Fitch Ratings is adopting a more systematic approach in looking at corporate governance and how it affects an issuer's unsecured ratings. The rating agency has come out with a list of the corporate governance-related factors it evaluates. The new way of looking at issuers is more likely to lead to downgrades than upgrades, according to Kim Olson, managing director in credit policy. Given the asymmetric nature of bonds--that is, investors only stand to receive their coupon but could lose their principal--an increased look at corporate governance will likely affect to the downside. Olson stressed that Fitch has always taken corporate governance issues into account but is now explicitly naming the factors it looks at.
Olson said most corporate governance reviews traditionally focus on the rights of shareholders, which is partly why Fitch is formalizing the factors it looks at to determine unsecured ratings. "At times there can be divergences and one needs to be aware of those differences," she said, of issues important to equity and fixed-income investors. For example, she noted companies that use proceeds from bond offerings to pay dividends to equity sponsors are an example of an issuer not acting in the best interest of the fixed-income set. Some of the issues bondholders should be looking at include whether an issuer has an independent board of directors and a reliable audit process, according to Fitch.