Strategic Corporate Finance: Applications in Valuation and Capital Structure

HOW TO MANAGE YOUR AGENCIES

The rating process, and the agency relationship that goes with it, are critical inputs into any rating outcome. Some issuers manage this process better than others and approach their agency relationships with the same thought and effort as they might put into key customer, employee, or shareholder relationships. We outline below observations of best practices, based on our own experience.

Best practice issuers understand what agencies need from them in today’s difficult credit climate, and they approach their relationship as positively and proactively as they would with any other key insider:

• Explanation of business strategy, legal and management structure, parent and subsidiary structures, and management processes including total compensation
• Frank discussion of risks and weaknesses with special attention to the issuer’s approach to enterprise risk management, and corporate financial policy
• Clear articulation of and adherence to acquisition philosophy and other financial policies (leverage, share repurchases, dividends) that tend to impair ratings
• Timely and granular updates on operating and financial performance, plus any material changes in the business environment, corporate performance, or potential financing or M&A transactions

The rating process balances qualitative and quantitative approaches, and because quantitative analysis requires significant discretion and judgment (e.g., ratings must capture underlying creditworthiness throughout an ...