Securities to Rate

Emerging economies in the ASEAN+3 often do not yet have many private corporations that have enough size to claim access to bond market. That is why we first turn to the public companies and agencies in the ASEAN+3. Most of the ASEAN+3 economies have huge financing needs in infrastructure: housing, utilities, waterworks, metro transit, rail, highway, plants, etc. In many cases, they also need financing for public bad banks, deposit insurance corporations, or local governments. The governments might directly take up these missions and put the assets on the books, but each one of these missions requires massive investments and financing. That is why governments usually set up public companies (sometimes, even privatizing the public companies) and spin off those missions.

However, the rating coverage of the public companies in emerging economies of the ASEAN+3 by the global credit rating agencies is not broad as we would like it to be. One of the reason is that the size of investor base do not justify rating these public companies. It is a pity because the credit risks of these public corporations are essentially the same as their sovereigns and oftentimes, the global rating agencies are rating those sovereigns.

We take the view that the institutional investors in the ASEAN+3 are currently not investing in these public companies in the region due to lack of ratings. The RCRA would rate the bonds of public companies, facilitating both emerging economies and institutional investors. It would also enable governments to spin off these public businesses having the public companies finance themselves.

Project Finance

In order to continue their rapid pace of growth, the emerging economies of the ASEAN+3 need substantial investments in social infrastructure, so-called SOC. They are, to name a few, highways, bridges, tunnels, water & sewage, telecommunication networks, and plants along with real estate developments. To finance such investments, government can use the taxpayers’ money taking up the projects themselves, have the public companies in those specific categories raise money, or finance private capital project-by-project base. The last method can be the most efficient one if governments can easily find financiers. Even the

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World Bank acknowledged that project financing (PF) for financing large “greenfield projects” had been gaining attention in developing countries. (The greenfield projects refer to new projects without any prior track record or operating history)

For the emerging economies including ours in the ASEAN+3, the search cost to find willing banks, investment banks, pension funds, or insurance companies are too high. We can, however, have the RCRA assess the credit risks of these projects, which then help governments’ projects to attract capital. This business of PF rating would work as additional competition to investment banks and it would drive down the underwriting fee for PF’s. Sovereign Bonds

In terms of the ASEAN+3 and emerging economies in general, the critique of the global credit rating agencies have been mainly the following: not enough rating coverage on emerging sovereign, procyclical ratings that help to amplify the credit cycles, asymmetric adjustments in ratings (gradual upgrading yet severe, abrupt, belated downgrading).

The governments should have the RCRA give broader and more frequent rating coverage than those of the global credit rating agencies. It is important to stress that we do not expect the RCRA to give higher sovereign ratings than the global agencies. Rather, what we hope for is “fairer ratings” in the sense of ‘through-the-cycle’ or ‘credit cycle neutral’ ratings, thereby enhancing the financial stability of the ASEAN+3

Large Corporation

Even the firms of size and with very good credit have limited access to international debt market due to both low sovereign credit ratings and narrow coverage by the global credit rating agencies. However, emerging economies typically need additional foreign capital to sustain their high rates of growth and expand their opportunity sets. The RCRA’s rating these firms would draw attention and interest from foreign investors at least in domestic currency corporate bonds. The rating of foreign currency bonds of large corporation will most likely be capped by their sovereign ratings, which are often under single A.

Comprehensive Strategy

The public companies and PF’s should be the main target of the RCRA in the short-run; the rating service would help emerging economies to finance infrastructure investments. The RCRA can also reap rating fees paid by public companies or governments, but the further study is necessary to estimate how much this business is self-financed. Owing to the asymmetric fee structure, the fee on these public companies and PF’s would be lower than those of the global credit rating agencies.

The RCRA will also offer regular sovereign coverage, indirectly funded by the ASEAN+3. And the initial focus is not on private corporate bonds. The existing private credit

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rating agencies may protest such service in fear that the RCRA might crowd them out. However, the matter of fact is that the RCRA does regional scale rating while domestic credit rating agencies do national scale rating. Therefore, crowding out would not be a concern until a private RCRA emerges.

We aim to have the RCRA start from regional scale and move on to global scale. The initial focus should be on coverage expansion with respect to intra-region relative scale rating. In time, the RCRA acquire the Nationally Recognized Statistically Rating Organization (NRSRO) status in the U.S., build up reputation, progress in commercialization. Then the RCRA can achieve credibility in absolute scale rating as well.