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International credit rating alternative to big three on horizon.

Credit ratings have come to play an increasingly critical role in the global economy. Prior to the worldwide financial crisis, agency ratings helped determine an entity's creditworthiness, but they received little attention from the public. The global financial crisis demonstrated their importance and caused many people to question how the world rates its creditors.

The belief that there's a better way to form credit ratings drew together three entities from different parts of the world in search of an answer. Existing credit rating systems have failed, and experiences and lessons learned from the global credit crunch should lead to reform of the international rating system, according to the Universal Credit Rating Group (UCRG), a partnership among China's Dagong Global Credit Rating, U.S.-based Egan-Jones Ratings Company and Russia's RusRatings.

"Credit ratings are indispensable in global economic operation, and it is obvious that the current rating system needs reforming and ... new thinking," said Guan Jianzhong, UCRG chairman and president of Dagong Global Credit Rating, at the platforms 2013 launch. UCRG will challenge the dominance of the major rating agencies that were blamed for contributing to the global financial crisis and strive to provide impartial ratings, Jianzhong said.

Plans for UCRG were first announced in October 2012, but it was officially founded in June 2013 in Hong Kong, based on its stature as a major global financial center and proximity to the world's most dynamic economies. Coverage about UCRG since then has been sporadic, however. On Jan. 13, Aleksandr Ovchinnikov, managing director of RusRatings, told Sputnik News Agency, UCRG is in its final stages of setup and would issue its first rating this year. He also stated that accreditation with a local regulator was underway. To date, the partnership still seems to be under construction.

What if anything UCRG will mean to international investors and the world at large remains to be seen. But it may help to understand what the organization is and why some people believe it is necessary.

What It Is

On Oct. 24, 2012, in Beijing, UCRG defined its mission as one that promotes reform of the international credit rating system, develops new international credit rating criteria to reflect laws that govern the development of credit-based economy and represent common interests, establishes independent international supervision for credit ratings and disseminates impartial rating information for the world. It identified its primary objective as providing independent, locally nuanced credit ratings for sovereign states and municipalities, local and multinational corporations, sovereign wealth funds, and individual credit products and portfolios.

UCRG brings together three ratings systems, and each partner has an equal share of the venture, which will work toward adding other local rating agencies. It will not consider the worlds three largest credit rating agencies--Fitch Ratings, Moody's Investors Service and Standard & Poor's Financial Services--for membership "because there is a big divergence between the principles and positions we respectively follow," Jianzhong said. The three agencies have been criticized for allegedly being overly generous to U.S. and EU clients and biased against developing or emerging economies.

UCRG aims to serve as a multilateral independent international credit rating agency comprised of private organizations whose responsibilities don't conflict with credit ratings and which don't represent the interests of any particular country or group. To accomplish these goals, UCRG announced it will use a dual-rating system where a new sovereign-free rating system co-exists with a current sovereign-owned rating system, creating a form of checks and balances. "We believe this new regime will deliver greater transparency and objectivity in assigning ratings, while developing unified credit rating criteria that can be applied globally," Jianzhong said. Ultimately, UCRG would like to dislodge the three Western firms, which control 95% of the world ratings market, from their current hold on the market.

"Introducing a fundamentally different way of providing global credit ratings is a daunting challenge," said Richard Hainsworth, UCRG CEO and president of RusRatings. "Our goal is not to replace the global rating agencies. We aim to offer another framework that brings in new geographic perspectives when evaluating the creditworthiness of corporate and sovereign debt."

The founders initially announced they would create the system's framework, including methodologies, by 2020 and then set up rating operations in participating countries to provide credit risk information on the world's economies by 2025. According to its Linkedln listing, UCRG, which has the support of Russia's and China's governments, is the world's only global credit rating agency headquartered in the Asia Pacific. Although it lists its website as www.ucrgratings.com, as of press time, the link is not yet operational.

Why Some Believe the World Needs UCRG

The global crisis magnified the need for transparency, competition and an even playing field in credit ratings, according to some news reports. The impetus for seeking a credit rating alternative grew out of the belief that the current system broke down and economic recovery depends on reforming it, said Sean Egan, UCRG director and previous president of Egan-Jones.

The international community should take ownership of such reform, Jianzhong said. Methods should reflect competing interests and cultural viewpoints, Hainsworth agreed. "Capital providers in the form of Asian and some Middle Eastern institutions have not had a seat at the table and have been terribly burnt as a result," Egan said.

At the initial press conference, Jianzhong identified several problem areas UCRG sees with the current system:

* It protects the interests of the largest debtor countries.

* It applies politicized and ideological credit rating standards.

* It lacks oversight and supervision.

* It is not objective and encourages the trading of rating grades as commodities.

UCRG argues the current system's design lacks impartiality and doesn't produce responsible and reliable ratings. The three partners consider themselves independent rating service providers that don't represent the interests of any particular country or group. For example, nationally recognized statistical rating agency Egan-Jones is paid by institutional investors--not by issuers, according to its website.

The financial crisis eroded the trust markets placed in credit ratings agencies due to inherent conflicts of interest and misaligned incentives, Egan said. This venture brings an international perspective to the ratings and provides greater accountability, he said. "There's going to be a variety of perspectives included as a result of a variety of ratings firms being part of it." A "self-policing" mechanism will assess contributors' ratings over time. It will serve as "a check on some major assumptions ... It's obvious that the supervision of the rating agencies to date has fallen far short of the mark. It's been rather geocentric, and it's time to get on an even playing field."

Will It Make a Difference?

Opinions regarding UCRG's viability vary among financial experts. In theory, some economists support its concept, but caution it will take time for it to establish credibility. "UCRG is a new unit and as such we do not have much experience with it," said Camilo Gomez, Ph.D., senior vice president Quantitative Analysis for CreditRiskMonitor and a panelist at the upcoming 119th Credit Congress. "It's not surprising to see a new global entrant in the field, especially given its focus on the important emerging economies like Asia and Russia, along with the general uncertainty of currency shifts and the volatile global economy. We too have seen increasing interest from our customers on monitoring global businesses and risk. It will be interesting to see how UCRG develops."

More ratings agencies could promote reform through competition, some supporters said. "Anything to introduce greater competition--it will encourage everybody to have better discipline," Avonechith Siackhachanh, senior advisor in the Asian Development Bank's Office of Regional Economic Integration, told CNN. "But I think it will take time for this new rating agency to establish itself."

The big three agencies also have weighed in regarding UCRG. "Fitch believes in healthy competition because markets benefit from a diversity of credit opinions," Fitch Ratings spokesman Daniel Noonan told NACM. "New entrants must build a reputation not only for analytical rigor, but for independence and effectively managing potential conflicts of interest." In February 2014, a Reuters story reports both S&P and Moody's acknowledged similar views. "We support healthy competition in the market for credit ratings, representing different business models and structures, and a level regulatory operating environment in which everyone competes on the basis of ratings quality," said Michael Ye, managing director and regional head of Asia-Pacific. A spokesman for S&P added, "Ultimately, it will be investors who will determine which ratings are credible and useful."

In general, "it won't matter," a U.S. economist, who wished to remain anonymous, told NACM. "It will add little value. Credit rating agencies outside the U.S. are typically viewed skeptically. It would take a lot of time and effort for a new agency to gain a foothold. Even if it were a domestic agency, it would take a lot for it to be globally recognized."

To date, "UCRG is really just a nascent effort to bring together international credit rating systems to offer an alternative voice to the other credit rating agencies," said Egan in an interview with NACM. "At this time, there aren't any ratings issued."

Diana Mota, NACM associate editor, can be reached at dianam@nacm.org.
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Title Annotation:SELECTED TOPIC
Author:Mota, Diana
Publication:Business Credit
Date:Apr 1, 2015
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