Credit rating must be wrong

Q:  During quarter 4, year 3, our credit rating fell to level 3, along with the rest of our world.  We would like to question the reasoning behind this.  We had a credit rating of 2 prior to fourth quarter, when we had the high sales in the industry at 5.1 million dollars, and we ended with the highest cash balance of 983,000 dollars with no loans.  We are hoping this was a fluke and can be appealed.  We have worked very hard to manage our finances as we have made long term improvements to our plant and product.  What has happened to our credit rating?  We were hoping for, and honestly expecting, our credit rating to move to 1 very soon.

A:  The factors that are considered by credit analysts in their year-end review are outlined under FAQ "Credit rating determination," and are considered for an extended period rather than just for a single quarter.  As this is the first year of the competition, the period is for the entire Year 3.  Credit analysts do not usually divulge the specific values of different variables that they consider, but to have an average credit rating generally expect your company to at least meet industry standards and excel in relation to other companies in the industry.

Your company certainly met repayment obligations and had no emergency borrowing, and from the Annual Industry Report showed an increase in market share of about 1.6 percentage points.  You might wish to check out the other factors noted in FAQ "Credit rating determination" in relation to general industry standards and other companies in your industry.  For example, no one in your industry paid any dividends during the year.  Your debt ratio (bonds/equity) exceeded the maximum permitted by your bond indenture.  Partly as a result of the high amount of long-term debt, your interest coverage ratio is a little low by most industry standards.  Please consider each of the factors listed.

And remember that credit rating is not the only measure to judge business success.  It does affect your borrowing costs and ability to raise funds with new stock offerings.