Local Cos. risk sinking without a monitoring mechanism on their rating
Sri Lankan companies could sink trying to raise easy cash based on fake ratings on the back of an absent compliance system to monitor rating agencies, analysts say.
The Securities and Exchanges Commission (SEC) doesn’t have a compliance requirement for rating agencies. These agencies carry out on-the-spot checks, which is essentially about scrutinizing the company’s name board, counting its staff and their resumes – mundane things like that, a former ratings’ agency employee and now an analyst said.
He added that there should be stricter guidelines such as banning directors of rating agencies holding shares of firms they rate.
Fundamentally, a rating by a company is aimed at a creditor, a bond holder, to get bank loans and even (to entice) a supplier. A rating depicts a corporate’s ability to pay its debt obligations in a timely manner.
The Colombo Stock Exchange (CSE) has stipulated a minimum investment grade (IG) which is a hurdle rate for firms issuing debentures. “This is highly debatable,” the analyst said. The analyst said it all comes down to listing debt on the CSE. “The companies get a tax break to list their debt but in order to list you must obtain this minimum IG by the CSE. This is what motivates companies to somehow beat the IG and get on the CSE,” he says.
He argues this is dangerous in that a company’s ability to pay back is on its balance sheet. “When a company issues its own debt, the recourse is the company itself. This isn’t so in a bank – as an example, when in pawning, the guarantee is the jewellery/article.”
He alleged that in the recent past, poor credit by companies doesn’t get their true classification when rated. Calling for more regulation in rating he added that ratings on firms need to be analytically precise. “At isn’t something frivolous – it’s not a rubber stamp.”
There are three rating agencies in Sri Lanka – Fitch Ratings Lanka Ltd (FRL), Lanka Rating Agency (LRA) and Indian Credit Rating Agency (ICRA).
FRL (formerly known as Duff & Phelps Credit Rating Lanka) pioneered credit ratings in Sri Lanka on 5 October 1999. DCR Lanka became Fitch Ratings Lanka subsequent to the merger of its principal shareholder Duff & Phelps (DCR), USA with Fitch IBCA and the formation of Fitch, the International rating agency.
The Central Bank (CB) and the International Finance Corporation (IFC) promoted FRL to provide credit ratings in Sri Lanka so that savings can be channeled to investments that create wealth and thereby achieve a higher economic growth and higher standard of living for Sri Lanka.
Lanka Ratings Agency Ltd (LRA – formerly known as RAM Ratings – Lanka) is a domestic credit rating agency which undertakes mandatory credit rating of financial institutions. LRA is recognised by the Insurance Board of Sri Lanka to assign claims paying ability ratings to insurance companies.
ICRA Lanka Ltd is a credit rating agency licensed by the SEC. ICRA Lanka is a fully owned subsidiary of LCRA Ltd of India, an associate company of Moody’s Investors Services. The company was incorporated in December 2010 and granted a license by the SEC in May 2011.