A motivation for banks in emerging economies to adapt agency ratings when assessing corporate credit

Abstract

Background: This article considers whether South African banks should utilise the credit ratings provided by US-based credit rating agencies when assessing the creditworthiness of corporate borrowers. Aim: A review is conducted of the relevant literature and specifically the methodologies used by the credit rating agencies for ranking corporates in emerging markets. Setting: The three largest international credit rating agencies are Fitch Ratings, Moody’s Investor Services, and Standard and Poor’s. These agencies’ credit ratings cover the global spectrum of corporate, sovereign, financial and other public entities and the securities and obligations they issue. The analytical frameworks used to produce these ratings are referred to as credit rating methodologies. Method: A review of Moody’s ratings for South African corporate entities was undertaken to examine claims of a sovereign ceiling influencing the external ratings obtained by these institutions in emerging markets. Results: Only 14 of the 200 global South African ratings pierced the sovereign ceiling. Conclusion: The study concludes that the use of unmodified external ratings by banks to assess a corporate borrower should be discouraged. High-level suggestions are provided on how the methodologies and data used by the external agencies may rather be used to arrive at more suitable internal ratings.