Capital Market Development Authority
Capital Market Development Authority
Capital Market Development Authority
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Brief history of Credit Rating
 Mercantile credit agencies emerged in the 19th century.
Mercantile credit agencies emerged in the 19th century
 In 1909, Mr. John Moody started to rate U.S railroad bonds
 Poor’s Publishing Company (later became S&P) issued its 1st g
rating in 1916
 Turning point for CRAs: Default of Penn Central on $82 million of CP in 1970 which created crisis of confidence in market
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Credit Rating
What is Credit Rating?
s ability &  The unbiased & independent opinion on borrower
The unbiased & independent opinion on borrower's ability & willingness to make timely payment of debt  Estimates the credit worthiness of an individual, corporation
 Objective is to differentiate credit risk in borrowers/issuers
 Credit rating is a forward looking exercise
Wh t a rating
What
ti is
i not:
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Not a one time assessment of creditworthiness of the issuer
Not a forensic audit of the issuing company
Not a guarantee of a company’s credit strength
Not a recommendation to buy, hold or sell the rated security
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Credit Rating in Maldives: Policy
 CMDA has the mandate under the Securities Act to License and 
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Regulate CRAs in Maldives.
As part of this effort the regulatory framework is put in place.
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The Capital Market Strategic Plan vision for CRAs.
ADB report on “Development on Efficient Financial Systems With Expanding Volume and Reach in Maldives recommends With Expanding Volume and Reach in Maldives” recommends the need for CRAs in Maldives.
Regulations for CRAs effective from June 2010.
Credit Information Bureau (CIB) in formation by the MMA
Credit Information Bureau (CIB) in formation by the MMA.
Regulatory framework for CIB is considered by MMA.
CIB and CRA complimentary institutions.
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Need for Credit Rating in Maldives
 Maldives capital market must be developed to provide an 
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alternative source of funding other than bank borrowings.
A thriving capital market is part of the enabling environment that promotes greater access to credit h
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information, i.e. credit ratings will facilitate access to credit.
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Promote credit discipline and responsible uses of credit
di di i li d ibl f di
Need for credit risk differentiation to assist debt issuers and credit providers.
Need to expand and diversify the economic base.
Expert credit opinions that are independent, objective and credible, are important.
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Overview
 More than 2000 private companies and 4 listed 
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companies
4 Dealing Companies and 6 Brokers
Around 40+ State Owned enterprises
Many family owned businesses
a y a y ow ed bus esses
5 Banks
5 non‐bank financial institutions (3 insurance companies))
Pension Fund, licensed Custodian
Central Bank and Securities Market Regulator
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Possible uses of Credit ratings in Maldives
 To establish a comparative and relative credit 
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worthiness of MSE listed companies.
E bli h di Establish credit worthiness of corporate borrowers.
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Establish credit worthiness (probability of default) of issuers.
issuers
Establish a credit worthiness of projects requiring project financing.
Pricing for governments divestments of its holdings in state owned enterprises.
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Limitations of Credit Ratings
 Ratings will not always predict default perfectly.
 Failure is a possible outcome for even a highly rated iinstitution.
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 Agencies do not adjust their ratings frequently as they take a long term view of a company s risk.
take a long term view of a company’s risk
 The accuracy of the information a ratings agency gets on a company is not independently checked by audit.
 The agency relies heavily on information provided by the company under review.
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Challenges
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Creating awareness on the concept of credit rating.
Capacity building and Human resource skill augmentation.
Limitation of size some critics.
Limitation of size –
some critics
Strengthening of the judicial system. Introduction of a Bankruptcy Act and other relevant laws and regulations
Creating an environment to enable banks to move towards project viability and cash flow based lending
Making audit mandatory for limited companies
Increasing the number of registered audit firms.
Making rating mandatory for specific instruments.
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Standard Credit Rating Process
 Receipt of Mandate Letter
 Request for information & Management visit etc.
 Observations and submission and formalization through 
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committees
committees.
Communication of Ratings awarded
Receipt of Rating Acceptance
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Issue of Rating Letter
Issue of Rating Rationale
Issue of Press release
Quarterly review of the financials/ ratings.
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Types of Credit Rating for Maldives
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Rating for debt market instruments
Corporate Governance Rating
Bank Rating & Financial Institution Rating
IPO Grading
Structured Finance Ratings
Issuer Rating & Corporate Rating
SME Rating
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Insurance Rating
R ti
Construction Rating
Sovereign Rating
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*This is not an exhaustive list 11
Ad t
S
i Rating
R ti
Advantages
off Sovereign
 Ease of access to international capital markets at better rates
 Credit rating of companies is determined by the rating of the country to which it belongs
 Increase in foreign investment in the country
 Reflects soundness of economic structure, growth prospects, monetary & fiscal flexibility etc
 Currently there is no published sovereign ratings for Maldives. C
l h i bli h d i i f M ldi
However, Maldivian companies are heavily borrowing from international banks.
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U
dit Ratings
R ti
Users
off C
Credit
Investors
 A simple symbol
 An independent, unbiased and objective opinion on risk
 To draw their credit risk policies and assess the risk premium p
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offered by the market on the basis of credit ratings
 To effectively monitor and manage investments in debt instruments
Issuers
 Wide access to funds ‐
Wide access to funds eliminates name recognition / access to non‐domestic markets
 More stable access to funds and financial flexibility
 Pricing and timing of issues correctly 13
Users of Credit Ratings
Regulators
 To determine eligibility criteria and entry barriers for different T d t
i li ibilit it i d t b i f diff
t types of securities /issuers
 To monitor financial soundness of organisations and promote efficiency in the debt market
 Risk management through risk weightage and capital adequacy
Financial Intermediaries
 Useful input in decisions relating to lending & investment Business
us ess counterparties
cou te pa t es
 For establishing business relationships  For opening letters of credit, awarding contracts  For entering into collaboration agreements
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T
R ti Agencies
A
i
Types
off Rating
Global Credit Rating Agencies:
 There are 10 CRAs currently registered
Moody's Corporation, USA
Standard & Poor
Standard & Poor’ss, USA
USA
Fitch Ratings, USA
A. M. Best Company, USA
Dominion Bond Rating Service, Ltd, Canada
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Japan Credit Rating Agency, Japan
Rating and Investment Information, Japan
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Egan‐Jones Rating Company, USA
LACE Financial, USA
Realpoint LLC, USA
LLC USA
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N ti l Credit
C dit Rating
R ti Agencies
A
i
National
National Credit Rating Agencies :
 Presently there 62 NCRAs across the world.
world
 There are 9 regulated CRAs registered in the South Asia.
 Credit Analysis & Research (CARE) (India)
 CRISI (India)
CR S ( d a)
 Investment Information and Credit Rating Agency of India (ICRA) India
 Fitch Ratings India
 Fitch Ratings (Sri Lanka)
 Brickworks Ratings (India)
(
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 RAM Ratings. (Sri Lanka)
 Credit Rating Agency of Bangladesh (CRAB)
 Credit Rating Information and Services (Bangladesh) In Maldives there are no CRAs licensed at the moment. However,
licensing work is in progress.
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Rating Symbol & Definition of a GCRA (S&P Ratings)
Symbol
Meaning
AAA
Highest & best quality rating. The obligor's capacity to meet its financial commitment on the
obligation is extremely strong
AA
The obligor's capacity to meet its financial commitment on the obligation is very strong
A
The obligor's capacity to meet its financial commitment on the obligation is strong
BBB
Adequate capacity to meet its financial commitments
BB
Inadequate capacity to meet its financial commitments
B
More vulnerable to nonpayment than obligations rated 'BB'
CCC
The obligor is not likely to have the capacity to meet its financial commitment on the obligation
CC
Highly vulnerable to nonpayment
C
Highly vulnerable to nonpayment & subject of a bankruptcy petition
D
An obligation rated 'D' is in payment default
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Salient features of Regulations
 CRAs are required to be licensed by CMDA.
 Licensing valid for two year and required to be 
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renewed.
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Renewal after performance evaluation.
S ffi i h i l Sufficient technical expertise and qualified staff.
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Comply with the IOSCO Code of Conduct.
Ad t ADB H db k I t
Adopt ADB Handbook on International Best Practices ti
l B t P ti in Credit Rating.
Conduct solicited (mandated) ratings only
Conduct solicited (mandated) ratings only.
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Way Forward / Summary
 Licensing a CRA shortly.
Licensing a CRA shortl
 Create market awareness  Develop the Maldives capital market by facilitating debt issues into the market and helping investors to make informed decisions based on objective credible j
credit opinion.
 Credit ratings are only one tool in assessing risk, and we advise investors to seek more information on d i i
k i f
i making wise investment decisions. 19
Thank you
y
For more information please call CMDA - 3336619
@
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E-mail: secretariat@cmda.gov.mv
Website: www.cmda.gov.mv
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