What are some recent developments in credit rating in China?
As the largest Chinese offshore credit rating agency, we can identify several recent important trends in rating Chinese issuers. First, it is very important to do financial projections in rating Chinese corporates, including property developers. Areas of focus include the contracted sales, revenue, cost structure, land bank and debt maturity profile. Second, when credit is given to the shareholder support in rating Chinese local government financing vehicles (LGFVs) and certain state-owned enterprises (SOEs), it is very important to have direct management meetings with the shareholders of the rated entities, rather than relying on the management representation from those rated entities, in accessing such shareholders’ willingness to support the rated issuers.
How do the practices of ratings agencies in China differ from those abroad?
International and Chinese rating agencies use similar factors (including business and financial analysis) and scorecards in their credit ratings. Each factor weighting in the rating scorecard may differ among the rating agencies, but the factors used in the credit rating are very similar. The international agencies focus more on the credit metrics while the Chinese rating agencies focus more on the operating scale and market position in the industry. The major issue with the onshore credit rating is the limited availability of credit rating scales, including AAA, AA+ and AA only; hence it is very challenging for the local rating agencies to differentiate the credit risk of the onshore bond issuers, compared with more than twenty notches available in the international rating scale.
What should investors keep in mind when investing in China bonds?
There are several important factors for bond investors to pay attention to when investing in China onshore bond markets. First, bond investors should distinguish between listed and unlisted bond issuers. Listed bond issuers have more financial flexibility, as they can opt for share placement if needed. Depending on local listing rules and regulations, listed bond issuers have to regularly disclose their financials as well as information significant to the investors. Second, ratio analysis and financial projections are largely based on audited financials; hence, auditors with good track records are very important. Bond investors should note if the auditors have been issued warning letters or even penalised by the Chinese regulator. This type of information is publicly available.
How does the entry of international rating agencies impact the onshore bond market?
It will take time for the international rating agencies to have impacts on the onshore bond market. S&P’s and Fitch are now licensed to rate in the onshore bond market, and the assigned onshore ratings are mainly in securitisation (including ABS and RMBS), and financial institutions (including non-bank FIs). Their presence in the onshore corporate issuer and bond ratings are almost absent at this stage. Whether the onshore ratings to be assigned by the international rating agencies can go beyond the AAA/AA+/AA ranges remains to be seen.