By Barry Critchley
Financial PostDecember 6, 2002
Credit ratings have taken on a new dimension with the first-ever North American assessment of a non-profit organization. Faites de la Musique -- a 10-year old non-government organization that backs emerging artists and that produces musical events in Montreal -- is to receive a fiduciary rating from Swiss-based RCP & Partners.
"They are competing against all kinds of organizations to raise money," said Robert Pouliot, RCP's chief analyst, who was asked earlier this year to rate FDM, an organization whose budget is about $1.3-million and is also known as Make Music. "They said 'If we have to beat those guys we have to be professional and we want a rating.' " The main focus of Pouliot's firm is rating asset management companies. (For instance, it has rated the European arm of TAL Investment Counsel, now owned by CIBC.)
"We measure trustworthiness. We don't measure credit worthiness, which is the ability of an organization to repay its debt," he said. RCP assigned a "good" rating to FDM. That rating is midway on the five-category scale used by RCP. The categories are: excellent, very good, good, adequate and satisfactory.
"Being assigned a 'good' rating means that FDM can raise money in the public domain. If an organization is rated below that, it can't engage in a fundraising campaign because it's deemed to be too risky. In our world, a 'good' rating means the organization is deemed to be investment grade," said Pouliot. Pouliot, whose firm has rated 70 non-government organizations in Europe, Asia and Latin America, said the rating reflects a major switch in non-government organizations, a major sector of the economy. "They aren't going for charity any more. They want to be like a real company, but socially driven."
Of the 70 that have been rated so far, about one-third have been accorded the "good" rating. None has been viewed as "excellent," while five have been deemed "unsatisfactory."
FDM's rating is being handed down as the organization -- now largely supported by governments in Quebec City and Montreal -- seeks to broaden its base of financial support. "We want to attract new financial partners, both among private foundations and semi-public organizations, to develop new projects," said Pierre Toth, chairman of FDM, an organization with about 15 full-time employees and which paid about $40,000 for the rating.
"We had no choice. We had to make a serious show of diligence and transparence to assert our credibility in the market. If we are going to raise funds on the public market we need to be more accountable and better managed," added Toth. RCP & Partners defines fiduciary risk as the risk that a person or an organization might breach the trust of a counterparty on the basis of declared or published statements.
"It evaluates the stability of an organization and its ability to fulfil the purpose of its mission and maintain the consistency of its services to beneficiaries."
Pouliot said an organization can be rich but untrustworthy, while a cash-starved organization can be trustworthy. "It all depends on the practices, the mission and the focus of the organization," he said, likening his world to mutual funds. "While past performance is no guide to future performance, management's practices and investment philosophy can be."
Besides assessing trustworthiness and creditworthiness, rating agencies of late have added another measure: stability.
That measure is applied in the area of income funds, a large and growing area of interest to investors. When Standard & Poor's hands out a rating, it is essentially measuring the ability of the entity to continue to meet its distribution targets. "The stability ratings assess the underlying downside risk of the distributable cash flow of an income fund," said Lorenzo Sliusarev, an analyst with S&P.
S&P has developed seven stability categories -- from SR-1 to SR-7. A SR-1 rating is highly desired by both issuers and investors. Indeed, in the trade-off between risk and return, some investors will accept a lower distribution target in return for higher stability. S&P has rated 26 income funds. Of the 26, four are rated SR-1 while none is rated SR-7. "Most of the funds are rated as a SR-2," said Sliusarev.
More Information on NGOs
More Information on Credibility and Legitimacy of NGOs
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