RAM Ratings clarifies misconceptions about ratings

RAM Ratings (Lanka) Limited the wholly owned subsidiary of RAM Holdings Malaysia holds a positive view of the local bond market. It is of the opinion that the local bond market has potential to grow despite the oil and credit crises, which are not unique to the Lankan market alone.

According to Suresh Menon, the Executive Director of RAM Ratings Lanka, there is a healthy level of lending going on in the credit market.

“There is still lending that goes on. For example in the banking sector there’s lending that take place between companies and banks and if this fund raising can be diverted into bonds or corporate securities that is the market we are targeting.

There is a marked deterioration in global economic conditions triggered by the decelerating American and European economies, affected by the sub-prime credit meltdown, tightening liquidity and correcting housing market.

Countries across the world are being affected by it with the only difference in Sri Lanka being the security situation. If the security situation improves there would be a lot of pent up demand for credit in the market and that would be good for the bond market,” he said.

Although the market has potential there are factors inhibiting the growth of the bond market. The next few years are going to be critical in terms of the development of the bond market, says Menon.

“Meanwhile the current market players will have to make changes to their current lending practices in order to elevate the Sri Lankan capital market to the next level,” he added. According to Menon currently most of the lending takes place based on the popularity and size of the company and not on any form of professional opinion or appraisal of the company’s creditworthiness.

“Failure by investors and lending institutions to understand that credit ratings help to price debts according to the borrower’s ability to repay on time is one of the main setbacks that the market is facing right now. That means if you have stronger credit profile ratings, you get a better interest rate whereas a weaker rating means the borrower will have to pay more in terms of interest,” said Menon.

“Contrary to the common belief that ratings are only for the use of financial institutions, Menon says that, “any institution or person borrowing money could have their credit profile rated.”

He also pointed out that a misconception exists within the market that credit ratings are a substitute for loan security, which he declared to be a fallacy. “Security means that you have a bank guarantee or some assets backing up the loan that you have.

A rating is just an independent opinion of the rating agency about the credit profile of a particular corporate or a company. It is not a recommendation to purchase, sell or hold a security, and the buyer or seller makes his or her own decision,” he said.

Further there is a common misunderstanding that rating agencies as one of their many duties carry out audits of the corporate being rated, whereas in reality the rating agencies rely broadly on audited accounts and other information provided by the corporate itself for their ratings and other reliable sources.

An international rating benchmarks a company from a universal viewpoint where the agencies rate the countries in terms of their ability to pay their debts, and at the same time takes into consideration the company’s home-country risks and operating environment. International ratings and domestic ratings are not comparable.

Domestic ratings provide local investors with a familiar and consistent yardstick on the relative credit quality of local currency denominated securities; the Government carrying an AAA-rating and the rest of the corporates rated in comparison.

To counter these misconceptions and educate the market on ratings and its benefits RAM has embarked on a series of programmes with the market intermediaries and market players.

“We have had arranger, investor and media briefings, and training sessions with analysts in RAM Lanka. We’re in close contact with the Securities and Exchange Commission (SEC) with regard to legislation change which can take place within the Sri Lankan bond market and we’ve kept them updated on RAM’s views on the growth of the Colombo market,” Menon added.