Too little, too late? Role of credit rating agencies in the Amtek AUTO default

2017 ◽  
Vol 7 (4) ◽  
pp. 1-22
Author(s):  
Shagun Thukral ◽  
Sunder Korivi ◽  
Dipasha Sharma ◽  
Dipali Krishnakumar
Keyword(s):  
Financial Markets ◽  
Credit Rating ◽  
Credit Rating Agencies ◽  
Fixed Income ◽  
Red Flags ◽  
Content Type ◽  
Rating Agencies ◽  
Markets And Institutions ◽  
Analysis Process ◽  
Credit Analysis

Subject area Fixed Income markets, Financial Markets and Institutions. Study level/applicability This case can be used in a postgraduate finance course such as an MBA and executive program for courses such as Fixed Income Markets and Financial Markets and Institutions. Case overview In late August 2015, the sudden downgrade and eventual default of Amtek AUTO Ltd (Amtek) on its debentures upset mutual fund investors and regulators. Questions were raised about the credit rating agencies and their lack of timely action as well as about the independent credit analysis followed by fund houses to protect the interests of investors. One such investor, Suresh Nair, decided to gather all possible available information on Amtek to determine whether it was sheer negligence on the part of all parties involved or if Amtek was in fact in a situation of sudden distress. The case seeks to highlight the credit analysis process, while looking out for red flags to identify potential default or financial stress in a company. Expected learning outcomes To understand the credit analysis process through a fundamental analysis process. To analyze and interpret the financial position of the company through various financial ratios. Identifying “red flags” while evaluating a potential credit that pose as “risks” to credit assessment. Understanding the role and relevance of credit rating agencies in the bond market. Supplementary materials Teaching Notes are available for educators only. Please contact your library to gain login details or email [email protected] to request teaching notes. Subject code CSS 1: Accounting and Finance

A comparative study of economic growth as a key determinant of sovereign credit ratings in Africa

2020 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Misheck Mutize ◽  
McBride Peter Nkhalamba
Keyword(s):  
Economic Growth ◽  
Credit Rating ◽  
Credit Ratings ◽  
Credit Rating Agencies ◽  
African Union ◽  
African Countries ◽  
Content Type ◽  
Rating Agencies ◽  
Sovereign Credit ◽  
Sovereign Credit Ratings

PurposeThis study is a comparative analysis of the magnitude of economic growth as a key determinant of long-term foreign currency sovereign credit ratings in 30 countries in Africa, Europe, Asia and Latin America from 2010 to 2018.Design/methodology/approachThe analysis applies the fixed effects (FE) and random effects (RE) panel least squares (PLS) models.FindingsThe authors find that the magnitude economic coefficients are marginally small for African countries compared to other developing countries in Asia, Europe and Latin America. Results of the probit and logit binary estimation models show positive coefficients for economic growth sub-factors for non-African countries (developing and developed) compared to negative coefficients for African countries.Practical implicationsThese findings mean that, an increase in economic growth in Africa does not significantly increase the likelihood that sovereign credit ratings will be upgraded. This implies that there is lack of uniformity in the application of the economic growth determinant despite the claims of a consistent framework by rating agencies. Thus, macroeconomic factors are relatively less important in determining country's risk profile in Africa than in other developing and developed countries.Originality/valueFirst, studies that investigate the accuracy of sovereign credit rating indicators and risk factors in Africa are rare. This study is a key literature at the time when the majority of African countries are exploring the window of sovereign bonds as an alternative funding model to the traditional concessionary borrowings from multilateral institutions. On the other hand, the persistent poor rating is driving the cost of sovereign bonds to unreasonably high levels, invariably threatening their hopes of diversifying funding options. Second, there is criticism that the rating assessments of the credit rating agencies are biased in favour of developed countries and there is a gap in literature on studies that explore the whether the credit rating agencies are biased against African countries. This paper thus explores the rationale behind the African Union Decision Assembly/AU/Dec.631 (XXVIII) adopted by the 28th Ordinary Session of the African Union held in Addis Ababa, Ethiopia in January 2017 (African Union, 2017), directing its specialized governance agency, the African Peer Review Mechanism (APRM), to provide support to its Member States in the field of international credit rating agencies. The Assembly of African Heads of State and Government highlight that African countries are facing the challenges of credit downgrades despite an average positive economic growth. Lastly, the paper makes contribution to the argument that the majority of African countries are unfairly rated by international credit rating agencies, raising a discussion of the possibility of establishing a Pan-African credit rating institution.

Chile spending commitments may hamper fiscal prudence

2018 ◽  
Keyword(s):  
Government Spending ◽  
Credit Rating ◽  
Gdp Growth ◽  
Credit Rating Agencies ◽  
Government Budget ◽  
Content Type ◽  
Rating Agencies ◽  
The Government ◽  
Fiscal Prudence

Subject The draft 2019 budget. Significance The government budget for 2019, announced by President Sebastian Pinera on September 29, is the most austere in almost a decade. It aims to restore Chile’s long-standing reputation for exemplary fiscal conduct, which in recent years has been undermined by increases in government spending that outstrip GDP growth, and the resulting increase in borrowing. Impacts Credit rating agencies have indicated that the draft budget is in line with their concerns about Chile’s rising borrowing requirement. The ongoing decline in fiscal revenues from copper underlines Chile’s need to diversify its economy. The government will be hard-pressed to meet its fiscal goals if, as current forecasts suggest, GDP growth weakens through to 2020.

China's Emerging Credit Rating Industry: The Official Foundations of Private Authority

2008 ◽  
Vol 193 ◽  
pp. 65-83 ◽  
Author(s):  
Scott Kennedy
Keyword(s):  
Financial Markets ◽  
Stock Markets ◽  
Credit Rating ◽  
Credit Rating Agencies ◽  
Bond Ratings ◽  
Trade Associations ◽  
Rating Agencies ◽  
Market Participants ◽  
Private Authority ◽  
Private Actors

AbstractAlthough China has had difficulty improving the performance of its banks and stock markets, it has struggled even more to develop a credit rating industry. Credit rating agencies (CRA), which provide bond ratings, are vital to financial markets in advanced capitalist countries, but China's credit rating companies are weak and have had little influence over the behaviour of those who issue or invest in bonds. Some argue that CRAs gain authority through their strong reputation in the eyes of market participants, but the experience of rating agencies in China supports evidence from elsewhere that their private authority is largely dependent on government mandate, a benefit China's CRAs have only recently begun to enjoy. Many private actors, from trade associations to charity groups, are struggling to gain public influence in China, but credit rating agencies may be the best barometer to measure the Chinese government's general stance towards private authority.

Regulating the Chinese credit rating agencies: progress and challenges

2015 ◽  
Vol 18 (1) ◽  
pp. 66-80 ◽  
Author(s):  
Jing Bian
Keyword(s):  
Credit Rating ◽  
Legal Framework ◽  
Development Stage ◽  
Regulatory Regime ◽  
Credit Rating Agencies ◽  
Content Type ◽  
Rating Agencies ◽  
Depth Analysis ◽  
Effective Level ◽  
Full Dimension

Purpose – The purpose of this paper is to examine the emerging Chinese credit rating agencies (CRAs), and their development, regulatory regime and challenges. The Chinese financial system has made many improvements; in particular, the regulatory regime has reached a more effective level. However, it should be admitted that some aspects still require further development. Compared with other developed markets, the Chinese credit rating industry is still young. Under these circumstances, questions are raised about the performance of the CRAs in China. Whether the legal framework is effective enough? A further point, in terms of the development, is what are the major obstacles lying ahead for the Chinese CRAs? Design/methodology/approach – This paper will concentrate on the study of Chinese CRAs. Starting with a brief introduction and analysis on the Chinese CRAs, it will further examine the rating methodologies of the Chinese CRAs. Following this, the regulatory regimes will be analyzed in detail, from the perspectives of the securities, banking and insurance market. Moreover, the paper will identify the key problems under the current regulatory regime. Last but not least, a conclusion and some future suggestions for the development of the regulatory regime will also be made based on the earlier observations and study. Findings – The current development stage and future reform requirement of the Chinese credit rating industry. Originality/value – Provide a full dimension and in depth analysis on the Chinese credit rating industry.

A Bayesian inference model for the credit rating scale

2016 ◽  
Vol 17 (4) ◽  
pp. 390-404 ◽  
Author(s):  
Philipp Gmehling ◽  
Pierfrancesco La Mura
Keyword(s):  
Bayesian Inference ◽  
Credit Risk ◽  
Credit Rating ◽  
Rating Scale ◽  
Credit Rating Agencies ◽  
Model Framework ◽  
Content Type ◽  
Rating Agencies ◽  
Credit Rating Agency ◽  
Limited Accuracy

Purpose This paper aims to provide a theoretical explanation of why credit rating agencies typically disclose credit risk of issuers in classes rather than publishing the qualitative ranking those classes are based upon. Thus, its goal is to develop a better understanding of what determines the number and size of rating classes. Design/methodology/approach Investors expect ratings to be sufficiently accurate in estimating credit risk. In a theoretical model framework, it is therefore assumed that credit rating agencies, which observe credit risk with limited accuracy, are careful in not misclassifying an issuer with a lower credit quality to a higher rating class. This situation is analyzed as a Bayesian inference setting for the credit rating agencies. Findings A disclosure in intervals, typically used by credit rating agencies results from their objective of keeping misclassification errors sufficiently low in conjunction with the limited accuracy with which they observe credit risk. The number and size of the rating intervals depend in the model on how much accuracy the credit rating agencies can supply. Originality/value The paper uses Bayesian hypothesis testing to illustrate the link between limited accuracy of a credit rating agency and its disclosure of issuers’ credit risk in intervals. The findings that accuracy and the objective of avoiding misclassification determine the rating scale in this theoretical setting can lead to a better understanding of what influences the interval disclosure of major rating agencies observed in practice.

scholarly journals Information as a condition of justice in financial markets: The regulation of credit-rating agencies

2017 ◽  
Author(s):  
Boudewijn de Bruin
Keyword(s):  
Credit Risk ◽  
Financial Markets ◽  
Institutional Investors ◽  
Credit Rating ◽  
Credit Rating Agencies ◽  
Informational Needs ◽  
Sources Of Information ◽  
Rating Agencies ◽  
Mortgage Backed Securities

This chapter argues for deregulation of the credit-rating market. Credit-rating agencies are supposed to contribute to the informational needs of investors trading bonds. They provide ratings of debt issued by corporations and governments, as well as of structured debt instruments (e.g. mortgage-backed securities). As many academics, regulators, and commentators have pointed out, the ratings of structured instruments turned out to be highly inaccurate, and, as a result, they have argued for tighter regulation of the industry. This chapter shows, however, that the role of credit-rating agencies in achieving justice in finance is not as great as these commentators believe. It therefore argues instead for deregulation. Since the 1930s, lawgivers have unjustifiably elevated the rating agencies into official, legally binding sources of information concerning credit risk, thereby unjustifiably causing many institutional investors to outsource their epistemic responsibilities, that is, their responsibility to investigate credit risk themselves.

India will struggle to revive growth quickly

2020 ◽  
Keyword(s):  
Credit Rating ◽  
Prime Minister ◽  
Fiscal Year ◽  
Gdp Growth ◽  
Credit Rating Agencies ◽  
Fiscal Deficit ◽  
Content Type ◽  
Rating Agencies ◽  
Goods And Services ◽  
Finance Minister

Subject Outlook for India's economy following the 2020/21 budget. Significance Prime Minister Narendra Modi’s government estimates that GDP growth for fiscal year 2019/20 (April-March) will be 5.0%, the lowest full-year rate in eleven years. Finance Minister Nirmala Sitharaman earlier this month presented a budget for 2020/21 and said growth would pick up to 6.0-6.5% in that year. Impacts Further widening of the fiscal deficit could prompt credit rating agencies to downgrade India’s outlook. Some states may try to reclaim powers of taxation that they surrendered when the Modi government introduced the Goods and Services Tax. Modi will double down on efforts to promote the ‘Make in India’ initiative, which is designed to increase domestic manufacturing.

Effects of fiscal credibility on sovereign risk: evidence using comprehensive credit rating measures

2020 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Gabriel Caldas Montes ◽  
Julyara Costa
Keyword(s):  
Risk Perception ◽  
Financial Market ◽  
Public Debt ◽  
Credit Rating ◽  
Credit Rating Agencies ◽  
Sovereign Risk ◽  
Content Type ◽  
Rating Agencies ◽  
Sovereign Credit ◽  
Long Run

PurposeSince sovereign ratings provided by credit rating agencies (CRAs) are a key determinant of the interest rates a country faces in the international financial market and once sovereign ratings may have a constraining impact on the ratings assigned to domestic banks or companies, some studies have focused on identifying the determinants of sovereign credit risk assessments provided by CRAs. In particular, this study estimates the effect of fiscal credibility on sovereign risk using four different comprehensive credit rating (CCR) measures obtained from CRAs' announcements and two different fiscal credibility indicators.Design/methodology/approachWe build comprehensive credit rating (CCR) measures to capture sovereign risk. These measures are calculated using sovereign ratings, the rating outlooks and credit watches issued by the three main credit rating agencies (S&P, Moody's and Fitch) for long-term foreign-currency Brazilian bonds. Based on monthly data from 2003 to 2018, we use different econometric estimation techniques in order to provide robust results.FindingsThe results indicate that fiscal credibility exerts both short- and long-run effects on sovereign risk perception, and macroeconomic fundamentals are important long-run determinants.Practical implicationsSince fiscal credibility reflects the government's ability to maintain budgetary balance and sustainable public debt, the government should keep its commitment to responsible fiscal policies so as not to deteriorate expectations formed by financial market experts about the fiscal scenario and, thus, to achieve better credit assessments issued by CRAs with respect to sovereign debt bonds. Sovereign credit rating assessment is a voluntary practice. It is up to the country whether they want to apply for a rating assessment or not. Thus, without a sovereign rating, one must find an alternative to measure the sovereign risk of a country. In this sense, an important practical implication that this study provides is that fiscal credibility can be used as a leading indicator of sovereign risk perceptions obtained from CRAs or even as a proxy for sovereign risk.Originality/valueThis paper is the first to verify how important the expectations of financial market experts in relation to the fiscal effort required to keep public debt at a sustainable level (i.e. fiscal credibility) are to sovereign risk perception of credit rating agencies. In this sense, the study is the first to address this relation, and thus it contributes to the literature that seeks to understand the determinants of sovereign ratings in emerging countries.

The relevance of credit ratings over the business cycle

2016 ◽  
Vol 17 (2) ◽  
pp. 152-168
Author(s):  
Christian Fieberg ◽  
Richard Lennart Mertens ◽  
Thorsten Poddig
Keyword(s):  
Business Cycle ◽  
Agency Costs ◽  
Credit Rating ◽  
Credit Ratings ◽  
Credit Rating Agencies ◽  
Cross Sectional ◽  
Content Type ◽  
Rating Agencies ◽  
The Business Cycle ◽  
Rating Changes

Purpose Credit market models and the microstructure theory of the ratings market suggest that information provided by credit rating agencies becomes more relevant in recessions when agency costs are high and less relevant in expansions when agency costs are low. The purpose of this paper is to empirically test these hypotheses with regard to equity markets. Design/methodology/approach The authors use business cycle identification algorithms to map rating events (credit rating changes and watchlist inclusions) to business cycle phases and apply the event study methodology. The results are backed by cross-sectional regressions using a variety of control variables. Findings The authors find that the relevance of information provided by credit rating agencies for equity prices heavily depends on the level of agency costs. Furthermore, the authors detect a “flight-to-quality” during recessions in the speculative grade segment and a weakened relevance of rating events in expansions in the investment grade segment. Originality/value This paper is the first to empirically analyse how equity investors perceive credit rating changes and watchlist inclusions over the business cycle. In the empirical analysis, the authors use a large sample of about 25,000 rating events in all Organisation for Economic Co-operation and Development markets. The presented results underline that credit ratings address the agency problem in financial markets and can thus be regarded as useful for risk management or regulation.

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