SEC sets rules for credit rating agencies

The Securities and Exchange Commission (SEC) has drawn up rules for credit rating agencies to ensure that they provide an informed and balanced assessment of an issuer’s credit quality.

A credit rating agency refers to any independent body engaged in the business of assessing an issuer’s ability to pay interest and repay capital in a timely manner. Credit rating is required for all issuers of commercial papers.

Based on the proposed rules drafted by the SEC’s Corporate Finance Department, credit rating shall be required for all companies issuing commercial papers worth P51 million and above.

The rules also provide that credit rating agencies have to be accredited by the SEC and must disclose their criteria used to rate securities as well as their limitations.

To get accredited, a credit rating agency is required to maintain a minimum paid-up capital of P50 million and submit to the SEC various documents, including the list of its shareholders and their corporate affiliations, guidelines pertaining to ownership structure and conflicts of interest, a written code of conduct to insure the independence of rating specialists and a copy of a model written agreement with issuers.

To ensure that a rating is accurate during the course of a normal business cycle of an issuer, a credit rating agency shall monitor each issuer on a continuous basis and shall raise or lower ratings to reflect significant changes in credit quality.

A credit rating agency shall advise an issuer in advance of any proposed change in the rating, provided, however that the former may withdraw a rating without prior notice based on lack of information or receipt of material adverse information.

If a credit rating agency decides to downgrade a rating, it shall withdraw the rating upon request of the issuer, but only after it has been publicly disseminated. Issuers shall not suppress a rating change.

The SEC said the ratings must be based on the following considerations: likelihood of default by an issuer, nature and provisions of the debt obligation, economic risk, industry risk, issuer’s market position and business diversification, management and strategy, financial risks, capital structure/leverage and financial flexibility.

Credit rating agencies are required to keep whatever information received from an issuer confidential. Any officer, director or staff of a credit rating agency that gets hold of non-public material information about the issuer whose securities are being rated are banned from trading that security.

Doing their part in promoting the development of the industry, five credit reporting companies have banded together to harmonize their credit gathering standards.

The five credit reporting companies – CIBI Information Inc., Equifacts Information Inc., Asian Credit Consultant & Business Services, First Asia Corporate Business Connection, and Excellent Credit Information Inc. have formed the Philippine Credit Reporting Alliance Inc. (Philcrea) to formalize their union.

To guide the members in carrying out their responsibilities to the public and the government, a code of business conduct and ethics was drafted by Philcrea.

At present, the SEC requires only issuers of commercial papers to submit together with their registration statement a credit rating report.

The move is to enable borrowers to obtain attractive credit terms by offering the market a precise definition of the credit risk associated with a borrower’s issue throughout its lifetime.