Wide-rang­ing im­pli­ca­tions for rat­ings agency

The Star Early Edition - - NEWS -

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.

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