How Rating Agencies View Independent Directors

In structured finance, credit ratings can make or break a deal. They affect everything from investor interest to deal pricing, and they’re often a reflection of how well a transaction is structured, including its bankruptcy protections.

What is one of the elements that is taken into consideration of the rating? The independent director.

Let's take a closer look at how rating agencies view independent directors and why their presence is essential to achieving a favorable rating.

The Role of Rating Agencies in Structured Finance

Rating agencies assess the creditworthiness of securities backed by pools of assets, such as commercial real estate, receivables, or infrastructure projects. To assign a high rating, they must be confident that:

1. The cash flows from the underlying assets are stable

2. The legal structure isolates those assets from outside risks

3. The risk of a bankruptcy filing is minimal

That’s where bankruptcy remote entities (SPEs) and independent directors come in.

Why Independent Directors Are a Must-Have

Rating agencies prefer deals that minimize unnecessary risks to bondholders. For loans exceeding $20MM, agencies often require independent directors as a condition for achieving investment-grade ratings, not just a recommendation, but a requirement to maintain investment grade levels. They view independent directors as a critical safeguard against strategic bankruptcy filings by affiliated entities and an essential component of deal structure.

Key expectations from rating agencies include:

1. The SPE has at least one independent director

2. That independent director must consent for a voluntary bankruptcy filing

3. The director appointed has experience

4. The individual is free from conflicts of interest, both financial and relational

5. The SPE's organizational documents clearly outline the director’s powers and role

Without these elements, the agency may downgrade the transaction’s credit profile or even decline to rate it at all.

How This Impacts Borrowers and Lenders

For borrowers:

1. A higher rating means broader access to capital markets

2. Better market perception results in lower financing costs

For lenders and investors:

1. Rating agency validation of the governance structure reduces perceived risk

2. Higher-rated deals are often more liquid and easier to syndicate or sell

In short, strong independent director provisions aren’t just a checkbox; they’re a market enabler.

How SPE Specialists Meets These Standards

At SPE Specialists, we understand exactly what rating agencies are looking for. Our team:

1. Provides independent directors with proven structured finance experience

2. Maintains strict independence standards aligned with agency guidelines

3. Works closely with counsel and lenders to ensure governance language satisfies rating criteria

Our involvement helps ensure smoother closings and stronger investor confidence.

Coming Next: Benefits and Pitfalls of Using Independent Directors. We’ll explore the advantages of using independent directors and what to watch out for when putting them in place.