The criticism has only just begun
The US based AFP (Association of Finance Professionals) are one of the latest groups to criticise the rating agencies claiming they are very slow to react to both good and bad news. But are the rating agencies really as bad as their recent press suggests? Surely they reflect the economic times we live in.
Whilst rating agencies are a very convenient scapegoat for the dramatic weakening of corporate credit, they are not the cause or the catalyst for this. They are mere reporters, reflecting what is happening. The valid criticism is that made by the AFP. They are often too slow and lag events. The rating agencies know this. They are now much quicker to lower a rating or put it on credit watch than they used to be. But this is just the beginning.
The rating agencies are going to become even more powerful as their influence extends further in to the banking market. Wise borrowers have understood this for some time they have tried to make sure their bank credit lines were not triggered by public rating downgrades which would be making the capital markets more difficult or more expensive to access.
But there is more to all this than just making sure the terms in your bank documentation do not create credit cliffs off which to fall. As the new Basel rules take shape, it is clear ratings will become an essential part of your banking relationships. Risk rating is one of the cornerstones of the new proposals.
So an action plan is needed. Short term, make sure that your bank lines are not triggered by a rating downgrade. Try to avoid rating triggers in loan documentation. Longer term, get to understand how your bank’s rating process works and how it rates you. It is not too early to start trying to understand this process. Is this a task for 2003?
Seasonal Greetings to all our readers from the team at Treasury Today :-)