“We have been become aware that ratings for our group companies at credit reference agencies such as Dun & Bradstreet (D&B) have been lowered recently despite our latest accounts showing better results than the prior year. We are considering contacting D&B to query this but wondered whether this would have any benefit and indeed whether this would potentially place a further “mark” against the companies we refer to. Has anyone else had any similar experience and followed up with D&B or similar agencies and was there any benefit to this?”
We have recently been working quite closeley with D and B for various reasons, but this change took us by surprise. We have noted that they have reduced some of GSK’s subsidiaries scores and will now be following up with them on the specific issues. What follows is the initial response they have given us:”The decrease in failure score from 76 to 59 for Smithkline Beecham PLC is as a result of the recent enhancements to our UK scorecardsWe had noticed that certain industries have been hit hard by the economic downturn, while others have prospered in the new environment. To help distinguish between sectors with greater precision than in the current Failure Score we have developed the Economic Index. The Economic Index has been developed through statistical modelling, taking into account changes in the macroeconomic environment, industry payment behaviour and industry failure rates. We have therefore been able to establish how each industry is faring in the current climate and can predict how it will be affected in the months ahead. This has allowed us to adjust the Failure Score to better reflect the risk associated with certain lines of business. The scale of adjustment driven by the Economic Index is proportionate to how other risk elements are treated in the Failure Score; this is only one of many elements used to calculate the risk of failure in the adjusted Failure Score. We are mindful that any changes to our scores and ratings can potentially carry important consequences for the companies we are rating. This is why we go to great lengths to ensure that our statistical models and expert rules are as robust as we can make them and apply to all companies equally. We have also increased use of interim financial statements which will ensure that our Failure Scores remain as up to date as possible. Greater weight has been given to certain trade and financial elements, such as levels of indebtedness; profit margin and changes in payment behaviour, to better reflect the impact of the credit crisis on liquidity and cash flow. Smithkline Beecham PLC has been impacted by the following areas as a result of these scorecard enhancements:– Economic indicator- 3 month change in payment behaviour. Paydex has reduced from 75 to 71 or Average Days Beyond terms of 14. This is based on 53 payment experiences over the last 12 months; total value £3,591,541; average value £67,765.”
As others have pointed out changing the scores in this way can have a dramatic effect on companies. The area of most concren is with regard to the Pension Fund Levy which as others have commented is dependent on your D & B rating.
Thanks for alerting us to this issue.
We successfully worked with D&B earlier this year to improve our credit score (free of charge). Basically, some of the information D&B was working from was out of date or slightly wrong. They were very happy to receive information direct from us and to work with us and happily adjusted our rating upwards as a result.
Our experience mirrors the other responses. We increased the number and gravitas of directors and dealt with some old CCJ issues that remained on the file, although our understanding now is that less weight is given to small CCJs (no. and value) on the record of, say national retailers with hundreds of outlets. The action increased our credit scores significantly for the PPF. We keep a watching brief and do contact D&B from time to time if we feel they are not properly reflecting the facts, and this does not appear to have any negative results.
After seeing a significant fall in our D&B Risk Score in 2008 we paid our Pension Scheme Admninistrator to advise on steps that we could take to improve our score in 2009. Practical steps we have taken were to appoint more directors to a subsidiary company, to clear obsolete charges against the assets of the subsidiary, and to correct the number of employees of the subsidiary shown in D&B’s records. We will have saved over £160K on our PPF levy for 2010/2011 (assuming the PPF indices and weighting factors remain unchanged) in return for consultancy fees of £5K.
In 2008 (in an unlisted company) we were concerned about the PPF levy charge, so the company paid D&B for the service they offer that explains in detail why the score is as it is.
As a result it was possible to identify some easy actions (such as adding extra directors of a higher age profile, in the case of one company board, and removing two erroneously recorded outstanding CCJs for minuscule amounts) that made a real difference to the rating. The service allowed access by telephone to a D&B analyst, who was able to explain some of their methodologies.
It comes at a price so would not be something to recommend every year, and I understand that D&B now prefer to speak to advisers rather than directly to companies, but it may be worth looking at to set a benchmark.
I am aware that in June D&B adjusted the way in which they calculate their Failure Score. There is a Q&A on this on their website. Perhaps this has had an adverse impact on your credit rating.
Following a change of ownership and resultant changes to our financing, we experienced a similar situation. We contacted D&B, who were happy to talk to us. I think they are happy to talk to companies, particularly where there are technical intricacies to be communicated.
The D&B rating is based on a number of factors in addition to published accounts.
If you are not clear why your rating has changed then you should contact them.
There is a major implication for companies if their ratings are recduced
as these impact their PPF levy score.
D&B do offer a service (which you pay for) to help companies address the weaknesses in their D&B rating for PPF levy purposes specifically.
Please find below an extract from a note from our pension advisers, which may be of assistance:
“D&B are refining their rating methodology which could lead to a one-off change in failure scores in the coming months. We have already seen some companies’ failure scores change significantly. The D&B failure score used for this year’s (2009/10) PPF levy is based on your D&B score at 31 March 2008. Next year’s levy will be based on your D&B score at 31 March 2009, so this change will only impact on PPF levies from 2011/12. One of the changes D&B are making is having a greater weighting on recent trade payment experience and up-to-date published information such as interim accounts. D&B have also developed an economic index that takes into account economic conditions and industry failure rates. I attach a link to D&B’s website and some FAQs about the scorecard changes.
http://www.dnb.co.uk/PDF/General/UKScorecardChangesFAQs.pdf “