Revamping credit rating system

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Revamping credit rating system

Credit rating agencies should primarily serve as traffic lights for debt investors, assigning a level of corporate quality and potential to direct investments. They study the financial state of issuers and their debt instruments and then signal “go” or “stop” to investors upon their assessment.

But local rating agencies have been faring poorly in their role, wreaking havoc in the market and causing damage for investors with wrong signals. LIG Engineering & Construction received an investment-grade rating from agencies, even as it headed to court to apply for receivership on March 21. Upon winning the investment-grade rating in December last year, the company was able to raise 70 billion won ($64 million) in commercial papers.

Sambu Construction, which recently applied for court receivership, also gained an investment-grade rating in November. Since then, the company has issued 70 billion won in corporate bonds, incurring huge losses for buyers drawn by the stable rating, despite high yields.

In fact, companies which issue corporate bonds or promissory notes and securities companies which sell them in the stock market, are the same stakeholders in the business. That’s why investors find it hard to take their word at face value and investors eventually have to rely on credit ratings provided by the agencies.

Their ratings work as a yardstick in the financial market. So if they lose credibility, investors will shun the market and the financial industry cannot grow without reliable credit score boards.

Credit rating agencies say they had no way to know that the aforementioned construction companies had no will to comply with their debt obligations.

They insist they have done their work - company visits, interviews with managing executives, and analyses of financial statements - but that they are not mind readers.

Credit rating agencies are now accused of taking the side of corporate clients who pay them over the best interests of investors and the market. It is the pitfall that rating agencies often fall into.

It should be the supervisory authorities’ role to enhance the credibility in the market among profit-seeking private companies. Financial authorities should consider revamping overall rating evaluation system.

They should also examine how to encourage competition in the credit-rating market currently dominated by only two players.
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