HONG KONG, 11 May 2020. Pengyuan International has released one research report, “Are Ratings All the Same: A Comparative Analysis of Domestic and Global Ratings”.
This research selects samples of China’s corporate issuers and asset-backed securities (ABS) with domestic and global credit ratings to compare and analyse the differences in the two rating scales and the reasons behind such differences. Our findings show that:
For corporate issuers, the ratings of domestic CRAs are 8.69 notches higher on average than those of global CRAs. Compared with domestic ratings, global ratings demonstrate more significant variations in different firm types and industries, and a better discriminatory power. The results of the Receiver Operating Characteristics (ROC) curve analyses show that global ratings are superior to domestic ratings in terms of ranking power for credit risks, but domestic ratings still provide valuable information on credit risks.
Domestic and global ratings on asset-backed securities (ABS) products are relatively similar, with the former marginally higher than the latter by around two notches. Senior tranches and ABS with standardised underlying assets demonstrate even smaller differences between domestic and global ratings. We believe that for ABS products, the rating symbols in domestic and global rating scales represent relatively similar creditworthiness compared to the ratings for corporate issuers. In addition, both domestic and global rating agencies adopt quantitative-based rating methodologies for ABS products, leaving the rating results more objective and comparable.
Domestic ratings demonstrate a lack of consistency and comparability across various industries and products. For instance, as an indicator of credit quality, the credit spreads differ markedly for corporates with the same domestic credit ratings in the property sector and non-bank financial institutions. In addition, corporates and financial institutions have far higher domestic ratings than global ratings, but Credit ABS have relatively similar ratings between their domestic and global ratings. This means that even if Credit ABS have the same domestic credit ratings as some corporate issuers, their credit risks may be widely different from each other.
Assigning domestic and global ratings simultaneously to an issuer or bond will facilitate the research and investment activities for both onshore and offshore investors. Firstly, global ratings provide onshore investors with a more differentiated credit-risk ranking. China’s bond market needs a more granular ranking of credit risks to improve credit pricing and assist investors in decision-making. In addition, foreign investors are more familiar with the global rating scale, which can provide a useful reference and guidance for their investments in China’s bond market. On the other hand, the domestic-rating scale conforms to the ecosystem and practices in China’s domestic bond market. After all, investment guidelines and risk-management systems for domestic investors are constructed on the basis of domestic rating scales.
Ke Chen, PhD
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