SSM-Audit Q&A Series – Credit Rating Agencies (Question 36)

Ratios are fine, yet outlook shifted and spreads widened

Question
Our leverage and coverage ratios screen OK, and last quarter we met guidance. Yet the agency shifted our outlook to negative, bond spreads widened on small news, and investors keep asking about “predictability.” Short-term debt rolls soon, a top customer trimmed volumes, and working capital feels lumpy. Why is rating risk rising when the ratios look fine?

Answer ✅
Ratings lean on stability and headroom, not just levels. If coverage cadence weakens, maturities bunch, liquidity buffers wobble, or customer concentration rises, you can “hit ratios” while predictability thins. SSM-Audit adds a stability band beside the KPIs you already report so you can show performance that is calm and repeatable—reducing the chance of outlook cuts and spread jumps.

What the bands would have shown 📊
• Leverage stability sliding A+ -> A0 (quarter-end netting hides intra-quarter spikes)
• Interest-coverage cadence degrading to A- (EBITDA and interest timing misalign)
• Maturity-wall concentration weakening A0 -> A- (rollovers bunch in the next 12–18 months)
• Liquidity coverage stability tilting A0 -> A- (cash + revolver vs uses gets spikier)
• Customer/segment concentration stability dipping A0 -> A- (top-3 share rises, churn risk)
• Cash-conversion cycle stability softening A+ -> A0 (DSO/DPO/inventory swings increase)

What to do now 🛠️

  1. Band the rating panel: leverage stability, coverage cadence, maturity-wall concentration, liquidity coverage, customer concentration, cash-conversion stability—review monthly.
  2. Defend headroom: when coverage band < A0, pause discretionary spend and throttle variable comp until the band recovers.
  3. Pre-fund the wall: if maturity-wall band < A0, refinance earlier, stagger tenors, and add covenant-light where feasible.
  4. Harden liquidity: raise minimum cash triggers; if liquidity band < A0, pre-arrange backup lines and tighten working-capital terms.
  5. Diversify demand: when concentration band dips, cap exposure to top accounts and accelerate mid-tail growth.
  6. Narrative with evidence: include the band panel in investor/agency updates to show predictability, not just point-in-time ratios.

How SSM-Audit helps (practicalities) 🌟
• No additional infrastructure: runs beside ERP, treasury, AR/AP, and CRM exports.
• Numbers unchanged: GAAP/IFRS figures stay the same; stability is a read-only overlay.
• Easy to use: spreadsheet/BI friendly; one lightweight monthly ritual ahead of earnings and reviews.
• Universal language: A++ / A+ / A0 / A- / A– aligns finance, treasury, sales, and the board fast.

CLI 💻 — try our mini Calculator to identify the drift
(Mini CLI Download Page)
Feed your CSVs and see bands and drift at a glance (numbers unchanged).

# Leverage stability (net debt / EBITDA, intra-quarter)
ssm_audit_mini_calc ratings.csv --kpi "Leverage Stability" \
  --out bands_lev.csv --plot_kpi "Leverage Stability" --build_id rate

# Interest-coverage cadence (EBITDA vs interest timing)
ssm_audit_mini_calc ratings.csv --kpi "Coverage Cadence" \
  --out bands_cov.csv --plot_kpi "Coverage Cadence" --build_id rate

# Maturity-wall concentration (12–18m rollover share)
ssm_audit_mini_calc ratings.csv --kpi "Maturity-Wall Concentration" \
  --out bands_wall.csv --plot_kpi "Maturity-Wall Concentration" --build_id rate

# Liquidity coverage stability (sources vs uses)
ssm_audit_mini_calc ratings.csv --kpi "Liquidity Coverage Stability" \
  --out bands_liq.csv --plot_kpi "Liquidity Coverage Stability" --build_id rate

# Customer concentration stability (top-3 share, churn-adjusted)
ssm_audit_mini_calc ratings.csv --kpi "Customer Concentration Stability" \
  --out bands_conc.csv --plot_kpi "Customer Concentration Stability" --build_id rate

# Cash-conversion cycle stability (DSO/DPO/Inventory cadence)
ssm_audit_mini_calc ratings.csv --kpi "Cash-Conversion Stability" \
  --out bands_ccc.csv --plot_kpi "Cash-Conversion Stability" --build_id rate

Outputs you will get:
• CSVs with stability bands for each timestamp (e.g., bands_wall.csv).
• Drift charts per KPI (--plot_kpi) showing exactly where predictability and headroom thin.
• Optional alerts if you enable thresholds in your setup.

Technical notes

Representation: x = (m, a) with a in (-1, +1)
Collapse parity: phi((m,a)) = m
Order-invariant pooling:
  U = sum(w_i * atanh(a_i))
  W = sum(w_i)
  a_out = tanh( U / max(W, eps_w) )

Typical bands (example):
  A++: a >= 0.75
  A+:  0.50 - 0.75
  A0:  0.25 - 0.50
  A-:  0.10 - 0.25
  A--: a < 0.10

Navigation
Back: SSM-Audit Q&A Series – Commodity Windfalls (Question 35)
Next: SSM-Audit Q&A Series – Lenders & Project Finance (Question 37)

Page disclaimer
Illustrative scenario for research and education. Observation-only; do not use for critical decisions without independent validation.