The investment community in our globalized world has grown ever so bigger each day and it is easy to see why some investors can get lost when picking their investments.
One tool that can help you decide is the credit ratings assessed by the credit agency. The three top agencies – Moody, S&P and Fitch are the world’s top rating agencies which provides assessment on companies accredited ratings. Different rating agencies give you slightly different framework but from the broad view they generally serve the same purpose – the higher your risk profile, the lower your ratings and vice versa.
For the purpose of the post, we will take a look at the framework from Moody in determining the credit rating for Reits listed companies in Singapore.
There are generally 4 main factors used by Moody in analyzing a company’s internal and external characteristics. These factors are:
Factor 1 – Liquidity and Funding (24.5%)
Factor 2 – Leverage and Capital Structure (30.5%)
Factor 3 – Market Position and Asset Quality (22.0%)
Factor 4 – Cash Flow and Earnings (23.0%)
Factor 1 – Liquidity and Funding
Under this factor, it covers the ability of the companies to hold ample liquid assets under their books. This includes things like debt maturities, dividend payout ratio and the amount of unencumbered assets.
For instance, under the debt maturities, the higher the amount of weighted debt maturities out of the total debts, the lower will be the ratings.
Factor 2 – Leverage and Capital Structure
This probably takes the highest weightage out of all the four factors and you can see why they have placed a huge importance on leverage assessment.
Under this factor, items such as the gearing ratio and whether the debts are secured or unsecured does play an important factor in assessing the company’s ratings.
For Reits, the gearing probably is capped at 45% out of your total assets and if you exceeded this, then you are probably screwed by the MAS regulators.
Factor 3 – Market Position and Asset Quality
This is probably the factors that are most subjective as you really need to assess external environment if your assets are in other locations of the world. Another item that falls under this factor is the company size, so the bigger your total gross valuation of assets the better your credit ratings.
Factor 4 – Cash Flow and Earnings
This factor covers the ability of the company to provide earnings, positive cash flow and cover costs such as the interest coverage ratio.
For instance, the better the company is at covering their finance expenses, the better their credit ratings will be.
These ratings might not be important to you right now but it definitely gives you a checklist to see which areas are companies weak in. As investors, we need to be vigilant on the companies we want to be invested in, lest any weaknesses might upset what happened back then during the gfc.