Some companies are happy to be called “junk,” says a senior Moody’s executive.

“Many companies can accomplish their business objectives without attaining the scope, scale, and diversity required of an investment-grade company,” Pamela Stumpp, chief credit officer of Moody’s Corporate Finance Group for North America told a Moody’s Annual Corporate Finance Conference in Toronto yesterday.

“The cheaper debt service costs of being investment grade are more than offset by the companies’ views that an investment-grade profile is too conservative to enable them to meet their strategic business or growth objectives.”

Speculative-grade companies, also known as high-yield, or even junk, are those that are rated Ba1 or below on the Moody’s rating scale. High-yield companies strategically maximize the use of debt in their capital structures to achieve targeted investor returns, whereas investment-grade companies have the strategic objective of maintaining investment-grade ratings despite the attendant constraints on the use of debt in the capital structure, according to Stumpp.

For example, companies owned by financial sponsors such as private equity firms may view subordinated debt and convertible securities as equity and, hence, they would choose objectives that are return-driven. Other companies may be transitioning from private to public ownership, or their financial sponsors are preparing an IPO. Still others with large debt loads may be saving the use of their “equity currency” for more favorable market conditions, Stumpp said.

Companies that do aspire to investment-grade status should have some common characteristics, such as strong market and product positions, earnings and cashflow, and liquidity, she said. The quality of management, financial reporting, and corporate governance may also affect ratings.

“An investment-grade company should deliver high-quality financial disclosure, providing enough information about risks so that investors and rating agencies can make accurate and informed decisions,” Stumpp said. “Most investment-grade companies have relatively simple borrowing structures. This better assures that fixed-income investors will have equal standing with all other creditors.”

For example, an investment-grade company is not typically dominated by or dependent on a single individual, and its management team is not entrenched, nor does it change frequently. It has high-quality corporate governance that would preferably include an independent board of directors. Moreover, from a financial perspective, an investment-grade company has a defined financial personality that includes well-articulated and achievable financial targets, share repurchases consistent with stated financial targets, and little inclination for financial gimmickry.