Examining Singapore’s unrated credit market
Credit ratings have been an integral part of fixed-income markets for over a century. The big international Credit Rating Agencies (CRA) were birthed in the early 1900s, a period that was marked by the rapid growth of railway infrastructure in the US. Such infrastructure assets were financed by bonds, with investors relying on information provided by CRAs.
Endorsed by regulators, CRAs have become entrenched in fixed-income markets over time, becoming important financial intermediaries that disseminate independent opinions about the creditworthiness of issuers. For example, asset managers may be required to use credit ratings provided by CRAs as part of their investment decisions.
Currently, the CRA market is highly concentrated. According to a paper published last year by a group of academics in the Journal of Accounting and Economics, titled “Market Power and Credit Rating Standards: Global Evidence”, S&P and Moody’s accounted for over 90% of the market share in the US in 2019. Outside the US where there are domestic CRAs, the market shares of S&P and Moody’s are still significant at around 70%.
Why have credit ratings persisted despite conflicts of interest?
Potential conflicts of interest arise as issuers pay rating agencies for providing credit ratings. This is evidenced by the 2007–2008 Global Financial Crisis (GFC) where credit ratings were found to be inflated, while there was an over-reliance on credit ratings by investors and financial professionals which contributed to the subprime mortgage crisis.
Despite the problems seen in the GFC and the subsequent reforms undertaken, credit ratings by CRAs continue to be widely used. In our view, a key reason is due to economies of scale. The Big Three US credit rating agencies collectively employ more than 4,000 rating analysts globally. In contrast, the asset management industry is highly dispersed, with even the largest having fewer than 100 credit research analysts. Many firms would not have the scale to individually assess the fixed-income market in-depth without the information provided by CRAs, as it is time prohibitive to perform the in-depth research required.
Meanwhile, the fixed-income market has also grown beyond financing infrastructure projects, with issuers spanning across sovereigns, municipals and corporates (financial institutions and non-financial institutions). As of writing, around 306,000 unique corporate credit issues are outstanding, including instruments issued by financial institutions (but excluding issuances from sovereigns and statutory boards), according to data gathered on Bloomberg.
Singapore-dollar market is unique, being largely unrated
Given the continued use of credit ratings and the objective for market participants to gain useful information about the creditworthiness of issuers and their issuances, in 2014, the Monetary Authority of Singapore was reported to be working with industry participants to encourage more rated instruments in the market. Between June 2017 and March 2022, a grant was in place to encourage issuers to obtain credit ratings, where the grant could help defray rating costs. However, there were no plans to make credit ratings compulsory, and this remains so today.
The Singapore-dollar credit market currently stands out as being a predominantly unrated market. The Big Three CRAs have only a 34%–50% market share in Singapore (some issuers may have gone through a rating assessment but not made the credit ratings public).
In contrast to other major markets, there is no domestic rating agency in Singapore, which implies that most of the Singapore-dollar market remains unrated. This low penetration of credit ratings is despite the Singapore-dollar market being a relatively active local currency market with $112.7 billion of credit issuances outstanding (excluding issuances from sovereigns and statutory boards), according to data gathered on Bloomberg. The Singapore-dollar credit market is also the third-largest market in Southeast Asia by total amount outstanding.
In our view, issuers in the Singapore-dollar credit market will still opt to be unrated if it is an infrequent issuer (typically smaller scale) or if they can access the market at a competitive cost
without a credit rating. Despite being unrated, we think many of the issuers have a commendable credit standing based on our work on credit fundamentals and their operating environment. Many will likely be at least in the “crossover” bucket between investment grade and high yield, if not stronger in our view. Additionally, deals could get easily placed for unrated issuances with declining interest rates before 2022.
Implications of a broadly unrated market
The unrated Singapore-dollar bond market poses challenges for investors, who must rely on their own research and financial advisers to make informed investment decisions. While this requires each market participant to form a view of the issuer, the lack of credit ratings is offset by having direct access to company information. Many Singapore dollar credit issuers are publicly listed and are obliged to provide ongoing disclosure, which can help credit investors assess creditworthiness.
However, for unlisted issuers (which includes companies that have been taken private), current levels of disclosures may leave much to be desired. Despite the difficulty of accurately assessing the credit standing of such issuers, we understand that numerous unrated issuances by unlisted issuers are routinely marketed based on name familiarity of the issuer (for example, well-known names to the market), as well as the existence of a perceived strong shareholder (say, related to investment holding companies owned by the government).
Oftentimes, there is no explicit guarantee provided by the shareholder. While current requirements typically stipulate that audited financials would need to be provided to existing credit investors, this may be inaccessible to prospective investors. Even when information is available, the content and quality vary widely.
Disclosures as a differentiator to credit selection
In our view, investors will be better served with stronger informational rights especially as Singapore-dollar bonds are widely disseminated and frequently traded. At the very least, the bulk of the issuances are intended to be frequently traded. Even in private markets, informational rights are negotiated and demanded by investors.
At OCBC Credit Research, we tend to be conservative in assigning issuer profile ratings if disclosure is lacking and where we are unable to accurately monitor an issuer’s credit profile trajectory. With loose credit conditions something of the past, we expect the availability (or lack) of information and accountability to investors to be a differentiator in credit selection.