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In 2023, more than ever, cybersecurity strategy is a core part of business strategy. Cyber risk has proven to be an overwhelming factor impacting large enterprises that can decimate an organization's bottom line, impose significant reputational damage, and even lead to bankruptcy. In addition to the costs of recovery and loss of revenue from disgruntled customers, cyber breaches also have a longer-term impact on the victim's credit rating.

The reality is that cybersecurity risk is being considered by lenders and credit agencies when evaluating a company’s probability of successfully repaying borrowed funds before green-lighting a line of credit.

Cybersecurity posture also has other nuanced impacts on a company's ability to acquire business deals. Clients are increasingly looking to do business with entities that can demonstrate a high degree of cyber-maturity to protect their own reputations.  As organizations continue to grapple with the evolving threat landscape and increasing sophistication of cyberattacks, they need to shift towards more proactive and formal cybersecurity activities such as adhering to IT security standards and best practices, achieving reputable IT security compliance, and implementing vulnerability management and penetration testing programs. 

The Cost Of A Data Breach

Breach incidents are extremely costly and the per-incident costs are rising rapidly.  The most obvious reason for lenders to be so fixated on cybersecurity posture is the potential costs incurred when a weakness is exploited by attackers.

According to research from Mastercard, Canadian businesses pay an average of $6 million dollars after a cyber-breach and Canadian companies rank third highest in the world when it comes to cost per incident. 

How Cyber-Risk Impacts Credit Rating 

The number of cyberattacks has significantly increased, and negative rating actions related to cyberattacks have more than doubled in recent years. Credit rating agencies continuously strive to gain a better understanding of the risks that companies face and cyber-risk is increasingly considered while assessing credit scores. A proactive and formal cybersecurity posture thus enhances a company's creditworthiness, indicating a stronger ability to repay borrowed funds successfully. Conversely, a weak cybersecurity position may result in a lower credit rating, leading to challenges in obtaining credit and affecting business opportunities.

A cyber-attack can impact a company's overall credit score through the following factors:

• Competitive position: Expectations of future profitability are affected by cyber incidents because the incident can significantly damage a company’s reputation, and customer loyalty, reducing the potential for market growth and causing unexpected increases to costs.

• Liquidity: The overall liquidity position of an organization can be severely reduced due to financial losses.  Capital draining costs of a breach incident include payments to third-party consultants, litigation and fines, customer subsidies, ransomware recovery, and sudden demand for security investment.

• Cash flow/leverage: Investing in cyber defenses and addressing cyber deficiencies can result in higher operating costs, potentially affecting cash flow, profitability, and leverage. Moreover, system downtime caused by cyber incidents can lead to lost revenue, while the loss of revenue-generating partnerships can further compound the financial impact.

• Management and Governance: A cyber incident can expose deficiencies in enterprise risk management standards, board effectiveness, and governance resulting in a negative assessment of the enterprise's management and governance assessment, and its Environmental, Social, and Governance (ESG) indicator assessments.

Cybersecurity Advice For Protecting Credit Rating

Lenders, recognizing the crucial role of cybersecurity in credit assessments, are eager to provide valuable advice to companies. In general, lenders encourage businesses to adopt a proactive approach to mitigating cyber risk and demonstrate their commitment to protecting sensitive data. By heeding such advice, companies can improve their cybersecurity posture and positively influence their credit ratings.

Let's take a look at some advice presented by lenders for achieving strong cybersecurity posture:

• Cybersecurity Posture Starts At The Top: To establish a strong cybersecurity posture, the board and executive levels of an organization must actively engage in understanding cyber risk and implementing effective mitigation strategies. Cybersecurity is no longer solely the responsibility of the IT department—it's a critical aspect of overall business strategy.

• Use Reputable Standards As Foundation: S&P Global Credit has disclosed that it uses NIST standards in the risk assessment process. In addition to a robust set of Special Publications, NIST has also released Cyber Risk Scoring guidelines for organizations to accurately assess their cyber maturity.

• Stay updated on emerging cyber threats and technologies: Organizations should stay vigilant and keep up-to-date with the ever-evolving landscape of cyber threats to understand the latest tactics used by hackers and take appropriate preventive measures. Also, staying current with emerging cybersecurity technologies enables organizations to adopt the most advanced defensive strategies.

• Invest in cybersecurity awareness training: By educating staff about common cyber risks, phishing techniques, and best practices for data protection, organizations can significantly reduce the likelihood of successful cyberattacks and mitigate the impact of potential security breaches.

• Prioritize proactive cybersecurity strategies: Implementing measures such as regular vulnerability assessments, penetration testing, and proactive threat hunting effectively reduces the risk presented by the most advanced and persistent types of cyberattacks, helps minimize potential damage to systems and data, and ensures an organization can recover quickly and completely from a successful cyber-attack.

• Understand incident reporting requirements: By having a clear understanding of the incident reporting requirements set forth by relevant regulatory bodies an organization can promptly report and document cyber-breach incidents and maintain compliance with legal obligations. Proper incident reporting helps organizations mitigate potential penalties and reputational damage.

Conclusion

In summary, there is a strong link between cybersecurity and credit ratings due to the high cost of data breaches, and the impact these costs can have on a borrower's ability to pay back the principal. To mitigate this risk, credit rating agencies evaluate a company's cyber risk to assess its creditworthiness accurately and lenders urge companies to adopt proactive measures. Ultimately, by prioritizing cybersecurity, businesses can bolster their credit ratings, gain a competitive advantage, and safeguard their reputation and financial stability.

Lenders emphasize the importance of implementing robust security measures such as staying updated on emerging threats, conducting regular security audits, vulnerability management, and penetration testing. By heeding such advice, companies can improve their cybersecurity posture and positively influence their credit ratings.