Credit ratings are important for PE-backed businesses

In our previous blog post, we delved into the challenges private equity (PE) backed companies face when it comes to accessing robust ratings and recommended credit limits. 

In case you missed it, the primary hurdle lies in the disparity between the accounting methodologies employed by rating agencies and the prevalent EBIT focus within the PE sector.

Let’s explore the significance of these ratings further. It’s crucial to understand that multiple rating agencies wield substantial influence across various facets of your business, including supplier terms, accessing funding and finance, and your tendering capabilities.

These agencies can offer vastly differing perspectives on the same business. This diversity in assessment becomes particularly pronounced for businesses that file exempt or abridged accounts, a common scenario in the PE realm.

To illustrate this point, let’s consider the case of XYZ Limited, a PE-backed construction company with a £9 million turnover. Here’s how it fares across four prominent UK rating agencies.

So, let’s use a few examples

XYZ Limited is a PE backed construction company with a turnover of £9 million, rated as follows with the four main UK agencies:

Such discrepancies are not unusual, especially for companies that file exempt or abridged accounts.

XYZ makes a Profit after tax (PAT) margin of 4% on average – £360,000 PAT, spends on average £500,000 per calendar month on goods/supplies on building projects. It has 10 key suppliers offering a variety of terms based on the below:

Now, let’s examine the tangible impact of improving these ratings and recommended credit limits for XYZ Limited. 

After collaborating with Lightbulb to enhance its ratings and credit limits, XYZ now boasts significantly improved standings:

As a result, XYZ secures favourable payment terms with all key suppliers, enjoying 30 to 45-day credit periods across the board. This translates to an immediate injection of over £500,000 back into the company’s balance sheet within a week. 

With improved supplier terms in place, the possibilities for XYZ to attract new suppliers and customers expand significantly. This underscores the strategic importance of enhancing ratings and credit limits for overall business growth and sustainability.

But the benefits don’t end there. In our upcoming blog post, we’ll delve into how XYZ Limited leveraged these improved ratings to enhance competitiveness in tendering processes and successfully refinanced debt with more cost-effective alternatives. 

Stay tuned for more insights into optimising your company’s financial health and performance.