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The Role of Credit Rating Agencies in Developing Caribbean Corporate and Government Bond Markets . Caribbean Connect: High Level Symposium on CSME Barbados: June 28-30, 2006. S.Venkat Raman CEO & Chief Rating Officer. Caribbean Information & Credit Rating Services Limited.
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The Role of Credit Rating Agencies in Developing Caribbean Corporate and Government Bond Markets Caribbean Connect: High Level Symposium on CSME Barbados: June 28-30, 2006 S.Venkat Raman CEO & Chief Rating Officer Caribbean Information & Credit Rating Services Limited
Presentation structure • Key elements of bond market development • The role of rating agencies • CariCRIS: A rating agency for the Caribbean • CariCRIS & CSME
What is a credit rating ? What a rating is: • A current opinion on the relative creditworthiness of debt • An debt specific evaluation • Aimed at differentiating credit quality • A response to the market’s demand for information What a rating is not: • Not an audit of the issuing company • Not a one time assessment of creditworthiness of the issuer • Not a general purpose certification of “goodness” of a company • Not a recommendation to buy, hold or sell the rated security
Key elements of bond market development • Issuer diversity • Investor diversity • Transparency and disclosure • Accounting standards – to give true financial picture • Corporate governance – for predictability of corporate action • Credit ratings – to provide a comparative framework • Independent regulator • Market infrastructure – brokers, exchanges, settlement systems etc.
Role Of Rating Agencies In Debt Market Development– At The Core • Creation of market for corporate credit and pricing of credit risk • Readily usable risk indicator • Tool for price-discovery, particularly for non-sovereign debt • Creating of a proper yield curve • Key information intermediary between issuers and investors • Reduce information asymmetry between investors and issuers • Facilitate comparison of investment options • Facilitate pricing of credit risk • Creation of secondary market in debt • Creates liquidity in bond portfolios • Leads to clarity in pricing of credit risk • Makes structured debt issuances easier • Building of financial awareness • Best practices for company analysis, risk assessment
Role Of Rating Agencies - At The System Level • Widen access to funding for smaller businesses • Compliments regulatory oversight • Prioritises regulators’ concern areas • Prudential practises predicated on ratings • Effective self-corrective tool for managements & businesses • Enhances trust and market confidence =>Expands savings pool
Role Of Rating Agencies - At The Application Level • Estimation of credit risk • Unbiased opinion arrived at through structured process • Publicly available information • Single, easily comprehensible grade • Basis for scientific risk management in banking sector • Better lending decisions, less NPAs going forward • Fundamental benchmarking for IRB (Basel) approaches • Better pricing of credit risk • Improved loan portfolios lend strength to the banking system • Basis for securitisation • Unlocking liquidity in loan and asset portfolios
Rating agencies: Role Vs Obligations • Independence : Real & perceived • Ownership • Governance architecture • Financial independence • Conformance to recognized codes of conduct • Transparency • Integrity in analytics & operations • Investment in market education & development
The need for ratings in the Caribbean • Need for a vibrant bond market • Efficient financial intermediation and credit allocation • Alternate funding source to banks • Financial System Stability • Liquidity & financial crises management • Caribbean • Small sized economies limiting local bond market development • Businesses with appetite for funds and vice-versa • Credit research in public domain relatively scare • Sizeable regional economy • Increasing evidence of cross border financing • The Caribbean needs an integrated, regional debt market • A regional credit rating agency is a critical ingredient
CariCRIS • First Caribbean rating agency and world’s first regional credit rating agency • Launched in 2004/2005 • Fruition of an idea long espoused by CARICOM • Promoted by regional Central Banks, CDB, IDB and other pan-regional institutions • Shareholding by CRISIL Ltd., the 4th largest rating agency in the world and a subsidiary of S&P. • Currently ratings being conducted in Barbados, Jamaica, OECS & T&T.
CSME and role of CariCRIS Key Themes of CSME • Integration of Financial Markets • Seamless cross-border financial flows CariCRIS role & benefits • Strengthen markets and facilitate unified regulation • Strong impetus to capital market development; • Energise the CSME initiative to create a unified debt markets • Strengthen financial systems through diversified markets • Investor Protection & better Market Discipline • Facilitating regional penetration of companies Increases transparency • Enhance credibility & independent profiling/risk analysis • Increased access to funding sources • Facilitating cross-border investment/lending • Enhanced ability to compare credits across the region • Reduces information risk and facilitates informed decisions
The Road Ahead • The Beginning : has been WELL DONE • Rating Agency : needs to stick with its values and mission • Policy Makers & Regulators: Need to act further – to consciously build ratings into financial architecture • Investors & Issuers : The leaders need to show the way
THANK YOU Caribbean Information & Credit Rating Services Limited email@example.com / www.caricris.com Tel: (868) 627-8879 Fax: (868) 625-8871