May 21, 2021
Five reasons to use credit ratings in public stimulus
The Next Generation EU fund will mobilize €140 billion in Spain to finance economic transformation. In the awarding of public aid, the credit rating should be used as an eligibility condition to improve the process for five reasons:
- Provides transparency and objectivity
Requiring a positive credit rating as a requirement for accessing loans means incorporating an objective and unequivocal condition that clarifies the loan granting process, ensures equal treatment for all SMEs and allows public institutions to control the proper distribution of funds.
- It is more efficient
Neither the State nor the Autonomous Communities have sufficient resources to evaluate the suitability of all the SMEs that will apply for financing in a short period of time. Making public financing conditional on obtaining a positive credit rating solves this problem because it frees up public resources and considerably speeds up the granting process.
- It guarantees the validity of the procedure before the European Union.
The use of the rating guarantees that the process of access to the public financial stimulus complies with the requirements of the European Commission regarding the viability of the SMEs that apply for it. This avoids that, in the future, the European justice could request the return of the aid provided by Spain to the companies, as has already happened in the past (Spanish tax lease).
- Reduces loan defaults
Credit ratings are dynamic opinions, which are updated as events relevant to the company arise. In high risk exposures, with an institutional investment of around 4 million euros in credit ratings, an additional loss of between 130 and 490 million euros for the public coffers could be avoided.
- Facilitates public-private cooperation
The balance sheet restructuring of medium-sized companies, which are heavily indebted due to the pandemic, requires public-private partnerships channeled through participating loans, subordinated debt, senior debt and convertible debt. But in order for asset managers and large institutional investors to be able to invest “safely” in SMEs, they need an independent opinion that is recognized by all players in the financial market, i.e. a credit rating.