Why Get a Credit Rating?
Why should a company consider getting a credit rating? There are several reasons that we have seen:
1. To lower financing costs – most companies obtain a credit rating because they have plans of issuing debt paper. Commercial papers, bonds, asset backed securities — the interest rates charged on such debt issuances would vary depending on the credit rating that is assigned. It is no longer unusual here in the Philippines to hear underwriters saying that if the credit rating is such, such a spread will be charged over the chosen base interest rate. A higher credit rating corresponds to lower risk and therefore, lower interest rates.
A credit rating likewise helps a company negotiate for better rates with its other creditors. Assuming the company has the license to issue debt to the public (by virtue of having a credit rating on that issuance), the company can tell its banks or other financial institutions that if interest rates charged are not reasonable or acceptable, it can turn to the capital markets for funding.
2. To market your product or service – Sometimes, companies have no plans to issue debt paper but obtain a credit rating just the same. The credit rating, the company can then use to market its services. For example, we have an existing credit rating on one pre-need company. This pre-need company came for a credit rating when serious issues about the pre-need sector started cropping up. The company uses its credit rating to market its educational plans to the public, citing that it has been evaluated by an objective, third party.
If your company is also not as well-known or does not produce established brands, a credit rating can introduce you to the market, making the public or potential partners more comfortable in dealing with your company.
3. To review your own operations – A credit rating can also serve as a good management tool. In the course of doing a credit rating, a rating agency will list credit issues for discussion and will point out a company’s positive and negative credit rating factors. Negative aspects cited can be a take-off for future improvements to be undertaken. Questions and issues raised will allow management to see how an outside party views the risks associated with its particular business.
There may be a host of other reasons why a company might want to obtain a credit rating. Whatever the reason may be, obtaining a credit rating can only benefit the company and the market in terms of greater transparency and disclosure.