1 August 2008 at
9:28 am (UTC +8 hours) by Nathaniel Forbes
This month, U.S. credit rating agency Standard & Poor’s (S&P) started evaluating the enterprise risk management (ERM) capabilities of non-financial companies that it covers. This is S&P’s announcement, and here are their answers to common questions about it.
Extrapolating a risk evaluation to a logical, eventual conclusion, if a company doesn’t have a business continuity management (BCM) program, its credit rating could be lowered. The consequence? Borrowing money would cost more, and for the large companies that S&P reviews, that could be a material consequence.
S&P already evaluates risk management at the banks, insurance, energy and agribusiness companies that it rates, and now wants to do so at companies in other sectors. These are the Asian corporates that S&P rates and these are the U.S. corporates. You’ve probably heard of their S&P 500 index of American companies. S&P also rates companies, governments and debt instruments all over the world.
Suppose one of those companies wanted to issue a bond for $200 million to build a new plant in, say, India. Suppose also that, in part to its assessment of the company’s risk management, S&P lowered its credit rating from, say, A- (upper medium grade) to BBB+ (lower medium grade). As a result, the company was forced to pay a 4.1% coupon instead of 3.9% to make the bond attractive to investors or underwriters. On $200 million, two-tenths of one percent (the difference between 4.1% and 3.9%) is $400,000. Read more... (885 words, 0 images, estimated 3:32 mins reading time)