Alberto Jones Tamayo
Director General
Moody’s Investors Service
View from the Top

Building and Maintaining a Good Credit Rating

Wed, 02/24/2016 - 14:39

Q: Last year, Mexico’s credit rating was raised one level to A3 after the energy industry opened. How will this upgrade draw more investors to the country and signal the opportunities within the industry?

A: The doors to the energy industry were opened with the Energy Reform in 2013 and the sheer force and momentum took us by surprise. In a sense, we did not expect such bold changes and Moody’s was the only credit rating agency that took action based on this. As the first credit rating agency in the world, Moody’s has had a unique trajectory, with experience in providing ratings during the inception of the railroad and steel industries in the Americas. This means it has become accustomed to rating through cycles and looking at risk over the long term. In many respects Mexico holds credit A attributes, and the sheer breadth of the Reforms meant that its long-term growth profile would change, albeit over time. Prior to the reforms, Mexico was already an attractive destination and prestigious players were already in place. Five years ago institutional investors, primarily from North America, Europe, and to a lesser extent Asia, were setting their sights on this market. Additionally, a huge portion of the Mexican government’s local debt is in the hands of foreign residents. For the past 20 years, Mexico has conducted extensive research on the economic and fiscal front, and this A3 upgrade is a confirmation to all investors that the country is on the right path. Perhaps it is not only financial investors, but also companies across the globe that will see Mexico’s potential.

Q: What are the concerns that investors share, and what are the risk factors that you take into account during credit ratings?

A: Security issues in Mexico are a prevalent question among investors, yet for us they are not relevant because we have a long-term perspective. We focus on risks that have an impact on stability and can alter the credit profile of our issuers. Businesses have pragmatic viewpoints and handle different levels of risk. While there might be reasonable concerns surrounding security and corruption, many companies have managed to thrive in equally problematic regions such as the Middle East and some African nations. Companies need a solid balance sheet in order to face these challenges, and while insurance and operating costs may be higher, they will invest if the business model makes sense. Investment opportunities are scarce at the moment in some markets, and when we turn our sights to Mexico, the prospects certainly look brighter.

Q: What are the challenges of giving smaller players accurate credit ratings?

A: Transparency may be difficult to obtain from these companies, so we follow strict criteria. We want to know details of the auditors, their rank, the owners, and their reputation and track records. Moody’s has a conservative approach, especially for lower rated credits and there are a lot of new entities being created so we limit the number of companies to which we provide ratings. We can rate an enterprise even if it is relatively young, provided the shareholders have a good reputation and the business model makes sense. We look at who is behind the company; sometimes we see that it is a local family with different businesses across sectors and this is something that is taken into consideration.

Q: When examining credit ratings for companies in Mexico, does Moody’s apply specific criteria for this country, or does it use the same criteria globally?

A: A series of questions have to be thoroughly answered. For instance, who is behind the companies? What is their expertise? Who are their partners? What is their track record? It is not only the size that matters, but also the experience and financial solvency that the stakeholders have. However, the business plan also holds great importance regardless of ownership. Having a renowned parent company does not necessarily mean companies will obtain the same rating as the parent. While this background might give them added value, it may not translate to the same rating. Even if solid, highrated conglomerates are behind these new ventures, the subsidiaries will not be rated as highly as their parents without real backing, capital, and funding. Serious companies are managed by experienced investors and these are the only ones that can truly be rated. To date, there has been no influx of energy companies desiring ratings, since they typically approach credit rating agencies at the end of the process.