Asset Manager Review
Tyron Green, credit analyst at PSG ASSET MANAGEMENT
says now that there are only two dominant rating agencies in South Africa, the situation has allowed them to gain more pricing power but has also allowed Global Credit Ratings Co. to grow their coverage.
While there is a conflict of interest in that the company chooses – and pays for – the rating agency, the rating goes through the rating agency’s committee before it is issued. This same conflict exists with companies choosing and paying for their auditors.
“This will in part be mitigated by our assessment of the integrity of management and to a greater degree through our own rating assessment,” says Green.
“We have found in many instances that as the rating agencies are relatively removed from the local market, they are more reactive than proactive in their rating changes. Therefore, a BRICS rating agency will most likely still not solve the problem.
“The BRICS countries still operate in different industries with different legal frameworks and regulations. In the end the rating agencies use a yard stick with which they measure each company and compare them to their peers globally, but the measure is not always relevant or correctly weighted to each country or company.
“A potential solution to this problem could be some form of local presence and adaption of the yard stick and weightings, rather than just introducing a BRICS rating agency.”
Ockert Doyer, credit analyst at SANLAM INVESTMENTS
says conflict of interests/issuer pay model remains a concern. This is somewhat balanced by the reputational risk faced by these agencies to retain investor confidence in their ability to form objective and balanced views.
“Competition in most industries normally leads to better products and services for consumers, but in the credit ratings business, a few (three, maximum four) large but trustworthy players is probably sufficient. “Investors want broad coverage by the agencies they subscribe to and having too many different methodologies for assessing credit risk will not necessarily add any value.
“Facing reality as it is and not as you want it be – shopping around until you get an opinion that you want to hear, rather than an opinion that you need to hear, is a very dangerous approach.”
is not convinced that an increased number of rating agencies will improve the situation. She says the credit ratings provided by the three US-based agencies – Fitch, S&P and Moody’s – do not differ markedly from that provided by the Japanese agency R&I.
And while the rating from Chinese rating agency Dagong is somewhat higher, the direction of travel is exactly the same. At the same time, the majority of investors in South African government debt are from the US, UK and Europe. “We may not like what the rating agencies say – but we cannot ignore them until we stop needing to borrow money every week from foreign and local investors who care about credit ratings.
“Unless the pension funds of Brazil, Russia, India and China will start buying South African government debt, a BRIC rating agency will not change this.”
John Orford, portfolio manager at OLD MUTUAL INVESTMENT GROUP’s
MacroSolutions boutique says in principal more competition is good for any market, the market for ratings agencies is no different. Ratings agencies do face a potential conflict of interest and this has led to concerns about their role, particularly in the financial crisis in the US.
“However, from our perspective our investments decisions are not taken on the basis of a ratings agency view but on the basis of our own investment process and the respective merits of any asset class or security.
“This may take into account ratings agencies views but only as one piece of data within a much bigger picture.
“A BRICS rating agency could provide a useful service if it was a competitive independent ratings agency. It would certainly face considerable scrutiny if it was funded by and controlled by BRICS governments and would need to prove its capacity and independence.”
Henk Viljoen, co-head of STANLIB’s
fixed interest business says the external credit rating agencies are regulated by the FSB and are required to comply with the Credit Rating Services Act, 24 of 2012 (“CRSA”). The scope of the CRSA is referenced to the International Organisation of Securities Commissions Code of Conduct and this covers independence and circumventing conflicts of interest and responsibilities to the investing public and issuers.
It would be great to have Fitch return to South Africa as investors are familiar with their methodology and processes. It is questionable whether a BRICS rating agency or any new credit rating agency will be useful as credibility and reputation will have to be earned and demonstrated before recognition is assigned to their opinions.
Samantha Steyn, portfolio manager at CANNON ASSET MANAGERS
says there is no doubt that the rating agency relationship with debt issuers does give rise to a major conflict of interest problem. They do, however, offer valuable information to investors to compare various countries, debt issuances and a broad measure for comparison.
“It is definitely not the best single measure from which to judge: the agencies have been criticised for being behind the curve or after the fact, and often follow each other’s rating moves. However, I am not convinced that more competition in this area would provide a solution.
“It might be useful to have an emerging market or Brics rating agency, as these economies are far more comparable and this would allow more focussed attention on some of the smaller economies which are often larger debt issuers due to their growth requirements.”
Izak Odendaal, investment strategist at OLD MUTUAL MULTI-MANAGERS
says the reputation of the major ratings agencies took a knock after the global financial crisis, partly because of the conflict of interest in being paid to rate
sub-prime mortgage instruments. However, when it comes to sovereign ratings, there is neither an apparent conflict of interest, nor any reason to suspect a hidden agenda.
“It is not clear whether having more major ratings agencies active in the SA market, would have a positive influence on the view of South Africa’s creditworthiness. Not that they have exactly the same view in anyway; Moody’s has long been more generous in its assessment of South Africa than the other two.
“A BRICS ratings agency would only be useful to investors if it offered credible and objective research and opinions. It is difficult to envisage such a ratings agency gaining the confidence of international investors soon. If such a ratings agency is established, the BRICS bank can use those ratings for its own lending activity (similar to the role played by any bank’s credit department).”
Rowan Williams-Short, head of fixed interest at VUNANI FUND MANAGERS
says ratings – produced by mortal, fallible analysts – clearly have too much influence over markets, policymakers and investment mandates. Further, ratings are at best ordinal; not mathematically precise. A TV weather announcer may decide that 12 C is mild but 11 C is cold. The distinction between investment grade and non-investment grade is just as subjective.
“Out of the plethora of analysts’ views on rated entities (sell and buy-side), why do we give such heavily skewed credence to rating agencies?
“More competition among agencies should be welcomed.
“Rating agencies are ostensibly conflicted by their remuneration models, but no more so than auditors, whose billing arrangements are widely accepted. Good ethics and a commitment to pure objectivity should be able to overcome rating potential conflicts.
“A BRICS rating agency would be utterly futile and would be deemed by developed markets to have as much credibility as one side’s cricket captain simultaneously serving as the match umpire.
“The very notion of and motivation for a BRICS rating agency smacks of a scolded child’s sulks. SA’s BRICS partners are in any event not feasible contributors to the financing of our borrowing requirements; our own institutions and developed markets are the only plausible candidates,” says Williams-Short.
Evan Jankelowitz, director and portfolio manager at SESFIKILE CAPITAL
says this argument would greater meaning ‘before the fact’.
“We have been fully aware of what the rating agencies look for, and they have been extremely accommodative. There will always be the ability to poke holes into the process around the rating agencies and highlight conflicts and previous errors in judgment. However, with regards to our current circumstances within South Africa, we don’t see any undue force being exercised, rather prudent warnings to existing and potential investors who rely on a standardised metric in analysing sovereign risks across the globe.” hold
Craig Sorour, head of SA research at LAURIUM CAPITAL
says the company’s interaction with the rating agencies insofar as South Africa is concerned, is that they are measured in their approach and very cognisant of the implications of downgrading a country.
“In our view they have given South Africa the benefit of the doubt in the past but recent political noise appears to have reduced their ability to continue to do so.
“While conflicts of interest are inherent in their business, we believe that the global crisis refocused the rating agencies on the need to maintain independence. In our view they are still in the process of rebuilding trust with the market in fulfilling what is a very necessary function.
“Notwithstanding the well documented shortcomings and criticisms of these agencies, global investors place significant “stock” in their recommendations. This is based on methods and process gathered over a long period of time.
“If a BRICS agency were to emerge, it would need to prove to investors that it applies the same standards as the incumbents and gaining investors’ trust is likely to take a long time.”