In August of 2017, I wrote an op-ed in The Bond Buyer entitled “Issuers: Don’t Let the Rating Agencies Tell Your Story – Tell It Yourself”. This week’s Fisc commentary is a follow-on to that initial article, driven by an excellent story last week from Bloomberg reporter Amanda Albright.
Albright’s story highlights the risk to issuers who don’t engage investors directly but instead rely on the rating agencies to do so through their assessments. I encourage you to read her article.
Ratings are meant to translate all of an issuer’s characteristics at a single point in time into an assessment of relative risk based on their criteria. These can be very valuable for investors requiring a third-party assessment. When the criteria changes, however, as Albright’s article centers on, it can have major implications for issuers.
To wit, S&P just changed their evaluation model for priority lien debt, affecting the ratings of nearly $50 billion in outstanding bonds. Of the 1,300 issues S&P includes in this category, 85% are expected to receive a new rating, with 45% likely to rise or fall at least two notches.
Obviously, it is important to have the most accurate rating outstanding, and S&P should be applauded that it is responding to court rulings involving Puerto Rico debt. But multiple notch swings can, in fact, be disruptive to issuers and investors. Nothing fundamentally changed with the issuers themselves, simply the criteria of the third-party providing its assessment.
The key takeaway for issuers is to put as much focus on your investor engagement as your rating agency efforts prior to a bond sale. Ratings are important, but at the end of the day they are only a single data point for investors to use when making an investment decision. More and more investors will do their own credit assessment, but they need easy access to issuer data in order to do that.