Wide-ranging implications for ratings agency

MOODY’S Investors Service did not breach Hong Kong’s regulatory code of conduct because it never used a 2011 report on listed companies as a credit-rating tool, the city’s high court heard yesterday during an appeal hearing.

Adrian Huggins, lawyer for the New York-based credit-rating firm, told the three judges that Moody’s had considered using the note’s contents as part of a credit-review report, but “decided not to, as it was inappropriate.”

A bright line between regulated and unregulated activities had been blurred by the regulator, Huggins said.

Moody’s was appealing a decision by the city’s Securities and Futures Appeals Tribunal that resulted in a HK$11 million ($1.4 million) fine.

The panel in March affirmed an action against the company by the Securities and Futures Commission for breaching the regulator’s code of conduct when it published a report on dozens of Chinese companies. That ruling alarmed investors and analysts, concerned that such actions could strangle critical commentary about the city’s markets.

The report highlighted warning signs that Moody’s had about weak corporate governance, opaque business models and unclear financial reporting at the companies.

The tribunal said in March that the note qualified as a ratings notice, which meant it should be held to higher standards.

Under questioning from the judges, Huggins said though the report had been confusing, no one reading it would think credit ratings at the firms mentioned were about to be adjusted.

Shares plunged and borrowing costs jumped for some of the companies, including Winsway Coking Coal Holdings Ltd and West China Cement Ltd. Moody’s said the research note was a primer on possible credit-rating reviews, rather than a review in itself.

“The tribunal has been drawn to the conclusion that there was a failure in clear and unambiguous terms to set out the true nature and purpose of the red flag framework,” the tribunal panel said in its March ruling. “The evidence indicates the market understood the red flag framework as providing a form of ranking system of credit risk, and acted accordingly.”

A first of its kind in Hong Kong, the tribunal’s decision was seen as having wide-ranging implications for how ratings agencies operate in that territory.