The Dealmakers Forum: Make Or Break - The True Value Of Credit Ratings
At its core, a credit rating provides transparency and third-party verification for investors. Depending on the level, achieving a credit rating can significantly help open additional doors for financing and also ensure that the financing is achieved at the most cost-effective and flexible terms available. And as the rating level increases or improves, the cost of capital decreases and the volatility over time becomes more muted.
Nonrated organizations, on the other hand, have much more limited access to capital; and when and if they do access capital for a project, the cost can be significantly higher than for a rated organization. “So, from [a banker] perspective, our view is that credit ratings provide tremendous economic value to an organization,” Nick Gesue, Chief Credit Officer at Lancaster Pollard, maintained.
Ancillary benefits of a rating
While its primary benefit is its economic value, a credit rating also allows management to benchmark the organization’s performance against competitors and/or similar types of organizations (e.g., by rating level, contract type, number of sites, or other distinguishing characteristics) from both a financial and a ratio perspective. It also allows the organization to quantify and compare the cost of interest on fixed-rate debt in an open pricing or initial pricing effort or when negotiating with letter of credit banks. “[A credit rating] provides a barometer, allowing you to truly and more clearly define what the pricing should be,” noted Jerry Grant, Executive Vice President and CFO at ACTS Retirement-Life Communities.
For organizations that have been rated for a number of years—such as ACTS, whose ratings date back to 1996—tracking performance over time can be particularly helpful. Has the rating been maintained or increased over time? Has it been maintained when the industry (or the economy as a whole, as in recent years) has gone through difficult times and when ratings overall have been negative or on a downward trend? If so, the rating can provide a perspective on how an organization performs.
Being able to benchmark against a similar cross-section of the industry can help executive management and board members identify ways to improve operations, market their community, and generally feel good about their financial and operational progress. A rating helps leadership share financial details with its management team, as well as with residents, and provides greater transparency when presenting data to the board.
A credit rating also serves as a tool for setting financial goals. Rating agencies often hear that their clients manage to certain metrics of a particular rating level. They may look at their operating margins or days cash on hand—or leverage other metrics or a combination of metrics—to achieve a certain level. In effect, they’re using the rating as a benchmark—comparing themselves to others in the rated community.
The dialogue that takes place between a rating agency and a rated entity provides another voice and another set of information that can inform a strategic or project planning process. The rating agency perspective on what the organization is seeking and what that might mean when stacked up against the numbers for similar organizations is helpful, as organizations think strategically about their marketplace and about what’s happening within the industry, in the broader community, and even nationally......Want to read more? Click here for a free trial to Senior Living Business Interactive and download the current issue today