How credit ratings shape corporate financing strategy: Cost of capital, market access, and long-term value creation

Graziano Stefanelli
Sep 8
5 min read

Credit ratings shape capital access, pricing, and strategic decision-making.

Credit ratings are central to modern corporate finance. They provide an independent, widely recognized assessment of a company’s likelihood of meeting its financial obligations. Issued by specialized agencies such as S&P Global Ratings, Moody’s Investors Service, and Fitch Ratings, these grades serve as shorthand for risk, enabling investors, lenders, counterparties, and regulators to make informed decisions without conducting exhaustive due diligence on every issuer. For the company itself, its credit rating has wide-reaching implications—from day-to-day borrowing costs to the structure of major transactions and long-term strategy.

The mechanics of credit ratings: categories, criteria, and consequences.

Credit ratings are expressed on a scale ranging from prime investment grade (AAA, AA, A) down through lower investment grade (BBB/Baa) to speculative (junk) grades (BB/Ba, B, CCC, etc.) and, ultimately, default (D). The granularity (plus/minus, numeric, or letter modifiers) provides additional nuance within each broad class. Most institutional investors, such as pension funds, insurance companies, and sovereign wealth funds, are restricted by policy or regulation to holding only investment-grade bonds.

Rating Category	Common Symbols	Credit Quality	Funding Impact
Prime Investment Grade	AAA, AA	Highest, lowest default risk	Cheapest debt, maximum market access
Strong/Adequate Investment Grade	A, BBB	Solid, moderate risk	Low spreads, broad investor base, flexible covenants
Speculative Grade	BB, B	Elevated default risk	High spreads, limited investor base, tighter covenants
Highly Speculative/Default	CCC, CC, C, D	Very high default risk or default	Restrictive, short-term, high rates, or market exclusion

The “investment-grade” threshold (BBB–/Baa3) is a critical dividing line, affecting pricing, access, and even index eligibility for the company’s bonds.

How agencies assign ratings: a multi-layered analysis.

Credit ratings are determined by analyzing a blend of quantitative metrics and qualitative factors:

Financial strength: Debt/EBITDA, net debt/EBITDA, FFO (Funds From Operations)/debt, interest coverage, and cash flow ratios.
Business risk: Industry outlook, market share, customer and supplier diversification, and earnings volatility.
Corporate governance: Management track record, risk controls, transparency, and shareholder alignment.
Event risk: Exposure to M&A, regulatory change, litigation, or unforeseen shocks.
Liquidity and funding: Access to committed credit facilities, cash balances, refinancing needs, and debt maturity profiles.

Agencies conduct in-depth management meetings, review internal forecasts, and analyze business plans to supplement publicly available financial data. For global companies, ratings may also incorporate country risk and currency exposure.

Ratings determine the breadth, cost, and structure of debt financing.

A company’s credit rating directly affects its financing options:

Investment-grade companies can issue long-term, fixed-rate bonds, often at low spreads to government benchmarks. They enjoy access to a vast pool of global institutional investors and can negotiate flexible terms and covenants.
Speculative-grade (high-yield) issuers pay significantly higher rates, face stricter covenants, and must often rely on floating-rate or short-term debt. Many institutional buyers are barred from holding such debt, shrinking demand and raising costs.
Ratings influence not just price but also maturity: lower-rated firms may be limited to 3–5 year tenors, while top-rated names can issue 10, 20, or even 30-year bonds.

Credit Rating	Typical Debt Tenor	Coupon Spread (vs. Gov’t Bonds)	Investor Base
AAA – AA	10–30 years	+30–60 bps	Central banks, pensions, insurers
A – BBB	5–15 years	+70–160 bps	Mutual funds, corporates, insurers
BB – B	3–7 years	+250–600 bps	High-yield funds, hedge funds
CCC – D	1–5 years (or shorter)	+800 bps or higher	Distressed/special situations investors

Below investment grade, covenants become more restrictive and debt may be callable, include warrants, or be convertible to equity.

Ratings act as a constraint and planning tool in capital structure decisions.

Management teams often set explicit credit rating targets—“maintain at least BBB–/Baa3”—as part of capital allocation and financing policy. These targets drive decisions such as:

How much debt to add: Large acquisitions, buybacks, or special dividends are modeled for their effect on leverage and ratings.
Equity issuance: In transformative deals, equity may be raised not for need, but to avoid a downgrade below investment grade.
Refinancing strategy: Firms may spread maturities and diversify sources (public, private, bank loans) to manage refinancing risk and rating agency scrutiny.

During periods of economic stress or market volatility, companies may curtail payouts, defer investments, or even divest assets to protect ratings and access to low-cost capital.

Ratings affect more than just the company—they influence counterparty, supplier, and customer relationships.

A strong rating can:

Lower costs for trade finance, letters of credit, and commercial paper issuance.
Enhance supplier and customer confidence—especially for long-term contracts or prepayments.
Improve negotiating leverage with banks and other counterparties.
Serve as a requirement for participation in certain government or regulated sector tenders.

A downgrade, particularly below investment grade, can trigger collateral calls, force some investors to sell the company’s bonds, and prompt suppliers to tighten payment terms.

Changes in credit rating have immediate and long-term effects.

Downgrades: Raise borrowing costs, shrink investor base, and may trigger debt covenants or acceleration clauses. For public companies, this can also negatively impact share price.
Upgrades: Lower the cost of capital, increase flexibility, and may open new markets or reduce the need for covenants.
Outlooks and watches: Even before formal rating changes, agencies issue “positive/negative outlooks” or place ratings “on watch.” These signals prompt management to engage proactively with agencies and sometimes to alter strategy.

Management teams may request shadow ratings or regular feedback from agencies to understand how planned actions will affect their risk profile and rating trajectory.

Credit ratings are dynamic and require active management and communication.

Maintaining or improving a credit rating requires:

Consistent financial discipline: Meet or beat forecasts, manage leverage, and keep strong liquidity buffers.
Transparent disclosure: Regular, open communication with rating agencies and the market, especially about major strategic decisions.
Early warning systems: Identify emerging risks—whether from macro trends, regulatory shifts, or operational hiccups—and develop contingency plans.

Failure to communicate or surprise agencies with unexpected actions can erode credibility and result in rapid, punitive downgrades.

Global and cross-border implications: ratings bridge capital markets.

For multinational companies, ratings must reflect both home-country risk and exposures in international markets. Issuers may seek local currency ratings for domestic bonds and separate foreign currency ratings for international placements. Differences in sovereign ratings, capital controls, and market depth all factor into how agencies—and investors—view the company’s credit quality.

Ratings in strategic transactions: M&A, spin-offs, and restructuring.

Every major transaction is modeled for its impact on ratings:

Acquisitions: Ratings agencies assess pro forma leverage, integration risk, and new business risk.
Spin-offs or divestitures: The rating may move up or down, depending on whether risk is being transferred or consolidated.
Debt restructurings or distressed exchanges: Trigger negative outlooks, downgrades, or even a “selective default” rating if investors take a haircut.

Transaction advisors and banking teams work closely with management and agencies to structure deals that minimize rating impact or plan for staged rating recovery.

Credit ratings as a strategic asset: more than a number.

For leading corporates, the credit rating is an asset to be protected and leveraged—a tool for optimizing funding, extending strategic reach, and securing resilience in volatile markets. Companies with strong ratings enjoy not only lower financial costs but also enhanced reputation, stakeholder trust, and room to maneuver during downturns. Integrating ratings management into the core of corporate finance strategy is not optional—it is a hallmark of sustainable, value-driven leadership.

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