THE RATING GAME

Credit Watch

When utility parent CP&L Energy Inc. acquired Florida Progress last November for $5.8 billion, treasurer Tom Sullivan could guess what would happen to the credit rating of the new company, Progress Energy. "We knew our rating would drop based on the significant amount of leverage and the increase in business risk," says Sullivan. But guessing wasn't good enough to calculate the cost of raising, and paying off, the deal's $3.5 billion cash component. So CP&L drew up three plans, and paid Standard & Poor's Corp. $75,000 to tell it exactly what credit rating each scenario would garner.

Paying for credit-rating counsel is increasingly popular among consolidating industries, such as utilities and telecommunications. Miles Federman, product manager at S&P, claims that the agency has performed 380 evaluations since unveiling its Rating Evaluation Service in 1996. Rival Moody's Investors Service has provided about 90 evaluations, says managing director Roger Arner, including those it performed before it formalized its Rating Assessment Service offering last October. Fees at both agencies, on average, range from $75,000 to $120,000.

Fitch Inc. also provides evaluations, says group managing director Nancy Stroker, and is considering a formal offering in response to its competitors. That's a change of heart for Fitch, whose CEO was quoted in The Economist in April as saying that his ratings firm would not offer such services, because of "potential conflicts."

Historically, corporations have paid to be rated. So the suggestion that credit analysts are now "selling" a rating in advance hasn't created as much controversy as the perceived conflict of interest between equity analysts and underwriters that hail from the same company. All three services insist that ratings will change if companies don't rigidly adhere to the plans they present.

Sullivan believes it: Progress Energy rejected its more aggressive plan, which earned a high S&P rating, in favor of one that offered a lower rating with more flexibility. --Tim Reason

WHAT'S THE BUZZ?

Searching for clues to predict your company's near-term stock price movement? Consider tracking the stock option exercises of lower-level employees. A new study suggests that in the aggregate, low-rung employees foretell accurate stock price movement through these decisions. It takes six months for these junior-level predictions to play out, but researchers say option exercises increase before a stock price downturn and decrease prior to a stock price rise.

Furthermore, the information does not have to be reported to the market, notes Steven J. Huddart of Pennsylvania State University's Smeal College of Business, who penned the research with Mark Lang of the University of North Carolina. Huddart also says that to extrapolate the most useful information, companies should avoid placing exercise restrictions on lower-level employees, thereby allowing workers to act freely on the generally available inside skinny.

Does using the inside information as a crystal ball invite regulation? Not according to the Securities and Exchange Commission. The agency says it isn't considering any type of disclosure rule that relates to the corporate proletariat. -- Marie Leone

THE INSIDER: Prodded by the GAO, the SEC has agreed to publish its internal procedures regarding how it reviews accounting issues.

CAPITAL GAP

Bridging Fast Growth

Too tiny for venture capitalists or banks and too risky for angel investors, promising young businesses are often hamstrung by cash needs, despite climbing profits. To help solve the dilemma, a coalition of business trade organizations, led by Tatum CFO Partners LLP, is hoping Congress will agree that Uncle Sam can wait when it comes to extracting taxes from newly profitable businesses.

"In just about every business, there's a point where the cash flow turns negative even though the company is profitable, and a capital gap emerges," says Doug Tatum, CEO of the eponymous 300-person CFO practice. The needed capital infusion, usually $500,000 to $1.5 million, is too small for traditional capital markets, he says, but too large to be raised through personal loans. What's more, the tax burden that accompanies profits can be the straw that breaks the camel's back. "Companies are so fragile when the capital gap emerges that the cash requirements of the taxes can jeopardize the profit momentum," he says.

The trade groups are working with House of Representatives Small Business Committee members Jim DeMint (R­S.C.) and Brian Baird (D­Wash.) on the Bridge Act bill. If passed, the bill would allow high-growth firms with annual sales below $10 million to bank up to $250,000 in owed taxes for future borrowing or loan collateral. The firms would pay the federal interest rate for such borrowing, and would have up to four years to repay the deferred taxes, along with accrued interest. To qualify as high growth, a firm's current annual gross receipts must be at least 10 percent higher than its average receipts for the previous two years, and must use accrual accounting. All deferred taxes would be due immediately in the event of a sale or merger.

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