David L. Shedlarz
Executive Vice President & Chief Financial Officer
The Credit Rating process is of substantial interest and importance to Pfizer Inc. We remain one of a handful of industrial companies awarded a triple-A rating from all three accredited agencies. We value our rating and have maintained it through our 2000 merger with Warner-Lambert Inc and our forthcoming merger with Pharmacia Corporation.
As an issuer of debt, the triple-A rating is an integral part of our financing strategy. Pfizer currently has in excess of $10 billion in borrowings issued in a variety of instruments, in multiple currencies and in both the US and international markets. The value that the investor places on debt ratings is reflected in our substantial access to capital. This value is in most evidence during periods of "flights to quality" when lesser rated corporations find their access to the capital markets either restricted or increasingly expensive.
As an investor, Pfizer's financial asset portfolio today exceeds $15 billion. It is comprised of over 250 individual counterparties based throughout the world. The rating agencies provide one of the primary tools for specifying risk parameters for our investment activities. Our internal risk management guidelines formally restrict investment amounts and maturities according to the published ratings of the counterparties. Given our reliance on the rating agencies and in light of the significance of our financial assets, we have a natural interest in the integrity of the rating process.
Our contact with the ratings services is maintained through periodic reviews of our financial outlook and direct access to senior management. Many of these discussions focus on the operational and financial implications of our publicly available earnings guidance. Typically, we work with the agencies to link our expected future operating results with the resultant cash flow consequences and to model the balance sheet. We find these discussions focus on both operational and financial dimensions of the Company.
The SEC has specifically exempted information given to Rating Agencies from the requirements of Reg FD. We are aware of the potential concern that has been raised over how the agencies might justify ratings based on non-public information. We believe that the current, ongoing dialogue between the ratings agencies and their constituents benefits from this exemption in allowing the Rating Agencies to confirm perspectives available from an analysis of SEC filings, press releases and other public sources of information.
The financial markets are recovering from a period of unprecedented deterioration in the credit quality of investment grade obligors. This experience has lead many to wonder about the timeliness and predictive accuracy of the ratings process. At the same time, there is growing transparency in the market price of any particular credit. More and more practitioners are using the results of purely analytical assessments to either substitute or complement the traditional Rating Agency assessment.
We have found analytical models to be useful in managing the potential for rapid change in a large portfolio of investments. However, the utility of purely quantitative models is enhanced when it complements - rather than replaces - a qualitative understanding of an obligator's creditworthiness. In that regard, the Rating Agencies' contribution is particularly important. They begin with a formulaic, disciplined, quantitative process. However, that process is informed by the collective experience of trained analysts and is reflected in subjective judgments implicit in the issuer's credit rating.
Over the last two decades, the Rating Agencies have provided a valuable service in facilitating the process of financial innovation by moving beyond rating "vanilla" debt instruments to providing ratings services for complex structured financial products. The asset-backed securities market, for example, has proven to be a stable class of very highly rated securities.
While the Rating Agencies have enhanced their reach in concert with the ongoing innovation in the financial markets, they have also provided new products and services. For example, the Rating Agencies have moved into risk consulting, offering quantitative models that can be useful in analyzing the likelihood of default for a particular counterparty. These firms also provide, for a fee, an implied ratings evaluation under various, potential financial scenarios. We are aware that these efforts have exposed the agencies to potential conflict of interest issues. However, it has been our experience that the rating agencies have developed the internal guidelines and risk control processes necessary to ensure a timely, independent, comprehensive and confidential review. In the case of their rating evaluation services, I believe that an expedited understanding of the implications of an issuer's strategic decisions is helpful in anticipating market reaction and in ensuring that an issuer appropriately and timely educates investors viz. the financial implications of its strategic decisions.
We are closely following the Rating Agencies as they adapt their process to evolving and dynamic market conditions. We are participants in the changing dialogue that the ratings services are having with rated entities regarding concerns attendant to supplying relevant information to facilitate the ratings process. We are keenly aware of the recent challenges presented by the rapid deterioration of what were once investment grade borrowers and the impact that these challenges are having on the perceived value inherent in the ratings assessment. For these and other reasons, I welcome the opportunity to contribute to the dialogue through participation in these hearings by the Securities and Exchange Commission.