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Rating agencies need to start speaking out

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By Rev Hui
05 May 2016

Rating agency Fitch went against the norm last week when it publicly questioned the investment grade status given to Chinese online retailer JD.com by its peers. While commenting on rival deals tends to be a rarity in Asia, such an approach can only be good for the long-term development of capital markets.

A direct rival to Alibaba Group in China’s online retail segment, JD.com made its debut in the dollar bond market on April 22. The company raised $1bn in a dual-tranche deal, but the notes sold off substantially in the secondary market, widening 40bp-50bp each over the next week.

An aggressive pricing strategy was the main culprit for the initial sell-off, but Fitch added fuel to the fire when it published a note on April 25 saying JD.com did not deserve its investment grade status.

Moody’s and Standard & Poor’s rated JD.com Baa3 and BBB- respectively, but according to Fitch, the firm should be classified high yield, given its low or close to zero profitability. Fitch also questioned S&P’s method of assessment, as the latter did not include JD.com’s captive finance unit, which is a big part of its business. 

While it is normal for rating agencies to provide divergent credit opinions, what was different in this case was the fact that Fitch was not hired to provide JD.com with a rating.

Fitch said, in an emailed response to GlobalCapital Asiaon Tuesday, that publicly questioning the views of its peers regarding transactions that it was not officially involved in is not usual practice. But an exception was warranted this time, due to a number of queries from investors as well as the big difference in its views about the credit.

Fitch’s stance should be commended, given it has potentially ruined a relationship with a client by speaking out. In a market like China, this is especially a brave move, considering how relationships are often a key aspect of winning business.

By speaking out, Fitch has prompted more discussions on the assessment work being done by rating agencies and investors. And while there is a chance that things could turn ugly if rating agencies start taking regular pot shots at each another, as long as the arguments are valid the additional information will only be beneficial for the market. After all, more transparency is rarely a bad thing in capital markets. It will not let investors get too reliant on ratings agencies.

Unfortunately, such discussions are still painfully lacking in Asia. Before JD.com, the only notable example of any dispute was when Fitch criticised the Aa3(sf) rating given to Rongteng Individual Auto Mortgage Backed Securitization 2015-1 by Moody’s last year.

Asia capital markets can only benefit from a healthy dose of debate. Let the battles begin. 

By Rev Hui
05 May 2016