Credit rating change and capital structure in Latin America.
| Autor | Rogers, Dany |
| Cargo | Report |
Introduction
The credit rating reflects the credit quality of an issuer, being it business or governmental, or even an emission in particular, such as the sovereign bonds. These evaluations are usually performed by a specialized rating agency, which classifies the issuer (or emission) according to its probability of nonpayment. Despite the agencies of ratings affirm they use multiple indicators for rating determination, there are authors (Amato & Furfine, 2004; Blume, Lim, & Mackinlay, 1998; Damasceno, Artes, & Minardi, 2008; Kamstra, Kennedy, & Suan, 2001; Kaplan & Urwitz, 1979) affirm that it is possible to perform the prediction of rating with efficacy, using internal data of own issuing firms and having as basis, models of credit scoring. In this way, the issuing companies are able to predict the rating emitted by agencies of ratings and consequently, the imminence of a future reclassification of this mentioned rating. These researchers showed that a reduced number of accounting variables may be sufficient to determine a corporate rating.
From the assumption that companies can predict the imminence of a reclassification of the rating issued by an agency, Kisgen (2006, 2009), using data from companies from the United States of America (USA), concluded that those with imminent reclassification of the credit rating tend to use fewer debts than companies without imminent of a reclassification. The authors Klein, Michelsen and Lampenius (2011), analyzing companies from Europe, Middle East, Africa and the USA found out that companies, in the imminence of reclassifications in the credit rating, emit 1.8% less of debts in the subsequent period, when compared to firms that are not near a reclassification. Alternatively, Rogers, Mendes-da-Silva, Neder and Silva (2013), in a study performed in companies in Latin America, conclude that managers of companies with imminence of reclassifications of the credit rating seem not to consider this information potentially relevant in the occasion of choosing their capital structures.
In this context, this research analyzes the impact caused by imminent reclassifications of the credit rating on the decisions of the capital structure of non-financial companies listed in Latin America, i. e. whether these companies alter their capital structure when they have imminent reclassification of their credit rating, trying to avoid rating downgrades or to upgrade it.
This study contributes to the literature, by analysing a relevant and few explored issue, as Kisgen (2006) argues. Especially if considered that studies in the Latin American context are not found, with the exception of the recent work of Rogers et al. (2013). Additionally, in relation to this last study, the recent research utilizes different methodological procedures and is fundamentally based on other theories of financial literature, in addition to a new proxy for indication for imminence of reclassifications of credit rating and the use of dependent variables that consider the variations of debts in the short and long term.
This work is structured in six sections, including the introduction. Second section presents the literature about associations between rating and choices of capital structure by the company. The third section details the theoretical and empirical arguments around the question of the corporate rating determination. Then fourth section presents the methodological procedures employed during development of this research. The results obtained are presented and discussed in fifth section. Finally, the sixth section brings the final considerations.
Credit Rating and Capital Structure
Several studies support the argument that there are associations between the credit rating and capital structure (Bancel & Mittoo, 2004; Faulkender & Petersen, 2006; Graham & Harvey, 2001; Mateus & Amrit, 2011; Mittoo & Zhang, 2008; Valle, 2002), being the rating an important determinant of financial support of a company. Graham and Harvey (2001), in North American firms, and Bancel and Mittoo (2004), in 87 firms of 16 European countries, verified that the credit rating is the second most important item analyzed by chief financial officers (CFOs) when determining the capital structure of the company.
The importance attributed by CFOs to credit ratings is justified because, among other reasons, the rating allows a greater access to international bonds market. In this context, Faulkender and Petersen (2006) examined, between the years of 1986 and 2000, in the North American market, if non-financial firms with access to the market of public debts have a greater financial leverage that firms without access. These authors (Faulkender & Petersen, 2006) used the fact that the company has or not a rating as proxy for access to the market of public debts (i. e. firms with rating were considered with access to the market of public debts and firms without rating not). The results found suggest that firms with access to the market of public debts have a significantly greater leverage ratio from the companies that do not have access (28.40 % versus 17.90 per cent).
A similar study performed by Mittoo and Zhang (2008) points out that the Canadian firms, with access to the international market of debts, have leverage between seven and 11.60 percent greater than the firms without access. In the United Kingdom, Mateus and Amrit (2011), using a sample with 500 non-financial firms in the period of 1999 and 2006, found out that firms with rating of long-term debts have double of leverage ratio when compared with the companies without ratings, being their results significant in economic and statistical terms.
In this respect, Valle (2002), while examining the relevance of the agencies of ratings in determination of acquisition cost of various resource borrowers in the capital markets in Brazil, Canada and the USA, found out evidences that there is difference in acquisition cost among the companies in the USA and Canada, classified as investment grade and speculative grade. The risk premium offered by companies that have captured resources, both in Canada and in the USA, were inferior to the companies in investment grade.
Despite several studies that analyze the relationship between credit rating and capital structure, the influence on the decisions of the capital structure due to imminence of reclassifications of credit ratings is still little studied, especially in Latin American institutional environment.
Kisgen (2006) analyzed the association between the credit rating and decisions on capital structure of North American enterprises assuming that the rating is essential in decisions on capital structure due to the costs and benefits associated with the ratings (Hypothesis Credit Rating- Capital Structure, CRCS). This hypothesis implies that firms on the imminence of a reclassification of the rating, either downgrades or upgrades, will tend to emit fewer debts, if compared to firms that are not on the imminence of a reclassification. To test the hypothesis CR-CS, Kisgen (2006) uses two tests with the adoption of two concepts of ratings grouping:
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the concept of broad rating, which represents any levels of a particular rating, including their modifiers + or -, the S&P and Fitch, or 1, 2 and 3 of Moody's. From this concept it is made the POM test (test abbreviation for Plus or Minus), in which classifies companies for example, with the ratings emitted by agencies S&P or Fitch on the ratings BB+, BB- and BB, in a broad rating called BB, and companies classified by Moody's on the ratings Ba1, Ba2 and Ba3 in a broad rating of Ba;
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the concept of micro rating, which indicates the evaluation itself of the rating including all its numeric modifiers for S&P and Fitch (+ or -) or numerals to Moody's (1, 2 or 3). This means that BBB refers only to BBB and BBB+ and BBB- to only BBB+ and BBB-, respectively. By means of this concept, Kisgen (2006) presents the Credit Scoring teste, which will be applied in this study.
The procedure for carrying out the Credit Scoring test occurred as follows: (a) It was estimated an equation of scores, using data from its own sample, to evaluate the credit quality of companies within their respective micro ratings (i.e. how different two companies equally classified as BBB+ by S&P were in terms of credit risk); (b) It was divided the firms classified in each micro rating, utilizing the score calculated as the division criterion, in three equal parts (upper thirds, middle and lower); (c) After this categorization, it was adopted the following assumption: firms in the upper and lower thirds of your respective micro rating would be with imminence of a reclassification of rating, and classified companies in middle thirds would be with no imminence of a reclassification; (d) It was tested the hypothesis of research by means of a data structure in panel with regressions estimated by Ordinary Least Squares (OLS).
The main results found by Kisgen (2006) were that companies in the imminence of a reclassification of the rating, for both the broad rating and micro rating emit fewer debts than those with no imminence of a reclassification. Therefore, it can be noted that the rating of credit directly affects the decisions of managers on capital structure, being these decisions affected by either potential upgrades or downgrades.
In another research, Kisgen (2009) sought to examine whether the managers take their decisions about capital structure considering a credit rating target. The results found were similar to those obtained in their study of 2006; however, the decisions were not symmetrical in relation to the types of reclassifications (upgrades or downgrades). A peculiar result was that a downgrade affects manager's behaviour in relation to the leverage composition, allowing a partial adjustment toward the level of leverage target, being this adjustment significantly faster than in other firms. Moreover, a...
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