Rating agencies are important for the good functioning of capital markets as investment mandates are often linked to ratings, index inclusion for bonds is based on ratings and banks/insurances are using ratings in their credit models to calculate capital requirements.
As a consequence when we look at statistics on debt capital markets, we can see how the vast majority of bond issuances (~95/96%) are rated by at least one major rating agency. That allows bonds to benefit from deeper market access and better terms (in terms of size, tenor and pricing).
In our experience, corporate issuers engage with rating agencies directly (through their rating, investors relation or treasury teams) or through external financial / rating advisors.
Once involved, rating agencies will be able to quickly organise “Management Meeting(s)” between the analytical team and issuer top management to discuss financials, strategy, capital structure and company forecasts. This is a meant to be a two-way conversation where the analysts acquire company information or details that will impact the output of the rating. A Rating Presentation is often prepared by issuers/advisors and given to analysts during the meeting as reference material.
Before and after the Management Meeting, analyst may send the company more questions to have better understating on certain area of focus. All non-public information discussed or disclosed during the whole rating process is dealt with the utmost confidentiality as rating agencies work under strict “Confidential Information” policies.
Once the Management Meeting is completed, analysts will perform further analysis and bring the initial output in Rating Committee for review and final decision. Once that is obtained, the analysts will revert to issuers with an “Indicative Rating” (IR) for the company to decide whether to convert in a “Monitored” rating.
Usually the period between the Management Meeting and the rating assignment will last about 3/4 weeks. The process just described is valid for issuers that are new to ratings or not rated by a specific rating agency.
Once issuers are rated, they should inform the rating agency just 1 day before issuing the new bond issuance. Rated issuers issuing in an asset class never tapped before (i.e. subordinated or secured bonds) should inform the agencies at least 3/4 days before, as issuing in a new asset class will require the analysts to go again in Committee to assign the “new” instrument rating.
Gianluca Spinetti, Senior Director, Fitch Ratings
