Ratings agencies tread a fine line

Ratings agencies have a lot of power in the financial world. When a company wants to raise a loan it hires one of them – Standard & Poor’s, Moody’s or Fitch – to assess how creditworthy the firm is and, by implication, what the likelihood is of its defaulting on its loan.

Obviously the better the rating, the less risk to those lending the firm money and the lower the rate of interest rate the lenders will be willing to accept. So the rating delivered by the agency has a material effect on the company’s costs. In fact, it goes further than that. As ratings have become established they get used more and more as a guide to whether it is safe to do business with the firm at all. So if a firm suffers a rating downgrade, it may find its customers become more reluctant to do business with it.

Rating agencies make mistakes but the key to their credibility is their objectivity and their process. All the more interesting, therefore, to hear a financial PR firm say the other day that it had been retained by a company to get its rating improved – and it had found the project surprisingly easy and that it was now thinking of offering this specifically targeted service to others.

On one level, it might be thought no different from the work PR firms do to get a firm’s share price up, where they accentuate the positive and stimulate investors into buying. But it is not quite the same. Influencing rating agencies involves working directly on one of the market’s major pricing mechanisms and, if lobbying for an upgrade is acceptable, then presumably lobbying to get a downgrade for a competitor would be too.

The temptation to over-egg it is obvious. Because the stakes are so high it would then only be a matter of time before PR firms found themselves in court – either for hyping a firm that subsequently went bust, or for rubbishing one in ways that were libellous. Dangerous waters indeed.

anthony.hilton@haynet.com

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