Standard & Poor’s (S&P) is reconsidering its ratings methodology, which could result in upgrades for high-quality corporates in Asia which have traditionally been constrained by their country ceiling. This could in turn lead to lower – more appropriate – funding costs, according to commentators.
In Asia, companies and financial institutions have traditionally been rated below the sovereign as they were perceived to be more correlated with their governments, whereas their counterparts in Europe were seen to have a greater level of independence. However, following the global financial crisis, rating agencies have begun to reassess their methodology, which could spur some change in the region.
“The rating agencies are being assessed by regulators a bit more so there is a need to show more transparency in the way they represent ratings. There is also the feeling that they would like to standardise their methodology across geographies and across sectors,” said Sabita Prakash, head of Asian fixed income at Fidelity.
S&P put out requests for comment on proposed criteria changes earlier this year and is set to implement them soon. This could result in corporations in Asia receiving ratings as high as four notches above the sovereign. At the moment, very few companies in the region have a higher rating than the sovereign – those that have, are rated only one notch above.
In India, Infosys Technologies, Reliance Industries, Tata Consultancy Services and Wipro are all rated ‘BBB+’ compared to the sovereign rating of ‘BBB-‘. In Indonesia, Astra International and Telekomunikasi Selular are both rated ‘BBB-‘.
In Malaysia, Sime Darby is rated ‘A’; Philippine Long Distance Telephone Company is rated ‘BBB’, Chunghwa Telecom in Taiwan is rated ‘AA’ and Thailand’s Advanced Info Service Public Company is rated ‘A-‘.
The unwillingness of rating agencies to rate companies higher than the sovereign in the past has limited the ability of several higher quality corporates to access the capital markets at competitive pricing.
“Countries such as Indonesia, the Philippines and India, that have ratings in the ‘BB+’ to ‘BBB-’ range are the ones where it can be doubtful what rating an issuer will get. A number of issuers from these countries – whether they are telecom, retail or property companies – are market leaders in their own right,” said Prakash.
“If they were to be in a different domicile they could probably have got an investment grade rating, but because they are in these countries they are subject to the ceiling. Let’s take any Indian company issuing debt. If its rating on an unconstrained basis is ‘Baa1’ or higher, it will get a ‘Baa2’ rating.”
Higher ceilings
The ceiling reflects the risk that a sovereign could impose a debt moratorium on domestic companies if it ran into difficulties, and is an important part of the ratings methodology. At S&P, this is called the transfer and convertibility (T&C) assessment.
The likelihood of the sovereign restricting companies’ access to FX is very important when considering whether or not to rate a corporate above the sovereign, according to KimEng Tan, senior sovereign analyst at S&P. However, in Asia, the risks are relatively low.
“A government in an economy that is highly export oriented or is dependent on international financing is less likely to restrict FX access. This is because if they do, the economic consequences will be significant and may worsen the sovereign’s own situation,” he said to Asiamoney PLUS.
“Several East Asian countries have T&Cs above their sovereign rating as they are highly open to international trade and finance. But [even] that ceiling is sometimes not binding on subsidiaries of multi-national corporations that we believe would be willing to pay their debt.”
According to its new criteria, S&P would first figure out what the rating of the issuer would be on a standalone basis, and then apply a stress test based on a hypothetical sovereign credit event. Where there is a moderate to low risk in both cases, they will be willing to upgrade the rating by as high as four notches.
Sectors with moderate sensitivity to sovereign risk include non-life insurers, financial clearing houses and exchanges, telecommunications and cable companies, exporting natural resource producers, staple consumer product manufacturers, food retailers and pharmaceutical companies, according to research published by S&P.
Those industries with high sensitivity include life insurers, financial institutions, the real estate sector, non-exporting natural resource producers, non-exporting cyclical companies, domestic investment holding companies, regulated utility network infrastructure, public finance enterprise sectors and regional and local governments.
High quality companies in Asia have often chosen to come to the international bond market without a rating, rather than receive one lower than their standalone fundamentals would warrant. This is particularly prevalent in the Philippines. Many companies have been able to issue bonds without a rating due to the large domestic investor base and favourable technicals, said Prakash.
However, when Moody’s put the Philippines on review for an upgrade to investment grade on July 22, bankers and analysts placed pressure on local companies to get ratings in order to obtain better pricing and longer tenors on their US-dollar denominated bonds, according to Reuters.
At the moment, the bond market does not ignore the country ceiling, but there is some discounting, so the pricing ends up in between the standalone rating and the ceiling, according to bankers. Once the ratings methodology is updated, there will be more scope for companies to receive an accurate rating and investors will have to do less guesswork.