Financial market participants want more credit ratings

• One third of respondents built up their trust in assessments by rating agencies over the past year, and those who grew less confident declined in number to 9%, while last year saw the latter outnumber the former, fetching 27% against 8% respectively. Some 43% of this year’s interviewees admitted that their confidence strengthened due to tightening state control over activities of rating agencies in Russia.

• Ratings based on the national scale have enjoyed a wider usage, thanks mainly to the corporate sector and public authorities. Nevertheless, they still give way to their international-scale peers.

• Over half of survey participants expressed dissatisfaction over the level of Russian market coverage with credit ratings, which is, again, contrary to last year, when most of respondents were of the opposite opinion. Notably, most of the dissatisfied this time were among those who use only ratings based on the international scale, unlike those focused only on the national one, whose satisfaction has grown instead.

• Issuers strive after credit ratings mainly to pump up their investment appeal this year, while the previous survey showed bond issuance as their key motivator. Explaining their agency choice, respondents equally pointed to the importance of agency’s reputation on the national and global markets.

Confidence in rating agencies has upped, especially among financiers

See the ACRA June 16, 2016 research “Regulation has made ratings more credible in Russia.”

Most of respondents (57%) trust or generally trust ratings assigned by agencies operating on the Russian market (see Appendix, Question 7), while 30% of interviewees saw their confidence climb over the past year. Last year, the survey showed a confidence increase only with 8% of participants (see Figure 1). Overall, compared to 2016, this year saw ratings post a more pronounced credibility rise across almost all categories of market participants, especially on the part of the financial sector and those respondents, who opted out of attributing themselves to any of the proposed categories. A year ago, financial market participants, by contrast, recorded the lowest trust growth of just 5% among all the groups. The share of interviewees with unchanged rating confidence remained persistently high at 62%. However, the proportion of those, whose trust waned, was down from 27% to 9%.

Confidence growth was mainly fueled by state control tightening over rating agency activities in Russia and by correct risk assessments of rated issuers (see Figure 2). On the other hand, cases of credit risk underassessment, delayed reaction by the agencies, and divergence between ratings and capital market indicators negatively affected market confidence (see Figure 3). Waning competition was not the key driver of doubts regarding rating objectiveness, although the proportion of market participants who consider the Russian rating market monopolized has climbed from last year’s 57% to current 78% (see Appendix, Question 15). This might well be a temporary trend reflecting protracted recognition of rating agencies by the regulator and related uncertainty around application of Federal Law No 222-FZ.

ACRA conducted the survey among financial market participants between March 24 and May 22, 2017, interviewing 200 respondents, with 60% of them representing the financial sector, 15.5% – the corporate sector, 6% – public authorities, 5% – private investors, 13.5% – other sectors. The previous survey saw 154 respondents interviewed.

Figure 1. Over the last year, your confidence in credit ratings assigned by agencies working on the Russian market…

Figure 2. What events occurred over the last 12 months that helped increase confidence in ratings assigned by agencies operating on the Russian market? (multiple answers were allowed)

Figure 3. What events occurred over the last 12 months that could challenge the objectiveness of ratings assigned by agencies operating on the Russian market? (multiple answers were allowed)

National-scale ratings enjoy a wider usage

The year 2015 saw the adoption of Federal Law No. 222-FZ “On the Activities of Credit Rating Agencies in the Russian Federation…” This law provides for a transition period needed for running the rating sector through reforms and switching from the international rating scale to the national one for regulation purposes. The transition period ends July 13, 2017.

The national scale reflects relative creditworthiness assessments of issuers operating on the Russian market.

Some 69% of respondents use credit ratings when taking investment decisions. Over half of them, i.e. 58%, take into account ratings based on both the international and national rating scales, while 36% of survey participants rely solely on international-scale ratings (see Figure 4).

The fact that most respondents base their decisions on ratings assigned under international and national scales simultaneously suggests that they regard these ratings as complementing, rather than substituting each other. In other words, investors want to know how well entities they want to invest in would fare in terms of relative credit quality on the international and national markets.

The proportion of those who rely exclusively on national-scale ratings has grown over the past year from 3% to 7%. Last year, these ratings were used only by the financial sector and those participants who did not attribute themselves to any of the proposed categories. This is probably related to the transition period and the fact that banking regulation employs the national scale. This year’s survey showed, that now all respondent groups, except private investors, use ratings based on the national scale.

Nevertheless, the proportion of international-scale advocates is still high. As the survey showed, they make up as much as 36% of interviewees.

Figure 4. You use credit ratings based on…

Disappointment with credit rating coverage of the Russian market has increased over the past year

The proportion of respondents who are not satisfied with the degree of rating penetration on the Russian market has increased over the past year from 47% to 61% (see Figure 5), with 43% of respondents noting with disappointment that only the largest issuers have credit ratings. The greatest discontent growth was observed among those market participants who use ratings only under the international scale, while those focused exclusively on the national one showed the opposite trend, i.e. their degree of satisfaction slightly increased.

Transparency of credit rating agencies has enjoyed an increase in satisfaction on the part of respondents. The survey revealed that the share of those happy or relatively happy with the disclosure level sustained by agencies climbed from 49% to 66% (see Figure 6).

Figure 5. Are you satisfied with credit rating coverage of the Russian market?

Figure 6. Are you satisfied with rating agencies’ information disclosure?

Issuers apply for credit ratings mainly to raise their investment appeal

According to the survey results, debt issuance this year is no longer the main incentive to obtain a credit rating (see Figure 7), as it was in 2016. Instead, a much larger proportion of respondents now strive for credit ratings in order to increase their investment appeal. In addition, the share of those who resorted to rating services due to regulatory requirements climbed from 22% to 27% this year.

Choosing a rating agency, issuers focus mainly on its reputation. Moreover, this year, the agency’s reputation both in Russia and on global markets was regarded by market participants as being equally important, as in both cases this factor won 4.2 out of 5 points (see Figure 8).

Figure 7. If your entity has a credit rating, the impetus for obtaining it was… (multiple answers were allowed)

Figure 8. Name the most important criteria for selecting a rating agency
(5 – maximum importance, 0 – minimal importance)

Appendix. Russian rating sector evaluation survey results

1. Respondent profile

1. What group of market participants do you belong to?

2. Is the company you represent a rating object?

3. Have you ever worked with rating agencies for obtaining a credit rating?

4. How well do you believe you know the field of credit ratings? For example, do you know the difference between international and national rating scales?

5. Do you take credit ratings into account while making investment decisions?

6. You use credit ratings based on…

2. A correct estimate of future risks

7. Do you trust ratings assigned by agencies operating on the Russian market?^[1]

^[1] The 2016 survey did not feature this question.

8. Over the past year, your confidence in ratings assigned by agencies operating on the Russian market

9. What events occurred over the last 12 months that helped increase confidence in ratings assigned by agencies operating on the Russian market? (multiple answers were allowed)

10. What events occurred over the last 12 months that could challenge objectiveness of ratings assigned by agencies operating on the Russian market? (multiple answers were allowed)

11. What would you attribute to rating agency mistakes that you know of in credit risk assessment? (multiple answers were allowed)

3. Strong influence on the market with substitution of state functions

12. Do you believe that ratings have an excessive impact on the Russian financial market?

13. Is it acceptable for you that ratings represent only an opinion of a rating agency and formally the latter is not responsible for them?

14. If you believe that rating agencies have a significant influence and yet formally are not responsible for their assessments, then, perhaps, the rating function must be reassigned to a state authority?

15. Could you gauge competitiveness in the Russian credit rating sector and assess whether it contributes to rating quality?

4. A “paradox”: ratings are used by investors, but issuers pay for them

16. Do you see a conflict of interest in the fact that issuers pay for their ratings themselves?

17. Who should pay for credit ratings?

5. Availability of credit ratings

18. If your entity has a credit rating, the impetus for obtaining it was… (multiple answers were allowed)

19. Name the most important criteria for selecting a rating agency (5 – maximum importance, 0 – minimal importance)

20. Do you think that services provided by credit rating agencies are affordable for Russian issuers?

21. Do you find rating agencies’ requirements for obtaining a credit rating acceptable?

22. Are you satisfied with the credit rating coverage of the Russian market?

23. Are you satisfied with rating agencies’ information disclosure?

24. What extra services and products by rating agencies do you use or would like to use? (multiple answers were allowed)