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Techniques for Effectively Managing Credit Relationships:

Achieving the “Right” Rating

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What is the Right Rating?

The “Right Rating” for any organization is the rating that allows it to implement its business

strategy without financial constraints

From a corporate governance perspective, management should seek to achieve a rating

level that is sustainable given its business risk and strategy. Next

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Keys to Establishing & Maintaining Credibility with Rating Agencies

• Continuity

• Follow Through

• Balance

• Transparency

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Meeting the Rating Agencies

• Annual, semi-annual or quarterly meetings are main communication forums

• Opportunity for company to tell its story and for agency to ask its questions

• But also a chance for dialogue and for company to question the agency

• Thoughtful and organized presentations establish a good basis for communication

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Credible Written Presentations Will Include:

• A clear statement of business purpose and objectives

• An analysis of business segments - candid evaluation of competitive strengths & weaknesses - key strategies

• Explanation of accounting policies, financial policies and strategies )

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Credible Written Presentations Will Include:

• A discussion of financial goals and expectations 1) explain key assumptions (macro/micro) 2) build bridges from the past 3) provide evidence of flexibility & contingency planning

• Appropriate comparisons

(slide 2 of 2)

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Successful Meetings Require

• Advance preparation• Having the right people

present• Expanding on written

materials, not reading them

• Answering questions directly or not at all

• Asking questions

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Talking But Not Communicating

• Company’s Agenda 1) Rapid growth 2) Efforts to enhance shareholder value 3) external influences on performance 4) belittle competitors 5) success of last financial deal

• Rater’s Agenda 1) Cash flow predictability 2) evidence of contingency planning 3) take responsibility for performance 4) respect competition 5) appropriateness of financial policies

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Current Rating Agency “Hot Buttons”

• Corporate Governance

• Operational Risk

• Liquidity & Funding Risks

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Corporate Governance• Ownership Issues

1) transparency of ownership 2) owner’s influence

• Relationships with Financial Stakeholders 1) shareholder meeting & voting procedures 2) protection of minority owners’ rights

• Information Disclosure & Transparency 1) Quality of disclosure 2) Timeliness & ease of access to information 3) Independence & credibility of auditors

• Board of Directors 1) Structure 2) Responsibilities 3) Effectiveness

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Operational Risk

• The risk of direct or indirect loss resulting from inadequate or failed internal processes, people and systems or from external events - Basel definition

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Operational Risk

• Internal fraud• External fraud• Employment practices

& workplace safety• Clients, products &

business practices - i.e. fiduciary breaches, “rogue” trading, money laundering

• Damage to physical assets

• Business disruption & system failures

• Execution, delivery & process management failures

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Liquidity & Funding Risks

• Internal liquidity - core earning power

• Quality of external liquidity supports

• Dependence on purchased funds

• Dependence on refinancing to meet maturing debt

• Magnitude and timing of contingent cash demands, particularly triggers

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Conclusion

• Ratings have always been a balance between quantitative and qualitative inputs• The trend, however, has increasingly been towards qualitative inputs being given greater weight• Therefore, company management can and will have a greater effect on rating decisions, both positively and negatively