daunting. Martin O’Donovan explains how to go about it, and offers tips that will also be useful when seeking extra funding.*

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Explaining your business risk to agencies and funders
Before a banker can reach a lending decision or a credit rating agency (CRA) allocate a rating, they will need sufficient information to understand your business. The more you can help them gain that understanding the better the chance that they will come to a fair decision.

So, while this article does not purport to be a comprehensive checklist, it will help you think widely about what needs to be considered when you are asked to explain your business risks and opportunities to credit rating agencies and potential funders.

What are the CRAs looking for?

At the outset, even if just approaching a bank for a loan, look to see if the CRAs rate other companies similar to yours. If you subscribe to one or more ratings agency’s services – Standard & Poor’s, Moody’s, Fitch Ratings – you will have access to reports on individual companies, describing any special factors. From this you can learn whether there are any special factors the analysts see as risks or as strengths. In turn, if there are important factors distinguishing your company from others in the industry, resolve to make them clear.

Also, as the CRAs’ websites (see page 9 for links) show their rating methodologies – and often the ratios they regard as key performance indicators too – it is well worth looking at them.

Publicly available information

The easy part is the provision of relevant publicly available information and previous accounts for the company. But even this benefits from some thought being given to the exercise. For example, if particular accounting conventions affect the company’s business, then it makes sense to provide covering explanations and, if need be, pro forma recalculations of the data.

Presentations to the analysts

You will also need to provide a lot of unpublished information about the business, strategies, plans and projections, governance and risk management. This can be handed over as part of a presentation to the analysts.

Any credit analysis will depend on the historic track record plus forecasts and projections. For those forecasts to have credibility the analysts will want to build up confidence in the senior management and its overall strategy. For that reason an assessment of management, partly gained from those presentations, is an important part of the process. The directors or managers involved should understand this and be suitably prepared.

That said, it may not always be possible to answer every question instantly in the presentation meeting and it is vital that the management team does not blow its chances at this stage. Giving wrong answers off the cuff can weaken an otherwise excellent impression. There is no shame in promising to get back to the analysts. Credit analysts inevitably look at the world through different eyes from businessmen and the topics on which they raise questions may not always be top of mind for company executives, even the finance director.

Start with ‘macro’ and ‘meso’ factors

In explaining your business, start with the big picture – the macro (whole economy) and meso (industry level) scenarios. The analysts will usually be experienced in reviewing the company’s industry, but it is unwise to assume their knowledge is encyclopaedic, current, correctly selected or relevant to exactly what you do and where you do it.

This is an extract from the Finance & Management Magazine, Issue 192, October 2011.

*This article is based on ‘Corporate credit ratings: what information to give a credit rating agency’, first published in the International Treasurer’s Handbook 2011.