Lessons from Fitch

International credit rating agency Fitch Ratings has been breaking into the duopoly held by Standard & Poor's and Moody's Investors Services in recent years. The agency now has 1400 employees in 50 locations, nine of which are in Asia. These include wholly owned subsidiaries, JVs and equity participations. FinanceAsia.com talks to Peter Jordan, Group Managing Director and David Marshall, Managing Director, Financial Institutions Asia about Fitch's strategies for Asia and the themes that are affecting their rating decisions.

How does the Asian ratings market differ from the markets in the rest of the world?

Jordan: The disclosure levels tend to differ here from the rest of the world. In the US there are quarterly filings and everything is quite transparent. In Asia the disclosure levels are getting a lot better, although it has been challenging in the past.

Also a change that has happened over the last few years is that Asia now finances Asia. Three or four years ago, a lot of the debt was placed externally but since then there has been a significant build up in the local buy side, who are doing a lot of the financing in the capital markets now.

Marshall: One obvious difference is that the US has more developed and sophisticated capital markets but Asia is rapidly closing the gap. Globally securitisation and structured product ratings are the most rapidly growing part of our business and this is also true in Asia.

What strategies do you have for increasing your share of the regional ratings market and differentiating yourselves from the other two ratings agencies?

Jordan: One of the main things that differentiates us is the quality of our research. There are lots of new issuers coming to market here, so the quality of the research report is very important. We like to think we are very comprehensive and detailed in these reports, because putting out very good research is a base to show our levels of expertise. We then get out actively with investors, investment bankers and issuers to begin a dialogue about our perspective on any particular industry.

There is a perception that Fitch is perhaps quicker to move on ratings upgrades and downgrades than the other two agencies. How do you respond to that?

Marshall: We hope we do that because we are aiming to provide a more timely service to investors. It is hard to measure if we actually are quicker than anyone else. But we want to be the first to identify and highlight turning points that lead to ratings changes. Investors want to see that from rating agencies.

Jordan: One of our key mantras is 'get the credit right'. If that means identifying trends early and making calls early that is what it is all about.

Can you explain your affiliate strategy here in Asia and how do you mitigate the obvious reputational risks that having affiliates presents?

Jordan: Our preference is to have wholly owned subsidiaries operating in the local markets. In some markets where we want an initial understanding of the local capital markets and local investor base, we think it makes a lot of sense to follow an affiliate strategy. We have such an affiliate strategy in Korea, where we have a small equity stake in Korea Ratings. In Thailand we own 40% of Fitch (Thailand). Our investment in Indonesia is just a very passive investment.

Our preference is to have 100% control for these things, but in many cases that just isn’t practical. Over time we will be increasing our stake in our various affiliates but it’s a function of what kind of opportunities there are to do that.

Marshall: Where you see the Fitch name on our affiliate, that indicates we have management control and the rating process is integrated into Fitch's decision-making system. It means we are happy with how they operate.

Moving onto bank ratings, how does Fitch feel about the New Basel Capital Accords (Basel II)? Specifically are you happy with the rules that make your ratings semi-regulatory arbiters of credit extension?

Marshall: Around the world our ratings are already to certain extent part of the regulatory framework for securities issues. For instance, the Hong Kong Monetary Authority already specifies certain rating levels to assess the liquidity of securities held by banks. I think with Basel II, arguably the ratings will become a little more important that they were before.

We aim for our ratings to be accurate so they can be put into the risk management systems of banks. The basic approach under Basel II allows banks to use external ratings for their systems. But there are so few companies that are rated, that it could be difficult for them. The ability of banks to be able to assess the credit risks within their own portfolios is definitely a concern for us. Generally, banks in Asia have tended in the past to take a too optimistic view of the credits in their own portfolio. We see banks in Asia usually being under reserved for potential losses, not over reserved.

Jordan: The trend towards Basel II has created a lot of opportunities for different companies in the risk management area to develop ratings models and scoring models. We have put together a separate affiliate called Fitch Risk Management to be part of that trend.

You spoke earlier about structured products, what are you seeing in this market, given that it has been growing rapidly over the past two years?

Jordan: It is growing rapidly and new products are being put together all the time. Globally it is a very large part of our company – probably just less than half of our overall business. It has exploded in the US and it is growing very quickly in Europe. In Asia we see people getting more comfortable with the structures and technology and the way transactions are put together.

Marshall: More importantly, in Asia the legislative frameworks are being put in place now, which have not existed before. Over the past few years Korea has been the big growth area in securitization for non-Japan Asia, particularly from the credit card companies. With recent developments in Korea and the bursting of the consumer bubble we expect the steam to go out of the Korean securitisation market in the short term but the prospects for the region as a whole are encouraging. Transactions will be completed this year in Korea, Hong Kong, Singapore, Taiwan, India, Indonesia, Thailand, Malaysia and even China. While many of the transactions are small and domestically placed it is a remarkable transformation from a few years ago.

What general themes are you noticing in the regional credit markets?

Jordan: The corporate market is coming alive again. There are a lot of transactions coming out. Korea has been a good market for us this year and we think it will continue to do well. Also we think South Asia is going to come alive over the next year in terms of corporate finance issuance.

We also see some big opportunities in the insurance sector, which traditionally has not been a large, rated market in Asia. But it is now growing very rapidly and we are looking to service that market and resource it more and more.

Marshall: The low interest rate environment has stimulated a lot of issuance. That has been good for the investment banks and good for us. Also the investor interest in high yield issues this year has been strong. The question is whether this will continue. We are reasonably optimistic about the outlook for economic growth and interest rates.

On the bank side, there has been big issuance of capital instruments of all kinds, subordinated debt, upper tier two deals and traditional products. In the last year we have seen regulators around the region allowing hybrids to be issued by banks, Korea being one example. Thus we are seeing a more diverse range of instruments coming out from banks, particularly from the more advanced countries, but also spreading to other countries as well. We expect this to continue.