Standard & Poor’s, the ratings agency, said this week that from December it will give so-called public ratings for buyouts with debt of more than €1 billion. Investors and bankers hope this will improve confidence and liquidity in Europe’s leveraged loan market.
The proposal comes after two months of consultation with debt investors, private equity firms and regulators.
According to Paul Watters, director and head of loan ratings for European leveraged finance and recovery at S&P, many private equity sponsors, particularly in Europe, still have a very strong preference for keeping things private. They don’t like the public nature of ratings. Some even said they would withdraw information, be less willing to provide due diligence up front, and reduce the content of the monthly management accounts provided to investors in the debt.
However, for sponsors to fail to co-operate could prove costly. Given the nature of Europe’s bank-driven market, resisting the ratings process could constrain the sponsors of larger deals from accessing institutional lenders who need the reassurance that ratings offer.
Of course for the time being, while the institutional investors are in abeyance, this element of the debate is academic. In the main the only deals that are getting done are mid-market deals, which will still be able to toddle on behind closed doors with credit estimates and no public ratings.
But if the institutional market gets back on its feet, and the sponsors with larger funds are dependent on that, then expect more public ratings. In the meantime, S&P could well use the time making sure general partners know what to expect. Disclosure, the agency says, is less onerous than the firms fear, with no commercially sensitive information revealed directly. And issuers allowed a final review of the rating before it goes public for factual infelicities.
The GPs for their part must keep up a dialogue with the agency. The European market is different to the US and S&P needs to make sure it is flexible enough to accommodate regional variation. A cookie cutter approach will not work.