The Sixth Annual OECD/World Bank Global Bond Market Forum May OECD Headquarters Paris, France

Transcription

1 OECD The World Bank The Sixth Annual OECD/World Bank Global Bond Market Forum May 2004 OECD Headquarters Paris, France Room Document N 16 The Role of Credit Rating Agencies in Corporate Bond Markets (The Korean Experience) Mr. Chin-Woo Kim Korean Financial Supervisory Service

2 The Role of Credit Rating Agencies in Corporate Bond Markets (The Korean experience) Kim, Chin Woo (Financial Supervisory Service, KOREA)

3 1. Introduction 1 Role of Credit Rating in the Capital Market Improve information efficiency Reduce transaction costs Efficient allocation of resources Korean credit rating industry still at a developing stage, but role and influence gradually increasing Changes in the Korean financial market Changes in the financial regulatory environment (New Basel Accord etc.) Advancement of local CRA s capacity a key priority Overview of Topics for Discussion Brief History of Credit Rating Industry Current Status Role of Credit Rating Information Current Issues Lessons from the Korean Experience

4 2. History of the Korean Credit Rating Industry 2 < Pre - Financial Crisis > : Emergence Introduction of Bond Rating( 86) ~ Financial Crisis( 97) Bond market mostly composed of secured bonds Share of secured bonds : 80% Credit rating related regulations Issuer eligibility requirement : Exclude issuer with poor credit quality Compulsory credit rating by at least 2 rating agency - Regulation driven demand generated - Key basis in creating and sustaining the rating market Lack of voluntary market demand Failure of CRAs to build solid reputation and extensive knowhow

5 2. History of the Korean Credit Rating Industry 3 < Post - Financial Crisis > : Growth After Financial Crisis ( 98) ~ Present Shift in the bond market structure Rapid growth of unsecured bond market (%) % Guaranteed Bond Unguaranteed Bond ABS

6 2. History of the Korean Credit Rating Industry 4 Introduction of new financial products ( ex. ABS ) Implementation of bond pricing system Regulations on CRA Revision of relevant laws and supervising system CRAs Alliance with global credit rating agency Growth in both quality and size Strengthened international competitiveness

7 3. Current Status 5 4 Agencies approved by Financial Supervisory Commission Shift from Designation based system to Approval based system 3 out of 4 agencies cover all credit rating products 1 late comer specializes in ABS and CP rating Alliance with Foreign Credit Rating Agency No foreign agencies with independent operations in Korea Applied same approval requirements as local CRAs

8 3. Current Status 6 Fitch Alliance Equity Participation 7.44% Joint 50 % + 1 Moody s Venture KIS KR NICE Business Tie-up JR&I SCI JCR Business Tie-up

9 3. Current Status 7 Size of Rating Market Since 97, expansion of bond market led to rapid growth ( as of 03, approx. USD 34 mil. ) Expansion of issued volume unsecured bonds, introduction of new financial products such as ABS Three agencies monopolize the market <Market size> (Unit : mil USD, USD 1=KRW 1,200) Issuer pays for rating commission Problem of free-riding due to nature of credit rating as public good Highly dependent on large companies and financial institutions for revenue Potential for rating shopping, damaging the impartiality of credit ratings

10 3. Current Status 8 Traded securities subject to credit rating Bonds subject to compulsory rating : unsecured bonds, ABS, CP, foreign issued won denominated bonds etc. Other financial products (mutual funds, municipal bonds, bank products and preferred stock etc) not subject to rating. Rating operations expanding into new fields( ex. Issuer credit rating) due to changes in financial market environment. Rating coverage extended to subordinate bonds, banks, hybrid securities.

11 4. Role of Credit Rating Information 9 Primary Market Rating of at least two rating agencies compulsory when issuing unsecured bond Important factor in deciding the underwriting price between underwriter and issuer Secondary Market Used as objective benchmarks by institutional investor in structuring portfolios Bond pricing system takes root - Valuation based on credit rating used for accounting and setting fund benchmark price Used by private and institutional investor to base investment decisions Financial Supervision Used to regulate the soundness of financial institution - Expected to strengthen with the introduction of New Basel Accord Used to protect investors - Ease information asymmetry - Monitor issuers

12 5. Current Issues 10 Improve credibility of rating agency Market mistrust remains due to defaults of investment grade debts during the financial crisis Low coverage ratio : rating information not widely used - Only 20% of KSE listed & KOSDAQ registered companies carry ratings Lack of timely disclosure of rating information regarding current rating events - More frequent disclosure of rating information with wider coverage will reduce information asymmetry Enhance impartiality of rating process Prevent collusive relation between rating agency & issuer - Constrain CRAs from conducting both credit rating and consulting operation Tighter internal control (Implementation of internal audit system) Strengthen capacity of CRAs Develop more advanced rating methodology, upgrade quality of rating process - Promote alliance with global CRAs Enlarge pool of professional credit analysts

13 6. Lessons from the Korean Experience 11 Greater recognition of the importance of credit quality Financial Crisis serve as opportunity to raise awareness of credit risk Government s Institutional Support Autonomous growth can not be expected due to constraints inherent in emerging economies Build rating capacity to match international standards Significant time required for local CRAs to build solid reputation Rising market recognition of the role and quality of credit rating