Ratings, ratings everywhere?
One of the most noticeable trends in the European debt markets is the growing importance of corporate ratings. The largest European companies, multinational corporations and banks have had ratings for a number of years but, until recently, credit ratings have not been of interest to the middle market corporate in the same way as they have been to companies of a similar size in the United States.
Arguably this is not a revolutionary change in Europe. However, there is a sense that there is now a critical mass of movement as a wider range of European companies seek ratings. The key question is why is this happening now?
There are a number of reasons:
The creation of the eurozone.
The creation of the eurozone has been the cause of (or taken the blame for) a wide range of developments over the last couple of years. However, the creation of a larger single currency area has eliminated foreign exchange risk for a company that wants to tap the European capital markets for finance. Name recognition in these markets is usually not sufficient to attract new investors – a rating is also necessary.
Banks no longer lend to companies on a purely relationship basis and may never have done so in reality.
They need to ensure that they earn a sufficient return on the capital they employ. This has led to the development of a secondary loan market in Europe and the introduction of new funding techniques for corporates – both require the company, or at least its debt issue(s), to be rated.
US techniques are being imported to the European markets.
In most cases, these techniques (the use of commercial paper, securitisation or hedge funds) were first developed in the US. These have been imported into Europe (with modifications where necessary) and we are beginning to see these techniques providing greater access to the capital markets for more borrowers.
This trend is set to continue and even accelerate over the next few years. Many European companies will find it increasingly difficult to avoid the requirement to get a rating.