COLOMBO (EconomyNext) – Sri Lanka’s securities watchdog is looking at what appears to be a rising trend of rating shopping, where debt issuers change rating agencies just when they are downgraded.
"This matter is in the early stages of discussion," a senior SEC official who did not want to be named told EconomyNext.
"We see a problem an upgrade is given by one agency where another has downgraded the same entity."
The danger is that higher ratings could be used to attract clients from competition, he said.
Though companies can be naturally be expected to change rating agencies, especially if one agency is more expensive in terms of fees, there has been several cases where former clients of Fitch Ratings, a unit of an international agency left the agency soon after they were downgraded.
They have left for Lanka Ratings Agency and ICRA Lanka.
Some argue that Lanka Rating Agency understood the domestic market better than Fitch Lanka, a subsidiary of Fitch Ratings, one of the big three global credit rating agencies with Moody’s and Standard and Poor’s, with Fitch Lanka Ratings accused of being too conservative.
There is also a problem of methodologies, with different rating agencies using different yardsticks.
The SEC official said one possibility that has been discussed is whether a uniform model could be followed.
A recent case was last October when Lanka Rating Agency assigned a credit rating of ‘A-‘ to Softlogic Holdings, a diversified group. It said the rating was "upheld by its well-diversified business interests, moderated by high borrowings."
The gearing ratio (debt to equity) was reported as 2.36 times.
Fitch Ratings Lanka had downgraded Softlogic Holdings PLC to ‘BBB-’ down two notches from ‘BBB+’.
"The two notch downgrade reflects the aggressive investments and capital structure and the weakness in its liquidity profile and financial metrics which are not considered appropriate for the previous ‘BBB+’ rating."
Fitch was leveraged at 8.2 times, based on operating cashflows.
Lanka Rating Agency said the acquisition of Odel PLC, an upmarket fashion retailer was in favour of its ‘A-‘ rating based on forward looking prospects. Fitch Ratings Lanka said the acquisition put further pressure on increasing levels of debt.
In November Fitch withdrew its ratings on the company and its unsecured debentures saying they had " not received sufficient information".
Analysts say the issue of ratings is particularly significant now because listed debt is now tax free.
That means issuers may be wrongly incentivised into buying debt simply because of tax breaks and they may not be paying enough attention to actual credit worthiness.
Such a trend is particularly dangerous when general interest rates are at historical lows and there is a tendency for mal-investments, analysts say.
In the US also the Justice Department is also probing a situation where again Fitch Ratings had apparently refused to give high ratings to sub-prime asset backed securities which had credit enhancement features, UK’s Financial Times newspaper reported.