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 17 Ratings Agencies and Developing Markets Mr. Andrew Philpott Fitch Ratings

2 Rating Agencies and Developing Markets OECD, Paris, May 2004 Andrew Philpott Managing Director Central & Eastern Europe, Middle East & Africa

3 Agenda > Fitch Ratings in the developing markets > Ratings advantages and disadvantages > Regulation, Investor Guidelines and Ratings

4 Fitch in the Developing Markets Developing markets Emerging markets Fitch encourages all issuers to seek international ratings > Increases potential investor base > Internationally recognised standard > Historical default probabilities assist in pricing debt issuance National Ratings > Developed in response to perceived market demand in lower rated sovereigns > Bunching. National Ratings provide credit differentiation > Relative ratings only. Not default linked. Not internationally comparable > Published ratings: Asia (c.200); Africa (c.100); Latin America (c.1200)

5 National Ratings Argentina Bolivia Brazil Kenya Morocco India Chile Nigeria Oman Indonesia Mexico Poland Russia Sri Lanka Central America South Africa Tunisia Taiwan Venezuela Turkey Thailand

6 Ratings in Developing Markets Advantages >Credit differentiation >Disclosure, transparency >Good market practices >Greater Investor Confidence >Move away from name lending >Mis-pricing of capital >Over-leverage >Contagion Effect >Development of local capital market >Can prevent capital flight >Vibrant capital market can act as shock absorber >Greater choice for Issuer and Investor >Often limited information available >Privately owned or nationalised industries not used to providing information >Reliability of information provided >Name lending >Creates mis-pricing and mis-allocation of capital >Leads to over-leverage Complications >Potential contagion effect > Good investment or Investment grade titles can lead to mis-representation > Rating shelf can be created through regulation

7 Regulation, Investor Guidelines and Ratings Ratings are provided for information purposes only but are often incorporated into regulation and / or investment guidelines. > Ratings are not a recommendation to buy, sell or hold a security > US money market funds A $2trillion market > Latin American pension fund regulation > Bond issues require ratings in some local markets > Egypt, Korea, Taiwan, Tunisia

8 Regulation, Investor Guidelines and Ratings Investment guidelines can lead to market volatility and / or distortions in markets > US money market funds A $2trillion market > US 40-Act Rule 2a-7 requires that investment is in one of the two highest short-term rating categories > Compare depth of F1+/F1 with F2 market. > Investment recommendations and market perceptions > Mexican pension funds > Chilean pension funds > South Africa unit trust regulations > Central Bank of Tunisia Regulation

9 Regulation, Investor Guidelines and Ratings Egypt Tunisia South Africa Mexico All bonds issued on the domestic market to be rated and rating certificate affirmed each year 1. All bonds* issued on domestic market to be rated (Capital Markets Board) 2. All companies* with more than TND25 million in outstandings to either be listed on exchange or be rated ( CBT) Collective Investment Schemes Control Act (CISCA) has placed investment restrictions on money market portfolios Pension funds to invest in rated instruments Bonds are rated but market conditions poor. Central Bank of Tunisia regulations not being implemented. Fitch estimates in companies fall into this category, including public entities. Have created a ratings shelf through defining regulations with rating levels. Regulations apply to issuers OR issues, leaving investors open to other risks on bond structures Cautious fund managers have determinted that AA(mex) is level of risk tolerance. BUT has increased transparency in market and opened up alternative funding opportunities for companies *Some exceptions for banks and bank guaranteed issues

10 Summary Ratings provide a fundamental component in the development of debt markets. Independent opinions that enable investors to make more informed decisions. > Encourages transparency; greater investor confidence; greater choice for borrowers; widens investor base > Deters name lending and mis-allocation of capital Regulations and investment guidelines incorporating ratings must be structured with care as volatility can result > Rating shelves; issuer v issue ratings

11 Andrew Philpott, Managing Director, EEMEA