Mark Hynes - thoughts on corporate disclosure

Opinions on changing rules, changing best practices, and their effect on investor relations officers.

Wednesday, May 06, 2009

New regulation of rating agencies from 2010 will have an impact on investor relations practitioners.

Credit rating agencies wanting to operate in the European Union will have to register and be supervised from next year after European Parliament last week signed off draft rules proposed by the Commission.

The new regime will require agencies to apply to the Committee of European Securities Regulators in Paris for registration and be overseen on a day-to-day basis by “colleges” of national securities regulators. The new rules, fully operational in 2010, will impose requirements on ratings agencies – ranging from disclosure of the models and methodologies on which they base their ratings, to corporate governance standards, such as the presence of at least two independent board directors whose remuneration is not tied to the agency’s performance.

Traditionally many companies have thought of dealings with the ratings agencies as the preserve of Treasury, with the occasional burst of activity when a particular analyst wants a presentation on the strategy.

However in recent times, as debt has become more expensive, the credit rating has become an ever more important consideration. And as debt analysts – along with rating agencies – are turning up at equity analyst presentations, IR is increasingly involved. So these changes are potentially important.

Under the new regulations, agencies will be prohibited from issuing ratings if they do not have "sufficient quality information" to base them on. It is unclear what “sufficient quality information” is, or how it is defined, but IR can certainly expect an increasing flow of requests for information from rating agency analysts.

Rating agencies will also be required to disclose the models, methodologies and assumptions used in their ratings, and to conduct internal reviews of their ratings. Thus companies looking at a potential (expensive) downgrade will have access to the ‘workings out’ by which their rating was arrived at, and access to an appeals procedure.These new obligations are only applicable in the EU, and it will be interesting to see whether a consistent application is achieved across the EU – and indeed in the US.


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