what are the roles of rating agency?€¦ · what are the roles of rating agency? hwa ping, chang...

What are the roles

of rating agency?

Hwa Ping, Chang

CEO & President

Taiwan Ratings Corporation

Global Association of Risk Professionals

[June 2014]

2 | © 2012 Global Association of Risk Professionals. All rights reserved.

Agenda

Rating ABC

Credit Rating Agency Business Model

Global Corporate Credit Rating Track Record

The Rating Process

Q&A


Rating ABC


Guide to Credit Rating Essentials

• Credit ratings are opinions about relative

credit risk.

• Credit ratings are not investment advice, or

buy, hold or sell recommendations. They are

just one factor investors may consider in

making investment decisions.

• Credit ratings are not indications of the

market liquidity of a debt security or its price

in the secondary market.

• Credit ratings are not guarantees of credit

quality or of future credit risk.

Source: Guide To Credit Rating Essentials, published Feb 5, 2009.


Why Credit Ratings Are Useful

Credit ratings may play a useful role in enabling corporations and governments to raise

money in the capital markets

Investors and other market participants may use the ratings as a screening device to

match the relative credit risk of an issuer or issue with their own risk tolerance or credit

risk guidelines


Universal “language” for International Market

SSttaannddaarrdd && PPoooorr’’ss MMooooddyy’’ss IInnvveessttoorrss SSeerrvviiccee

AAAAAA AAaaaa

AAAA++,, AAAA,, AAAA-- AAaa11,, AAaa22,, AAaa33

AA++,, AA,, AA-- AA11,, AA22,, AA33

BBBBBB++,, BBBBBB,, BBBBBB-- BBaaaa11,, BBaaaa22,, BBaaaa33

BBBB++,, BBBB,, BBBB-- BBaa11,, BBaa22,, BBaa33

BB++,, BB,, BB-- BB11,, BB22,, BB33

CCCCCC++,, CCCCCC,, CCCCCC-- CCaaaa11,, CCaaaa22,, CCaaaa33

CCCC CCaa

CC CC

DD//SSDD// oorr RR DD


Standard & Poor's Rating Scales


Ratings Direction: Outlook and CreditWatch

Outlook

• Assigned to all long term

issuer ratings

• Assesses the potential

direction of a rating over the

next 2 years

• 4 Options: Positive, Negative,

Stable, Developing

• Not necessarily a precursor to

a rating change or

CreditWatch

CreditWatch

• Possible near-term change

(usually within 90 days)

• Focuses on identifiable events

and/or short-term trends that

deviate from expectations

• Additional information necessary

• Three options: Positive,

Negative, or Developing


Short-Term Rating Scale

Short-term rating scale is used for debts with

maturity of one year or less (such as CP or ABCP)

A-1+ A-1 A-2 A-3 B

AAA AA+ AA AA- A+ A A- BBB+ BBB BBB- BB+ BB BB-

Short-term

Long - term


Taiwan Ratings Corporate’s “tw” Ratings vs. S&P Global Ratings

Source: “認識中華信評評等定義”, 2010年8月6日,公布於中華信評網 www.taiwanratings.com/tw。



Business Model:

•Investor-pay (Subscription-based)

business model

•Issuer-pay business model

•Government sponsored business model

Rating Types:

Unsolicited rating ~ pi rating, e.g. [ Api ] Give a rating based on public information

Rating agency gives an estimation rating without issuer’s assignment

Solicited rating: Give a rating based on issuer’s assignment.

public rating, private rating, and confidential rating.


New Nonfinancial Corporate Bond Issuance (Maturities >= 3 years)



Average One-Year Transition Rates (%) 1981–2011 illustrate the stability of S&P ratings.

Average One-Year 'NR'-Removed Transition Rates, 1981-2011 (%)

From/to AAA AA A BBB BB B CCC/C D NR

AAA 86.08 9.81 0.55 0.08 0.08 0.04 0.07 0.00 3.30

AA 0.61 86.75 8.03 0.56 0.08 0.09 0.02 0.02 3.85

A 0.05 2.04 87.19 5.52 0.47 0.19 0.02 0.06 4.46

BBB 0.02 0.18 4.43 83.4 4.51 0.87 0.15 0.24 6.21

BB 0.01 0.07 0.28 5.86 74.74 7.68 0.84 1.05 9.48

B 0.00 0.05 0.25 0.32 5.59 73.64 3.83 4.79 11.52

CCC/C 0.00 0.00 0.21 0.38 0.89 12.08 49.49 23.42 13.51

Data includes industrials, financial institutions, insurance companies and utilities rated by Standard & Poor’s from 1981 to 2011.

Source: S&P “Why Settle For Average?: Understanding The Variation In Corporate Default Rates And Ratings Transitions, Table 8, RatingsDirect, September

19, 2012



Source: “中華信評2011 年企業違約與評等變動研究”, 2012年5月30日,公布於中華信評網 www.taiwanratings.com/tw。


Taiwan Corporate Credit Rating Track Record

Source: “中華信評2011 年企業違約與評等變動研究”, 2012年5月30日,公布於中華信評 www.taiwanratings.com/tw。


The Rating Process


The Rating Process

Rating Request Analytical Team

Appointed

Preliminary

Research

Rating

Committee

Company

Informed

Meeting with

Management

Appeal

ProcessRating Issued

Surveillance

Typical timeframe of

6-8 weeks from receipt

of initial information


Q&A


Thank You

Hwa Ping, Chang

CEO & President

Taiwan Ratings Corporation

Email:

[email protected]

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risk awarenessTM

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About GARP | The Global Association of Risk Professionals (GARP) is a not-for-profit global membership organization dedicated to preparing professionals and organizations to make

better informed risk decisions. Membership represents over 150,000 risk management practitioners and researchers from banks, investment management firms, government agencies,

academic institutions, and corporations from more than 195 countries and territories. GARP administers the Financial Risk Manager (FRM®) and the Energy Risk Professional (ERP®)

exams; certifications recognized by risk professionals worldwide. GARP also helps advance the role of risk management via comprehensive professional education and training for

professionals of all levels. www.garp.org.

© 2012 Global Association of Risk Professionals. All rights reserved.

what are the roles of rating agency?€¦ · what are the roles of rating agency? hwa ping, chang...

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