Deregulation of credit rating issuance requirements is unfavorable for the nation’s investment market, as it not only goes against the global trend, but also creates confusion, S&P Global Ratings said on Friday through its local subsidiary, Taiwan Ratings Corp (中華信評).
The Financial Supervisory Commission has in recent years lifted the ratings requirement on corporate bond and financial debenture issuance in a bid to boost funding efficiency and cut issuance costs, making Taiwan the only jurisdiction that allows issuer credit ratings to be used as proxies for issue credit ratings.
An issuer credit rating reflects a rating agency’s opinion of the likelihood that a business entity might default with regard to all its financial obligations, whereas an issue credit rating reflects default risks and the priority of a creditor’s claim in bankruptcy linked to the debt being rated.
“The deregulation is debatable, because issue credit ratings and issuer credit ratings are not interchangeable for investment purposes,” Taiwan Ratings president Grace Lee (李美鈴) told a media gathering.
The substitution of issue credit ratings with issuer credit ratings, a situation known as proxy ratings, has led investors such as life insurance companies to underestimate related credit risks and has created a loophole in which investors assign a lower capital charge on their subordinated debts, Lee said.
The removal of compulsory ratings has reduced costs for issuers, but failed to inflate the issuance volume despite Taiwan’s economic recovery, Taiwan Ratings said.
“Investors need an issue credit rating to evaluate their investment decisionmaking... We believe an unrated debt should be listed as such to reflect its true status and risk,” Lee said.
Issue credit ratings on subordinated debt are usually several notches below the long-term issuer credit rating, she said, adding that a consistent regulatory framework would allow markets and investors to operate more efficiently and in a healthy manner.
The nation’s regulatory regime is bucking established and accepted global practices, Lee said, adding that this could reduce the market’s attractiveness and distort the risks involved.
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