Recent opinions voiced by a senior figure within the Asian Bankers Association (ABA) has brought into question whether the methodology used by the three global ratings agencies - Moody’s Investors Service, Standard & Poor’s and Fitch IBCA - is suitable when it comes to rating domestic Asian bond deals.
It has been suggested that domestic Asian rating agencies are better versed in understanding local businesses, and as a result, better qualified to rate their issues on the local bond markets. Wan Heh-Song, the chairman of the ABA’s bond market development task force, is pushing for 19 domestic agencies, including those from Japan, India, Malaysia, Singapore, Hong Kong, Taiwan, Indonesia, Korea and the Philippines, to unify their own rating criteria in order to increase their participation in the expanding local markets.
Senior figures from those agencies will attend an ABA seminar in Tokyo on March 30 to discuss ways in which they might cooperate with each other and to see whether it is possible to form an Asian ratings model.
Heh-Song tells FinanceAsia that the initiative is being propelled by a desire to accelerate development of local bond markets. "In today's environment, the debt markets can be a very important source of funding, but there have been problems in fully developing local markets," he says. "We believe a priority for future development is to create standardized ratings. This will allow different countries to be rated by the same standard and provide regional investors with reliable information for them to make decisions."
Global agencies under attack
Heh-Song says the ABA's efforts should not be viewed as an attack on the global agencies, but he does believe that their methodology is not necessarily appropriate for Asia. "We are not criticizing the international agencies - we just want to help our own countries," he explains. "There is a need in the ratings process to adapt to Asian conditions. There are peculiarities in Asian structures and the methodology needs to be modified to take this into account.
"By doing so, we will be raising the standard of how ratings are conducted across Asia," he continues. "We would also like to see the development of more cross-border deals, and we hope this will encourage this. If the Asian ratings model exists, we believe that this market will really develop further."
In terms of the practicality of doing this, Heh-Song is reasonably confident. "I think it's possible to have a standardized ratings system," he states. "By attending the seminar next month, domestic agencies are showing a willingness to cooperate with each other and to share information, which will in turn improve rating practices and standards."
His comments raise some interesting issues, aside from the obvious question of what value do global agencies have in Asia. One of these is whether the remarks are driven by a genuine desire to see an improved methodology to rating Asian deals, or whether Asian issuers just want a system that will give them higher credit ratings. And, given the differences that exist between Asian countries, would a unified rating system be possible to implement in practice?
One Singapore-based banker remains sceptical about the ABA’s motives. “I think these comments are a little bit of a red herring," the banker says. "It isn’t the ratings system they don’t like, it’s the rating. It’s like, 'I don’t like the rating you’re giving me because you’re not taking into account my special nature.' On that basis, the Canadians should say the same thing.”
Standardizing the process
The banker also believes that the idea of a standardized Asian rating process would be impossible to implement in practice. “You go around the world - put a Brit, a Canadian, an American and Polish against the wall,” he continues. “It would be a hell of a lot more difficult to work out their nationality than it would if you put people from Asian countries against a wall. You’d have less trouble distinguishing between a Korean, a Malaysian, an Indonesia or a Thai. I just don’t see how this system would work.”
Julia Turner, managing director at Moody’s for the Asia Pacific region, refutes the suggestion that the agency’s methodology is inflexible to the intricacies of local markets. “In our methodology, we consider how business is done in any given market. We always have done,” she says. “I can only say that our business is growing strongly and there are companies, big and small, who don’t have access to cross-border debt markets but would like to compare themselves with global companies. They are asking us for our ratings which suggests that they value our opinion.
“What we must also remember is that local bond markets only grow if they have something to offer beyond other local sources of funding,” she continues. Long-term investors are key to that unique offering. Our ratings have always been focused towards the needs of those investors who continue to show strong signals of wanting to see our ratings for deals.”
Turner also points to Moody's partnerships with Asian agencies - Korea Investors Services, ICRA in India and China’s Dagong Global Credit Rating Company - as evidence of both the agency's commitment and willingness to better its understanding of Asian markets. “We’ve worked with a lot of talented people in domestic rating agencies,” she explains. “They don’t necessarily operate on a global scale, which can put things in a different context - and that’s one reason why we have developed national ratings.
“The domestic agencies are interested in our technology, our perspective and our experience,” she adds. “We’ve worked hard to find partners who are interested in providing high quality ratings, although they may not use the Moody’s rating system. It is a two way street, however: we learn from each other.
“The local markets are dynamic and the usefulness of ratings is going to grow and change,” Turner concludes. “We’re paying attention to this to see how we can contribute to the development of the markets. That is how we can serve the changing demands of investors. And we are developing rating systems for local needs: national ratings are one way, domestic currency ratings are another.”
Chang Ho Moon a senior analyst at Korea Investors Service, one of Moody’s partners, believes that local agencies' sole concern is what is happening in their own market, and it is difficult enough coping with internal pressures to take in what’s happening elsewhere in Asia. “I can’t talk about elsewhere, but in Korea we have many voices about what the role of the rating agency should be in the debt capital markets,” he says. “After the Asian crisis, there have been big changes in attitudes to analysis about credit risk because maybe it wasn’t as strict as it needed to be before the crisis.
“All the market players agree that a rating agency should be an independent provider of objective and accurate credit analysis,” Moon continues. “We’ve changed our stance to become more conservative with our ratings, which means we are on the right track to recognizing what our role needs to be.”
Moon argues that the criticisms leveled against the international agencies have also been voiced against the KIS and other domestic agencies as well. “The issuer has always complained that agencies are too conservative and about the fees charged as well,” he says. “We understand their complaints - it’s natural. Some have questioned the methodology, but as analysts we make human judgments based on qualitative and quantitative analysis.”
Moon believes that the main focus for an agency needs to be geared towards investors, not to meet the requirements of issuers. “Before the crisis, agencies didn’t really play a proper role in the markets, as investors were only interested in whether the deals were guaranteed,” he says. “Most guarantors were banks which were badly affected by the economic downturn, so after that the rating itself became a core indicator for investors to assess the credit risk of an issuer.”
According to Moon, intermediaries and investors are mistaken if they think domestic agencies will be easier to manipulate than the ‘big three’ for giving higher ratings. “The bottom line is that we are very afraid of a ‘rating dropping’ environment,” he stresses. “And although there are pressures to try to boost the securities market by upgrading corporate bonds, we have to uphold our stance. Domestic agencies must remain independent to these demands.”
The pros and cons
It is easy to say that your opinion on whether Asia needs a unified rating system or not depends on your role in the market, be it issuer, intermediary or investor. But Stephen Taran of Salomon Smith Barneyone says he can see the pros and cons of the various arguments.
“There is definitely a need for high quality, local rating agencies throughout Asia,” he argues. “It is impossible to envisage the development of liquid bond markets without high quality agencies in each country. If the ABA effort helps to raise the game of these agencies, this will be a good thing. But if the idea is to develop a ‘kinder, gentler’ Asian bond rating system, then I would advise local buy-side firms to hold on to their wallets because there’s trouble coming.”
Nonetheless, Taran doesn’t disagree with some of the criticisms leveled at the international ratings companies. “There are clearly many folks in Asia’s business world who are tired of seeing analysts get off an airplane, spend a few days in their country and then, after returning home, issue their rating verdicts from a distant place,” says Taran. “Despite this, those ratings have an immediate impact on their funding costs, and in some cases, even their share prices. I do believe that the global rating agencies need to staff up, to cover the issues more closely, and to be timelier in the publication of their analysis. More people who can speak the language would also be desirable.”
“It may, however, be comforting to believe that if only local folks were able to compete with the foreigners, then ratings would be more accurate [higher],” Taran continues. “I doubt, though, that anyone is complaining that the ratings are too low because a system that underestimates credit risk would be inherently unfair to investors.”
Taran also agrees that an Asian ratings model is not a viable possibility, but that is more to do with supply issues, not country differences. He does, however, advocate an alternative ratings system when seeing things is a regional context. “I think that it's impossible to have such a model because credit risk is credit risk wherever one may be, not because each country is different,” he explains. “If ratings are intended to reflect the relative risk of default in a closed universe of issuers, rather than credit risk in a global context, then it is possible to come up with a local rating scale, something that Moody’s has introduced in Mexico for example.
“A local rating scale permits an investor to compare the bonds of one local company with another,” he adds. “A triple-A, or similarly high rating, is assigned to the bonds with the least credit risk within that local universe only, and the ratings for bonds of other issuers are scaled back from there.”
Taran asserts, however, that the usefulness of this system is purely local, and any desire by an issuer to do cross-border deals means that they have to be subjected to being rated in an international context. “The relative risk ranking of bonds in a purely local context will cut no ice with foreign investors who can invest money anywhere in the world,” he argues. “An investor sitting in New York, London, Singapore or Bangkok for that matter, will want to know how the return on an investment in a Philippine telecom company stacks up against that from a telecom company in the UK or the US or wherever. A rating of ‘AA-1-local scale’ will not in any way assist them in making that decision. If I am an investor getting triple-A yields, I want triple-A risk.”
The unlikely
Ultimately, attempts to implement a wholesale credit rating system for all of Asia would not seem to be practical or even possible. .
There are marked contrasts between corporates within different countries that make the ABA’s idea of a unified model just too difficult to achieve, however interesting the concept. At this point in time, domestic agencies are focusing on building domestic-based business, and unless that changes, issuers wanting to attract international investors will continue to seek the ratings of Moody’s, S&P and Fitch, because their models remain the means in which deals from different countries are compared - however unfair that may seem to some.
