Apply your background knowledge to credit issues
While our mental maps are useful in helping us apply what we already know, they are not so helpful when it comes to learning something new.We may think we know something based on an experience and transfer that knowledge to a new experience—only to discover that our mental map is outdated and no longer useful. In a new partnership, we have to be careful how we transfer information based on past history. This is especially challenging, though, since knowledge transference is a common reasoning technique.
Here’s the magic of mental maps. A client of mine, the owner of a grocery store chain in the Midwest, wanted to form a partnership with several contractors to rebuild a grocery store in a chic section of town.He needed to keep the store open during the rebuilding process. Much work was done to bring the store managers and contractors together to talk about the customers’ shopping experience during the remodeling. They wanted to figure out how they could partner not only to complete the extensive construction job, but also to keep people coming in during the remodeling. The reconstruction went off without a hitch. Although shopping was more of a challenge during that period, people continued to shop there—and, remarkably, sales dropped only a few percentage points. Considering the amount of work, this was an incredible feat.
Despite the wide dispersion of credit spreads within the rating buckets the general link between credit spreads and ratings is clear, with average spread increasing as credit quality decreases. However, as it illustrates there are large overlaps between individual rating distributions. Myriad examples can be found to show that market participants often perceive the risk of one company in comparison to another to be completely different, even if both have the same rating. It should be noted that it includes bonds with rather different maturities and coupons.