| Elan's route to a corporate bond rating |
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| With more companies examining the potential of corporate bond issuance, Paul Gallen reviews the process of getting a credit rating. |
Élan Corporation, plc has had securities rated from Rating Agencies since early 1992. Élan is a leading worldwide speciality pharmaceutical company, headquartered in Dublin, Ireland. We focus on two business areas:
· The discovery, development and marketing of therapeutic products and services for use in the areas of neurology, pain management and acute care; and
· The development and commercialisation of products for pharmaceutical clients utilising the Company’s proprietary drug delivery systems.
One of the many benefits of the introduction of the Euro is that corporates have greater access to a larger pool of capital. It is predicted that corporate bonds will become an increasingly popular choice of Treasurers in raising additional capital. This move towards public debt issues will be seen as a way to reducing the cost of funds and accessing new sources of capital. It is now generally accepted that obtaining a rating is an inevitable part of the bond borrowing process and their use by investors is now well established.
Élan’s first experience of soliciting a rating was in 1992. Our initial public offering in the USA had been very successfully completed in 1984. We were the first Irish company to list on NASDAQ, subsequently moving to the AMEX and since 1995 the New York Stock Exchange. We decided in late 1991 to raise additional capital through the convertible bond market. The convertible investors are attracted to the combination of downside protection offered by the bond and upside potential in the form of share price performance. This combination provided Élan with competitively priced finance as well as flexibility. To be successful in marketing the debt issue in the US public market, it is an absolute requirement to have a rating. To enhance the marketability it is better to have ratings from two rating agencies. We decided to obtain ratings from Standard & Poor’s Rating Group and Moody’s Investors Services. The credit rating secured at that time was assigned to the individual debt issue. Today credit ratings are assigned to companies as a whole, where they are used as a financial credential and an independent measure of overall financial strength. Based on the corporate credit rating, ratings are then assigned to individual debt issues, taking into account the nature and provision of the obligation, and the likely protection and relative position in the event of bankruptcy or default.
Having decided to proceed with obtaining the ratings from both credit agencies we were faced with providing a very high level of information. We were already familiar with providing a good deal of information to the US regulatory authorities and to our shareholders and investment analysts. The information requested enables the credit agencies to assess the company’s business profile having looked at the overall industry characteristics, economic environment and the company’s position in the market, its management quality, its competitive threats and opportunities and the regulatory regime. The financial review and analyses are based on five years historical results and projected data ranging from two to three years. The review also includes an assessment of management appetite for risk, the existing debt maturity profile, financial flexibility, ability to generate cash flow and forward business plan. Projections are not used to measure results or to judge management’s predicative powers. Rather they are a basis for discussing with the credit agencies our planning process, future direction and management’s philosophy and strategy. To facilitate a proper analytical balance between industry and regional considerations, international corporate ratings are conducted by teams of analysts combining expertise in both the issuer’s country and industry.
Following preparation of the information a careful review is carried out by Élan’s Senior Management. A presentation booklet is prepared and a typical table of contents would be:
1. EXECUTIVE SUMMARY
2. INDUSTRY OVERVIEW
3. ÉLAN BUSINESS OVERVIEW
4. DEBT OFFERING OVERVIEW
5. USE OF PROCEEDS
6. ÉLAN FINANCIAL OVERVIEW
APPENDIX
· MANAGEMENT BIOGRAPHIES
· FINANCIAL MODEL
A meeting is arranged at the offices of the Credit Agencies in New York and a copy of the information is sent in advance of the meeting. Requests for additional information may be requested upon review prior to meetings.
We have always managed to arrange meetings with Standard & Poor’s and Moody’s on the same day. Typically the meetings are attended by two or three of the rating agencies credit analysts and our C.F.O., Treasurer and one of our internal financial analysts.
We present our case and this is followed by in-depth discussion on issues arising. Meetings usually take two to three hours. If the rating agencies are satisfied that they have enough information to make a rating we would generally receive their verbal result within 5 days followed by a press announcement issued by the agency the following day. Upon receipt of the rating we are now ready to price the debt offering and commence marketing.
Having received the credit rating it is important to develop the relationship with the credit agencies. We maintain regular contact and keep them on our mailing list for press releases, annual reports, regulatory filings etc. In addition we would organise at least an annual face to face review in addition to meeting with them prior to any major event such as an acquisition.
The summary only lists the major changes and does not include the many times we have received confirmations of our ratings prior to major acquisitions, debt offerings and in recent times revolving bank credit facilities.
Credit ratings systems provide an independent internationally accepted and recognised standard for assessing credit status. We have found over the years that the incremental work involved in providing information to the agencies has become less and less as the agencies familiarity with Élan increases and the availability of industry and company information enhances their understanding of the issues and challenges we face. We would consider the time and expense involved in securing and maintaining a rating very worth while, in relation to being successful in accessing the very large pool of capital at a minimal cost. |
Paul Gallen is director, treasury and risk management
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| Article appeared in the June 1999 issue.
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