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The Rating Game

Credit Watch

1Aug

When utility parent CP&L Energy Inc. acquired Florida Progress last November for $5.8 billion, treasurer Tom Sullivan could guess what would happen to the credit rating of the new company, Progress Energy. "We knew our rating would drop based on the significant amount of leverage and the increase in business risk," says Sullivan. But guessing wasn't good enough to calculate the cost of raising, and paying off, the deal's $3.5 billion cash component. So CP&L drew up three plans, and paid Standard & Poor's Corp. $75,000 to tell it exactly what credit rating each scenario would garner.

Paying for credit-rating counsel is increasingly popular among consolidating industries, such as utilities and telecommunications. Miles Federman, product manager at S&P, claims that the agency has performed 380 evaluations since unveiling its Rating Evaluation Service in 1996. Rival Moody's Investors Service has provided about 90 evaluations, says managing director Roger Arner, including those it performed before it formalized its Rating Assessment Service offering last October. Fees at both agencies, on average, range from $75,000 to $120,000.

Fitch Inc. also provides evaluations, says group managing director Nancy Stroker, and is considering a formal offering in response to its competitors. That's a change of heart for Fitch, whose CEO was quoted in The Economist in April as saying that his ratings firm would not offer such services, because of "potential conflicts."

Historically, corporations have paid to be rated. So the suggestion that credit analysts are now "selling" a rating in advance hasn't created as much controversy as the perceived conflict of interest between equity analysts and underwriters that hail from the same company. All three services insist that ratings will change if companies don't rigidly adhere to the plans they present.

Sullivan believes it: Progress Energy rejected its more aggressive plan, which earned a high S&P rating, in favor of one that offered a lower rating with more flexibility. --Tim Reason

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