Accounting Best Practices, Fifth Edition

11–18. Obtain Advance Rating Assessments

A company with publicly held debt can never be sure about the change in its rating by a major rating service after it has taken some significant action, such as an acquisition or a major capital investment. If the rating agency decides after the fact that the company’s action has downgraded the credit level on its debt, then the reduced ranking may trigger a number of adverse financial items—such as a drop in the market price of the debt in order to increase its effective interest rate, or difficulty in obtaining additional debt at a reasonable price.

This problem can be overcome by using Standard & Poor’s Rating Evaluation Service. This service allows a company to obtain a confidential review of its credit rating by a Standard & Poor’s analyst who will issue a prospective credit rating based on the proposed action. This is a particularly valuable service when a company has a range of action items to choose from and is willing to change its strategic direction based on which action results in the best credit rating. Since the ratings derived by Standard & Poor’s are based on prospective actions that may never be implemented, the ratings will be kept confidential until such time as the company makes its plans public. Examples of possible activities that could require a prospective credit analysis are asset sales or divestitures, stock buy-backs, mergers or acquisitions, financial restructurings, recapitalizations, expansions into new lines ...