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Tuesday, 25 June 2019

Global scale

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Credit ratings in Asia are here to stay even as the number of unrated bond offerings rises and more investors prefer to trust their own research after credit agencies failed them in the global financial crisis.

Competitors move beads on Japanese traditional calculating tools called the soroban (abacus) during a soroban competition in English, in Tokyo.

Global scale

Source: REUTERS/Issei Kato

Competitors move beads on Japanese traditional calculating tools called the soroban (abacus) during a soroban competition in English, in Tokyo.

Asian companies are selling bonds without credit ratings in greater numbers of late in a bid to shave transaction costs and gain greater flexibility in timing their offerings.

Yet, credit ratings are not disappearing from Asia’s capital markets. Investors may want to do their own analyses, but many are required to buy bonds with ratings and most appreciate the transparency the related process provides. Also, investors like the secondary market liquidity ratings help to foster.

“There are several issuers who choose to go unrated, but, as a syndicate banker, our advice to clients is always to get ratings,” said a Hong Kong-based DCM banker. “Our job is to ensure full transparency to investors and provide a level-playing field and ratings have been used to provide a level playing field.”

Still, companies have sold 11 benchmark-sized dollar bond offerings, totalling US$4.6bn, without ratings this year, after 34 unrated issues, totalling US$19.9bn, in 2013, according to Barclays. That is up from 22 unrated bonds, totalling US$7.6bn, in 2012 and six, totalling US$1.6bn, in 2011, Barclays says.

Of course, the number of bond offerings in the region jumped to US$133bn in 2013 from only US$73bn in 2011, according to Thomson Reuters, meaning the percentage of unrated dollar bonds rose to 14% in 2013 from 5.8% in 2012 and 2% in 2011. Only 5.9% of the US$77.8bn in bonds sold year to date are unrated.

“There are definitely more unrated deals being done now and this shows the market is maturing,” said another DCM banker. “Investors are doing their own credit work and, after the global financial crisis, they no longer trust ratings agencies blindly.”

From an issuer’s perspective, the cost of seeking a rating has to be weighed against the ability to sell a bond without one, the banker pointed out.

“Rating agencies charge US$75,000–$80,000 for ratings and an additional 5.5bp per issuance. So, the cost savings from not doing ratings is quite substantial,” he said.

Companies taking this route in Asia are often in Hong Kong, where they can make do with their strong brand names, and also from the Philippines, where the sovereign’s rating cap limits the rating individual firms can get.

Big, well-known companies sometimes choose to offer unrated bonds, too. China’s Lenovo Group sold an unrated US$1.5bn five-year bond in late April largely because the well-known computer company wanted the quicker execution an unrated issue provided, said a banker at one of the 12 lead managers at the time. The bond priced to yield 4.74%, or 300bp over US Treasuries. A rated offering likely would have yielded in the mid-to-high 200bp range, based on the market’s shadow rating of either BBB  or BBB, analysts said at the time.

Tata Motors Singapore subsidiary TML Holdings sold a smaller, unrated US$300m seven-year bond the same week, illustrating some of the limits of unrated bonds.

Market sources at the time said TML Holdings eschewed a rating, figuring it could do better on its reputation as a subsidiary of India’s largest automaker and the owner of Jaguar Land Rover Automotive, than on its speculative-grade credit rating.

The bond priced to yield 5.75%, considered generous for a high-yield credit, and nearly 30% of it went to private banks, which are rarely limited to buying rated bonds.

“Unrated bonds are not for everyone and aren’t necessarily in some indices. So, there are liquidity issues, which come along with unrated bonds that investors have to consider,” said Gregor Carle, investment director, fixed income, at Fidelity Worldwide Investment in Hong Kong.

Still, issuers are likely to give unrated bonds a try if they can, Carle said.

“As long as investors are willing to buy unrated paper, companies are likely to consider not getting ratings,” he said. However, “investors have a choice and don’t need to buy unrated bonds”.

Carle also suggested that, while Fidelity and other investment companies might do their own credit analysis, they still welcomed credit ratings.

“Even with our extensive credit research resources, we definitely appreciate the value of companies having a rating as a form of commitment to, or at least acknowledgement of, the interests of debt investors,” he said.

The businesses of rating companies in Asia also show no signs of shrinking.

Standard & Poor’s portfolio of credit ratings in Asia had grown more than 15% every year for the past few years, for instance, the credit rating agency said.

Several new ratings agencies are springing up in the region largely because a European regulator made a little-known rule change in the wake of the financial crisis.

The European Securities and Markets Authority said issuers requiring two ratings could choose at least one agency with less than 10% of the European market.

S&P and Moody’s each have nearly 35% of the market in Europe, while Fitch has nearly 18%, according to December data from ESMA.

Other companies are beginning to fill the gap in Asia.

Arc Ratings, based in Malaysia, formed in late January when Malaysian Rating Corp (Marc), along with Care Ratings from India, Global Credit Ratings from South Africa and SR Rating Group from Brazil, bought Sociedade de Avaliaçao Estrategica e Risco from Portugal.

Similarly, China’s Dagong founded Universal Credit Ratings Group last year in partnership with Egan-Jones Ratings of the US and Rus-Rating of Russia.

The emergence of new players is further proof that credit ratings remain a business worth pursuing in Asia.

 To see the digital version of this report, please click here.

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