2/6/2014

Managing Your Credit Rating

Categories: Ratings Agency Evaluations

Without question the single most important concern of clients when issuing debt is the credit rating they are likely to receive. This is rightfully so, for where else does Wall Street so clearly meet Main Street.

Invariably the conversation moves to the crux of the issue, the numbers. While predicting what credit rating the agencies will assign is never simple, there are benchmarks which provide a reasonable starting point. (see below for an abbreviated list) Issuers who go through the ratings process regularly know the ratios. If you are not one of these issuers, we recommend that you “run the numbers” and use the results as a fiscal planning tool. Such an activity, if nothing else, establishes a base case management approach to your credit rating. This will familiarize you with the ratings interview talking points and more importantly, may alert you to weaknesses in your finances.

While this base case approach suits smaller issuers, it behooves larger municipalities, cities, towns, counties and even larger school districts to more actively manage the financial underpinnings of its rating. After all more dollars are at stake.

We encourage these clients to be more proactive and to some extent, conduct the same financial stress scenarios used by rating agencies to develop their own models. One such scenario is as follows: Due to increased fears of a terrorist threat, travel to a region, whose economy relies heavily on tourism slows. In what ways and to what extent would the financial stability of the region be stressed? By conducting such an analysis, what counter measures can be taken or policies put in place to mitigate and stabilize municipal operations? Once stabilized, how does the credit look? Does it retain its original credit characteristics and preserve its current rating or does it deteriorate?

Just remember one thing…its your credit, manage it!

Sample Rating Agency Benchemark Ratios

Debt
Debt to Market Value

  • Hi >=6%
  • Moderate 3%-6%
  • Low <=3%

Debt Expenditure Ratio

  • Hi > 15%
  • Moderate 10%
  • Low <5%

Debt Amortization

  • 25% over 5 years
  • 50% over 10 years

 

Economic

Income as a % of US Average

  • Very Hi >140%
  • Hi 120%
  • Average 100%
  • Low 85%
  • Very Low <=75%

 

Financial

General Fund balance as a % of Revenue

  • Hi>=15%
  • Moderate 5% to 15%
  • Low 0% to 5%

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