In a release yesterday, the Reserve Bank approved the three well-known international agencies to provide the ratings, which will become necessary for non-bank deposit takers (NBDT), including finance companies, from March 1, 2010.
The Reserve Bank has proposed that the mandatory ratings will cover the issuer rather than individual debt issues with a long-term and local currency focus.
In a paper published this month, legal firm Kensington Swan says the proposal to require ratings of the issuer was “adopted on the basis that rating agencies, when establishing an issuer's rating, generally take into account its relationship with its guaranteeing subsidiaries and related parties”.
“In setting out its preferred approach the Reserve Bank has stated that flexibility should be maintained to enable deposit takers to use credit ratings other than those prescribed in the regulations, according to their business needs,” the Kensington Swan paper says. “However, it is proposed those ratings should be used in addition to a local currency, long term, issuer rating which would be prescribed by the regulations.”
The Bank is also considering responses to a consultation paper proposing other regulations of NBDTs that will set new tougher related party rules and higher minimum capital requirements.
It is understood a number of NBDTs would have to raise a significant amount of new money to meet the proposed new minimums, which would require such institutions to hold 8 to 10% tier one capital depending on their rating status. Under the proposals NBDTs can apply for exemption from the mandatory credit ratings regime.
The new regulations should be in force by the end of June.
In its release yesterday, the Reserve Bank also said that “in most cases” corporate bond issues would not be caught by the new regime.
“Corporate issuers are entities that issue bonds, debentures or other debt securities and that carry on essentially non-financial business (eg manufacturers and utility providers),” the statement said. “The Bank expects corporates that are unclear as to whether or not they come under [legislation] to seek their own legal advice.”
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