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
2
What is a credit rating ?
What a rating is:
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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:
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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
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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.
4
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
5
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
6
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
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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
7
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
8
The Caribbean Perspective
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
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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
10
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.
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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
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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
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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
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THANK YOU
Caribbean Information & Credit
Rating Services Limited
info@caricris.com / www.caricris.com
Tel: (868) 627-8879
Fax: (868) 625-8871