With rating agencies, it’s often a case of “damned if they do, damned if they don’t”. A constant but often unfair criticism is that they don’t alert investors early enough about deteriorating credit situations so they can get out of the way in time. But while a key role of rating analysts is absolutely to monitor ratings and outlooks and take decisive and timely action as appropriate in the light of new information (not market gossip), they’re not mystics or soothsayers.
But something happened recently that led to an unusual sequence of events. Early in March, S&P revised its outlook on Nordic real estate company Citycon’s BBB- long-term senior unsecured rating from stable to negative. The timing was interesting because the revised outlook report came out after Citycon had issued a new bond and a tender offer for an outstanding bond but before either leg had settled.
Which led to a different question: should rating agencies time their announcements to avoid interfering with live capital markets transactions? The first answer that presents itself from the perspective of keeping the process orderly is “yes”. But then again, it really depends on where you sit in the market ecosystem.
From the perspective of a corporate issuer, you obviously don’t want an announcement to adversely affect a live transaction. Particularly if you’re already under pressure to reduce leverage. Doubly particularly if you’re operating in a stressed sector like, in this case, real estate where market access has been spotty.
But from the investor perspective, there is an obvious case to be made for rating agencies to get updates out as quickly as possible after new information becomes available in order to provide well-timed updates – regardless of or even because of in-process transactions.
Heavily oversubscribed
Citycon’s €300 million (US$324.43 million) five-year senior unsecured green bond had all of the trappings of a successful capital markets exercise. The company had hosted investor calls on February 27 and launched and priced its new bond on February 28. The deal ended up 7x oversubscribed as investors poured €2.1 billion of orders of the book, allowing pricing to tighten by a chunky 62.5bp from the start of marketing to the final coupon of 6.50%. In the tender, €213.25 million of the €310.42 million still outstanding of its €500 million 2.5% due October 1 2024 bond was accepted for repurchase.
The chronology ran as follows:
March 4th: tender offer deadline.
March 5th: S&P published its revised outlook.
March 6th: settlement date of the new bonds.
March 7th: settlement date of the tender offer.
S&P’s announcement threw something of a spanner in the works because Citycon announced the day after S&P’s announcement, i.e., on the day the new bonds were due to settle, that settlement was being deferred to March 8th. I do recall feeling uneasy about that – a credit rating agency affecting a live deal that was being executed to improve one of the very areas the agency was looking for it to improve.
Difference of opinion
Anyway, the bonds did settle and the company got its money. But what if the rating had been lowered rather than the outlook revised? That would have altered the bond’s pricing dynamics and had a much more serious effect. It would have saddled the company with higher interest service over the bond’s life and, in a worst-case scenario, could have led to a failed trade, making the company’s leverage position more precarious.
I can’t imagine the company’s senior executives were thrilled with the sequence of events. When Citycon’s CFO Sakari Järvelä announced the bonds had settled with a delay, he pointedly referenced the significantly improved debt maturity profile and reduced refinancing risk that the new issue had facilitated. That cut right across S&P’s rationale for changing its outlook, which included tightening leverage headroom, shortening debt duration and continuing refinancing pressure.
S&P clearly felt moved to act quickly because in its view the actions the company had taken didn’t go far enough. Its report announcing the change in outlook referenced both the refinancing of the bond due in October and the €48.2 million equity issue that Citycon had concluded days before launching the bond and tender. (The share sale, undertaken to repay outstanding debt and improve the capital structure, was supported by core shareholders and institutional investors and ended up 4x oversubscribed.)
The timing suggests clearly that S&P made its decision after the company had launched its bond and tender offer. Imagine if it had waited until after the bond and tender had settled to make its announcement, just to avoid creating a potentially disorderly market for Citycon. Investors would likely have felt they’d been deprived of potentially material information that would have played into calculations of fair value and investment intentions.
I have no idea if any investors backed out of the trade as a result of the negative outlook. I did reach out to Citycon with a series of questions but received no response. If I do, I’ll update.
(For full transparency, I work on an arms-length consulting basis with a non-US rating agency but the comments above are made in a purely personal capacity.)
