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Credit rating no silver bullet: S&P

Standard & Poor's Ratings Services says it is supportive of the discussion on finance company ratings kicked along last week by a series of discussion papers. However it does not necessarily advocate a mandatory ratings regime.

Wednesday, September 6th 2006, 9:56AM

"A mandatory ratings regime can create a risk of 'rating shopping'", says Paul Stephen, S&P’s managing director, corporate and government ratings.

"We view credible credit ratings as one of the factors that can contribute to efficient self-regulation, but ratings are not a silver bullet," Stephen says. "A credit rating is not a substitute for adequate issuer disclosure or competent investor advice."

"Our experience in other markets indicates that, over time, investors create a demand for credible ratings and have the power to choose not to invest in debt instruments unless they are rated by a reputable rating agency.”

However, in the case of finance company debentures, the investor base is disparate and hasn't yet developed a strong lobby group. In this case, Standard & Poor's believes that financial advisors and the issuers should assume the responsibility to demand credibility."

Stephen says a regulatory approach is only the first step in achieving an efficient and transparent market where investors can make an informed assessment about the risk-return relationship.

“Investor and financial adviser education and the building of industry standards, such as standardising financial reporting measures, to create comparability, are also critical success factors.”

S&P is at an advanced stage of developing a new ratings scale that will aim to measure a finance company's creditworthiness relative to other participants in the sector.

"We have had an overwhelmingly positive response to our ratings scale from the finance companies we have spoken to, and are actively seeking support for the new scale over the coming months.”

Stephen says S&P will only launch if a critical mass of finance companies are willing to come onboard and support the heightened transparency offered by its new scale.

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