THE country’s biggest food and beverage company, San Miguel Corp., is going through what some financial analysts describe as the “tyranny of credit rating.”
Hardly had the closing documents of SMC’s recent $980 bond issue been completed, its former credit rating company, Standard & Poor’s, downgraded its debt rating from “stable” to “negative.”
This means the company’s cash reserves may, in S&P’s opinion, be insufficient to meet its debt obligations as they fall due. This depletion is being attributed to SMC’s aggressive investments in infrastructure and mining projects.
It will be recalled that in recent years, SMC has expanded its business activities from food manufacturing to power distribution, infrastructure operation and telecommunications.
SMC cried foul over the accuracy of the credit assessment. It said the rating was based on inaccurate assumptions, and that its existing debt load, in relation to its earnings before interest, tax, depreciation and amortization, should not raise concern over its ability to service its debts.
Besides, SMC pointed out, the data S&P used to justify its downgrading were already outdated since the company terminated its services way back in December 2010.
Assessment
For its part, S&P claimed that its evaluation of SMC’s debt position was based on its rigorous analysis, including forecasts and adjustments.
Noticeably, S&P failed to respond to SMC’s statement that its services had been cancelled six months earlier, thus putting into question the integrity of the financial data that S&P used to justify its negative rating on SMC’s debt situation.
It was prudent of S&P to limit its reply to SMC’s complaint to a one-liner. Otherwise, like what happened in the United States in 2008, it might find its foot in the horse’s mouth.
This is the same rating company that, together with Fitch Ratings and Moody’s Investor Services, the US Securities and Exchange Commission and several state governments have sued for fraud, negligence and willful violation of fiduciary duties in the assessment of the subprime housing mortgages that led to the near collapse of the US economy in 2008.
According to the complaints, these companies gave those instruments triple A rating (meaning, the holders of the mortgage papers are assured of the promised returns on their investments) without conducting the required evaluation of the credit standing of the parties involved in the transaction.
Had they done their job properly, they would have known that the people who executed the housing mortgages that constituted the underlying asset of the instruments sold to the investors did not have the capacity to pay their debts.
Responsibility
Apparently, the rating companies looked the other way or deliberately glossed over the credit record of the mortgagees in consideration for the fees that the issuers of the instruments paid them.
It was a classic you-scratch-my-back-I’ll-scratch-yours arrangement between the rating companies and the financial institutions that issued the instruments offered to unwitting investors.
The rating companies gave the credit rating the institutions wanted for their instruments, otherwise the latter would go to their competitors that would be willing—for the right price—to give the desired credit rating.
Since the rating companies have to satisfy their stockholders’ insatiable desire for profits, the due diligence and critical evaluation required of honest-to-goodness credit assessments were conveniently ignored.
When the roof fell and their involvement in the once-in-a-century financial crisis unraveled, the rating companies were quick to wash their hands of any culpability and claimed they merely gave opinions that the investors were free to accept or reject.
Not surprisingly, hardly any mention was made of the millions in dollars they earned for doing work, as authorized by their corporate charter and license, whose results were looked to for guidance by the investing public.
Bilateral
SMC’s statement about the termination last year of its relationship with S&P’s is significant. It gives a window to S&P’s motivation for downgrading SMC’s debt outlook.
Credit rating is not a routine business activity. It is done only by companies that want to borrow money from financial institutions or sell securities to the public upon the request of the underwriters, or when required by government regulatory agencies.
Prior to the conduct of the credit evaluation, the parties agree on the parameters of the review—the corporate documents and financial statements that shall be made available, the company officers to be interviewed to validate the facts and figures submitted and, if the company is a first-time client, meetings with government officials who perform regulatory functions over the company.
The rule of thumb is, no credit assessment should be made unless the rating company has at hand complete, accurate and updated financial and operational records of the client.
When a rating company renders an opinion about a company’s ability (or inability) to make good its debt obligations to investors, it is presumed, nay, required, to have all the facts and figures necessary to make such judgment because an unfavorable rating could have adverse consequences on that company’s ability to tap the market for future funding needs.
So what’s with S&P’s unsolicited credit assessment of SMC? A case of ambulance chasing or a matter of pique arising from the loss of a lucrative client?
(For feedback, write to rpalabrica@inquirer.com.ph.)