Credit Rating Agencies Raman

The Role of Credit Rating Agencies in Developing Caribbean Corporate and Government Bond Markets
Caribbean Connect: High Level Symposium on CSME
Barbados: June 28-30, 2006 S.Venkat Raman CEO & Chief Rating Officer
Caribbean Information & Credit Rating Services Limited

Presentation structure

Key elements of bond market development The role of rating agencies

 CariCRIS: A rating agency for the Caribbean CariCRIS & CSME
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What is a credit rating ?
What a rating is:
    A current opinion on the relative creditworthiness of debt An debt specific evaluation Aimed at differentiating credit quality A response to the market’s demand for information

What a rating is not:
  

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Not an audit of the issuing company Not a one time assessment of creditworthiness of the issuer Not a general purpose certification of “goodness” of a company Not a recommendation to buy, hold or sell the rated security

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Key elements of bond market development
 Issuer diversity  Investor diversity  Transparency and disclosure
Accounting standards – to give true financial picture Corporate governance – for predictability of corporate action Credit ratings – to provide a comparative framework

 Independent regulator  Market infrastructure – brokers, exchanges, settlement systems etc.
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Role Of Rating Agencies In Debt Market Development– At The Core
 Creation of market for corporate credit and pricing of credit risk  Readily usable risk indicator  Tool for price-discovery, particularly for non-sovereign debt  Creating of a proper yield curve  Key information intermediary between issuers and investors  Reduce information asymmetry between investors and issuers  Facilitate comparison of investment options  Facilitate pricing of credit risk  Creation of secondary market in debt  Creates liquidity in bond portfolios  Leads to clarity in pricing of credit risk  Makes structured debt issuances easier  Building of financial awareness  Best practices for company analysis, risk assessment
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Role Of Rating Agencies At The System Level • Widen access to funding for smaller businesses • Compliments regulatory oversight
– Prioritises regulators’ concern areas – Prudential practises predicated on ratings

• Effective self-corrective tool for managements & businesses • Enhances trust and market confidence =>Expands savings pool
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Role Of Rating Agencies - At The Application Level
• Estimation of credit risk
– Unbiased opinion arrived at through structured process – Publicly available information – Single, easily comprehensible grade

• Basis for scientific risk management in banking sector
– – – – Better lending decisions, less NPAs going forward Fundamental benchmarking for IRB (Basel) approaches Better pricing of credit risk Improved loan portfolios lend strength to the banking system

• Basis for securitisation
– Unlocking liquidity in loan and asset portfolios

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Rating agencies: Role Vs Obligations
• Independence : Real & perceived
– Ownership – Governance architecture – Financial independence – Conformance to recognized codes of conduct

• Transparency • Integrity in analytics & operations • Investment in market education & development
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The Caribbean Perspective

The need for ratings in the Caribbean
• Need for a vibrant bond market
– Efficient financial intermediation and credit allocation – Alternate funding source to banks – Financial System Stability – Liquidity & financial crises management

• Caribbean
– – – – – Small sized economies limiting local bond market development Businesses with appetite for funds and vice-versa Credit research in public domain relatively scare Sizeable regional economy Increasing evidence of cross border financing

• The Caribbean needs an integrated, regional debt market • A regional credit rating agency is a critical ingredient

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CariCRIS
• First Caribbean rating agency and world’s first regional credit rating agency • Launched in 2004/2005 • Fruition of an idea long espoused by CARICOM • Promoted by regional Central Banks, CDB, IDB and other pan-regional institutions • Shareholding by CRISIL Ltd., the 4th largest rating agency in the world and a subsidiary of S&P. • Currently ratings being conducted in Barbados, Jamaica, OECS & T&T.

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CSME and role of CariCRIS
Key Themes of CSME
• Integration of Financial Markets • Seamless cross-border financial flows • Strengthen markets and facilitate unified regulation
– – – –

CariCRIS role & benefits

• Facilitating regional penetration of companies Increases transparency • Facilitating cross-border investment/lending
– Enhance credibility & independent profiling/risk analysis – Increased access to funding sources

Strong impetus to capital market development; Energise the CSME initiative to create a unified debt markets Strengthen financial systems through diversified markets Investor Protection & better Market Discipline

– Enhanced ability to compare credits across the region – Reduces information risk and facilitates informed decisions

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The Road Ahead
• The Beginning : has been WELL DONE • Rating Agency : needs to stick with its values and mission • Policy Makers & Regulators: Need to act further – to consciously build ratings into financial architecture • Investors & Issuers : The leaders need to show the way
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THANK YOU
Caribbean Information & Credit Rating Services Limited
[email protected] / www.caricris.com Tel: (868) 627-8879 Fax: (868) 625-8871