Topic 5: External Relationships Flashcards
Name 6 Key External Relationships
6 key external relationships:
- Core banks
- Rating agencies
- central banks
- industry bodies
- peers
- debt investors
Define relationship banks Characteristics (4) - core banks - use of B/S - # banks - tiers
Relationship banks: look at entire relationship, not just lending.
- Core number of banks get majority of business
- Core banks should be rewarded for use of balance sheet by getting ancillary business
- Right # banks depends on amt of debt and ancillary business available, and creditworthiness of company
- Some have 2 or more tiers of banking panel
List ancillary business (8)
Ensure annual review of spread of business
- transactional banking
- letters of credit & guarantees
- advisory
- debt capital markets (lead manager etc)
- other fee paying business
- investments
- foreign exchange deals
- interest rate swaps / cross currency interest rate swaps
annual review of relationship banks
- Internal element (5)
- External element (6)
INTERNAL REVIEW
- Spread of business
- Any new banks to add?
- Review size of banking panel
- Selection / confirmation of likely banking panel
- Wallet review for next 12 months
EXTERNAL REVIEW
- Include senior personnel
- Fees/profit achieved over year
- Looking forward - expected share over coming year
- Feedback on performance / areas of improvement
- Relative position
- Pricing discussion / product offering
Credit Rating - define
Credit rating: independent agency’s opinion on creditworthiness
“ability & willingness to meet financial obligations in full and on time
- companies pay for rating
Advantages of credit rating (5)
- Widen pool of potential debt markets / products available
- Widen group of potential investors
- Improve credit terms from suppliers
- Provide timely information to investors / suppliers on changes in credit worthiness
- Cheaper borrowing rates
Disadvantages of credit rating (5)
Credit rating disadvantages
- Costly to obtain / retain credit rating (time & $)
- Need to provide private information
- Hard to cancel once established
- Risk of leak of internal info
- Provides timely info on changes in creditworthiness
Name 3 x credit rating agencies
- S&P
- Moody’s
- Fitch
Name 3 types of credit rating
Name 2 x ratings
- Counterparty credit rating (organisation)
- Issue specific credit rating
- Sovereign credit rating (impacts all companies based there as company cannot be stronger than the country
2 x ratings
- Short term
- Long term
4 x ratings outlooks (6 - 24 months)
Watch List
4 x rating outlooks
- Stable (no change anticipated)
- Positive (could go up)
- Negative (could go down)
- Developing (contingent on future event)
Watch List: upgrade or downgrade imminent (90 days)
Ratings impact cost of debt
2 x credit rating grades
2 x rating grades:
- investment grade
- non investment grade
Name 6 key numbers / ratios that ratings agencies look at:
- Gross debt
- Cash
- Net debt
- Net gearing
- Funds from operations (FFO ratio)
- Adjusted gross debt to EBITDA
Funds from Operations (FFO)
- compares earnings from net operating income plus depreciation, amortisation, deferred income taxes & other non cash items to
- LT debt plus maturities, CP and other ST loans (leasing included as debt)
The lower the FFO to total debt ratio the more highly leveraged the company is.
>60 = minimal risk
Debt Investors
3 types of engagement
- regular programme (non deal roadshow)
- Deal specific (deal roadshow)
- Special event
Debt Investors
3 Beneficial effects from regular engagement
- feedback on credit
2, pricing improvement relative to peers - increased participation in new issues
