5.6.2 The Credit Rating Process

5.6.2 The Credit Rating Process

The issuer is responsible for selecting members of its financing team during the early steps of the debt issuance process, including consideration (with advice from the financial advisor or underwriter) of which credit agency or agencies should be used to independently rate the creditworthiness of the proposed debt obligation. Before engagement, an issuer may find it helpful to meet with representatives of each credit rating agency or participate in conference calls to discuss and understand the credit ratings criteria, process, ratings application, and terms of agreement and anticipated fees in connection with the expected financing. 

Another important consideration is the market creditability of the rating agency. Issuers should be familiar or seek assistance from municipal advisors familiar with each agency’s area of specialization because ratings for particular types of debt may be more respected at a particular agency, which can result in increased marketability and added value. Following the adoption of its first set of rules for NRSROs in 2007, the SEC began granting registrations to credit rating agencies (listed in Figure 5-2) each with a specialization of one or more of the following classes of credit rating sectors: (1) financial institutions, brokers, or dealers (Financial Institutions); (2) Insurance Companies; (3) Corporate Issuers; (4) issuers of asset backed securities (ABS); and (5) issuers of government securities, municipal securities or securities issued by a foreign government (Government Securities). 

In general, the ratings process begins when a credit rating agency formally accepts an application from an issuer requesting a rating. Each rating agency has its own application process. Normally, once the financing structure is designed, and the controlling legal documents are close to final form, the financial advisor or underwriter will provide all of the necessary documents to the rating agency or agencies and will provide any other additional information (such as cash flow data or other financial calculations) requested by the rating agency. Rating agency representatives will discuss the financing directly with the issuer.98 Representatives of the rating agency also may visit the issuer or the project being financed. A financial advisor or underwriter may also recommend that representatives of the issuer and other members of the financing team meet with rating agencies in their offices in San Francisco or New York to present details of the financing or provide a presentation via conference calls.

When a decision on a credit rating has been made, a representative of the credit rating agency informs the issuer on the credit rating decision and may provide a draft copy of the written credit action before public dissemination. With the exception of those credit ratings that are clearly identified as point in time ratings, once a credit rating has been published, the credit rating agency will periodically review the credit rating, whether or not requested by the issuer. A review may result in the up or downgrading of an existing rating. To perform their reviews, credit rating agreements typically require issuers to provide periodic financial and other reports relating to the issuer, the source of debt repayment, and the status of the bond issue.100 If the issuers do not provide these reports, the rating agency may suspend the rating of an issue. Although ratings are generally assigned only in response to a request from the issuer, the rating agencies reserve the right to assign a rating without such a request. More detailed descriptions of the credit rating categories and ratings methods for each major rating agency are available on each firm’s website. Information about the OCR and registered NRSROs may be found on the SEC’s website.