Managing the Credit Rating Process During a Major Acquisition
by Gurdip Dhami, Treasury Consultant
During the weeks leading up to the public announcement of a major acquisition, the senior managers of a publicly rated company will be focused on transaction related aspects such as valuation and purchase price, financing, due diligence, statutory filings, legal agreements, employee and customer strategy, IT plans, and shareholder and debt holder approvals. In this intense period, the credit rating process may consciously or inadvertently become a secondary priority. This is a risky strategy as it increases the possibility of a negative rating action and is sub-optimal from a workflow perspective. This article sets out an approach for dealing with the rating agencies and the process for evaluating the potential impact on a company’s credit rating. Although the focus is on acquisitions, the main messages also apply to other major events that companies may initiate such as disposals, changes in business or geographical mix, and changes in capital structure. This article applies to companies that have at least one ‘solicited’ public credit rating for which they pay a fee to a rating agency, supply it with information during regular meetings and calls, and have a confidentiality agreement in place.
1. Before the public announcement of an acquisition
When a company announces a material acquisition, the company’s rating agency is likely to publish a press release setting out their initial view on the transaction, including the rating action if and when the transaction completes. Therefore the company should contact the rating agency well before any public announcement about the acquisition to get an understanding of the potential rating agency action.
The company’s managers should contact their usual rating agency analyst and provide an outline of the proposed transaction. They should also use the opportunity to:
a. Seek feedback from the agency analyst about the potential impact of the transaction. The analyst cannot give advice and also cannot speak for the rating committee, which will make the decision about the rating impact, although the analyst should at least be able to state how the agency will apply their rating criteria for such a transaction and potential areas of focus
b. Ask the rating agency analyst about the agency process including the information that they require and the timing of agency announcements. In particular the company should confirm how much time that it will have to review agency draft press releases and when they will be provided to the company
c. Confirm details about the agency Rating Evaluation Service/Rating Assessment Service (RES/RAS) including the cost and timing, see below.
The company should approach the agency only when there is a high degree of certainty that the acquisition will go ahead and when the main parameters of the transaction structure have been set. However the company should not leave it too late especially if it wants to make use of the RES/RAS product as it could take two or three weeks for agency feedback.
After the initial contact with the rating agency analyst, the senior management of the company should meet with the agency to explain in detail the transaction including the rationale, benefits and risk management, and to gain feedback although this may be limited unless the RES/RAS product is used. See below for further details on the information provision.
The agency will use the information provided to set out their view in their public announcement. Usually this will be in the form of a ‘Watch’ or ‘Review’ statement as the acquisition may still require shareholder/regulatory approvals and financing. The company and the agency should agree the process for making their respective public announcements on the day that the acquisition is announced to the market. Typically the company will make their announcement first followed shortly afterwards by the agency announcement.
The agency press release will be given to the company as a draft so that it can check it for accuracy and to ensure that it doesn’t contain information that should still remain confidential on the date of publication. The company should also carefully review the opinions in the press release and if it disagrees will need to decide whether to appeal the agency decision. It will need to discuss with the agency whether the agency will allow the appeal under their processes.