Credit ratings have long been dominated by the “big three” — Moody’s, Standard & Poor’s and Fitch — but a new firm, Universal Credit Rating Group (UCRG), is being established, with aims to challenge the hegemony of the three main agencies.
The group, which is headquartered in Hong Kong, is backed by Dagong Credit, RusRating and Egan-Jones, from China, Russia and the US, respectively.
Richard Hainsworth, chief executive of UCRG, is vocal about the dominance of the three main rating agencies and argues that they suffer from a strong American bias, given that they are all headquartered in New York, and their ratings committees are also in the US.
“There are a number of flaws highlighted by the crisis in the ratings system developed by the big three,” said Hainsworth in an interview with FinanceAsia. “They are very strongly American-based and their headquarters are all in New York.
“They have over-rated a number of companies [in the US], not to mention the securitisation and subprime [crisis],” he added. “We believe there is an opportunity to create a rating agency here in Asia that will have a different view of the world.”
During the global financial crisis of 2008, rating agencies attracted criticism for giving their highest credit ratings to mortgage-backed securities that relied on poor underwriting standards and fanciful assumptions about the US housing market.
Hainsworth purports that as a result of the biases of agencies, companies outside the US often receive a lower rating than they deserve, or that historical defaults would point to. He cites Russian banks as an example.
“The mean rating for Russian banks is single-B,” said Hainsworth. “This is fairly consistent among all three rating agencies. If you take the mean rating of international banks globally, it is single A, which corresponds to one default in 150 in five years.”
“A single [B rating] corresponds to one default in five over five years,” he added. “Based on that, 20% of all [Russian] banks that are rated should have defaulted, but the actual rate is 1 in 14, which corresponds to BB rating.”
Despite his ambitions to reform the current rating system, UCRG will first have to gain acceptance from investors. The group is in its nascent stages of being established and, according to Hainsworth, it needs to get its licence from Hong Kong’s Securities & Futures Commission first before it can start rating companies. However, it plans to start doing so next year, beginning with companies in China and Russia.