On April 10, 2009, new rules relating to the interaction between companies and credit rating agencies will go into effect.
These rules prohibit certain types of interaction that the SEC believes could undermine the objectivity and quality of a credit rating. The consequences of violating one of these rules are severe – the relevant credit rating agency would be required to withdraw its rating.
Bond indentures and credit agreements may contain covenants requiring companies to maintain their credit ratings. The withdrawal of a rating could therefore lead to a breach of these covenants and trigger an event of default under the relevant debt instruments.
Companies should carefully monitor interactions between their employees/financial advisers and personnel at credit rating agencies that determine or approve credit ratings to avoid the potentially severe consequences of contravening the new rules.
Prohibition on Recommendations
Credit rating agencies will not be allowed to make a recommendation on how to achieve a desired rating and then rate the obligor or debt instrument that was the subject of the recommendation. In essence, the SEC does not want the agency to rate its own work.
Unfortunately, the line between permissible and unlawful communication is blurred. The SEC does not view as a recommendation the credit rating agency’s explanation of the assumptions and rationales it uses to arrive at rating decisions and how these criteria apply to a given rating transaction. But if this “feedback” turns into a “recommendation” about changes needed to obtain a desired credit rating, the agency would be in violation of the new rule. The SEC believes that agencies that provide the greatest clarity to the marketplace about their ratings methodologies will not need to provide detailed explanation during the rating process.
Prohibition on Fee Discussions
Credit rating agency personnel who determine or approve credit ratings are prohibited from any involvement in setting the fee paid for the rating. Essentially, the SEC wants to remove from fee negotiation those persons directly involved in issuing credit ratings
Prohibition on Gifts
Credit rating analysts, or persons responsible for approving the rating, are prohibited from receiving gifts other than those items whose aggregate value is less than $25 and that are exchanged during a routine business meeting. This $25 limit is per analyst and per interaction, but does not mean that an analyst may accept any gift, regardless of value, that has no use in the conduct of the business meeting. Typically, note pads, pens and light refreshment with an aggregate value of less than $25 per analyst are allowed