by François Masquelier, RTL Group Head of Treasury, Corporate Finance & ERM, and Honorary Chairman EACT
Management analysis is arguably one of the most qualitative and immeasurable among the many considerations of Credit Rating Agencies (CRA), when attributing and following rating of non-financial institutions. The quality of a management judgment is not easy to assess. It is also extremely difficult to benchmark the management level and performances via quantitative methods in the way the financial ratios for example; cash-flow models or earning capacities do to define precisely the company profile.
CRAs have decided to introduce ERM analysis into the credit rating process globally as a structured framework to evaluate management.
It seems that CRAs have decided to introduce ERM analysis into the credit rating process globally as a structured framework to evaluate management. ERM is a major component of a group overall risk profile. We believe it is an example of an initiative which could contribute to inoculate a better risk culture among European enterprises. Rating purpose could become an additional ‘good reason’ for setting up an appropriate ERM process within multinational rated corporations. Regulatory pressures, greater focus on governance and now credit rating agencies have been the stimulus for many changes in the industry. It is clear that there is recognition among the corporate community that they need to articulate risk appetite and tolerance more precisely. They should demonstrate their ability to withstand shocks, if any. Moreover, treasurers could be of help in translating risk metrics and methods into business decisions and reporting. They help also in setting the boundaries which form a dynamic link between strategy, target setting and risk management.
Introduction of ERM into corporate rating process
Rating agencies envisage introducing ERM analysis into their global credit rating process, as an additional means to better evaluate management as a principal component in determining the overall business profile, along with the financial profile. They decided to discuss with management about having a fair ERM evaluation and scoring the company properly. They want to benchmark the ERM process. They expect that deterioration or improvement in a company’s ERM quality would potentially drive rating and outlook changes before the consequences become apparent in published financial reports. Companies with superior ERM should have less volatility in earnings and cash flows, and will optimize the risk/return ratio.