The Role of Credit Rating Agencies in Developing Caribbean Corporate and Government Bond Markets

Caribbean Connect: High Level Symposium on CSME

Barbados: June 28-30, 2006 S.Venkat Raman CEO & Chief Rating Officer
Caribbean Information & Credit Rating Services Limited

Presentation structure

Key elements of bond market development The role of rating agencies

CariCRIS: A rating agency for the Caribbean CariCRIS & CSME

2

What is a credit rating ?

What a rating is:
A current opinion on the relative creditworthiness of debt An debt specific evaluation Aimed at differentiating credit quality A response to the markets demand for information

What a rating is not:

Not an audit of the issuing company Not a one time assessment of creditworthiness of the issuer Not a general purpose certification of goodness of a company Not a recommendation to buy, hold or sell the rated security

Key elements of bond market development

Issuer diversity Investor diversity Transparency and disclosure
Accounting standards to give true financial picture Corporate governance for predictability of corporate action Credit ratings to provide a comparative framework

Independent regulator Market infrastructure brokers, exchanges, settlement systems etc.

4

Role Of Rating Agencies In Debt Market Development At The Core

Creation of market for corporate credit and pricing of credit risk Readily usable risk indicator Tool for price-discovery, particularly for non-sovereign debt Creating of a proper yield curve Key information intermediary between issuers and investors Reduce information asymmetry between investors and issuers Facilitate comparison of investment options Facilitate pricing of credit risk Creation of secondary market in debt Creates liquidity in bond portfolios Leads to clarity in pricing of credit risk Makes structured debt issuances easier Building of financial awareness Best practices for company analysis, risk assessment
5

Role Of Rating Agencies At The System Level Widen access to funding for smaller businesses Compliments regulatory oversight
Prioritises regulators concern areas Prudential practises predicated on ratings

Effective self-corrective tool for managements & businesses Enhances trust and market confidence =>Expands savings pool
6

Role Of Rating Agencies - At The Application Level

Estimation of credit risk
Unbiased opinion arrived at through structured process Publicly available information Single, easily comprehensible grade

Basis for scientific risk management in banking sector

Better lending decisions, less NPAs going forward Fundamental benchmarking for IRB (Basel) approaches Better pricing of credit risk Improved loan portfolios lend strength to the banking system

Basis for securitisation

Unlocking liquidity in loan and asset portfolios

Rating agencies: Role Vs Obligations

Independence : Real & perceived
Ownership Governance architecture Financial independence Conformance to recognized codes of conduct

Transparency Integrity in analytics & operations Investment in market education & development
8

The Caribbean Perspective

The need for ratings in the Caribbean

Need for a vibrant bond market
Efficient financial intermediation and credit allocation Alternate funding source to banks Financial System Stability Liquidity & financial crises management

Caribbean
Small sized economies limiting local bond market development Businesses with appetite for funds and vice-versa Credit research in public domain relatively scare Sizeable regional economy Increasing evidence of cross border financing

The Caribbean needs an integrated, regional debt market A regional credit rating agency is a critical ingredient

10

CariCRIS
First Caribbean rating agency and worlds first regional credit rating agency Launched in 2004/2005 Fruition of an idea long espoused by CARICOM Promoted by regional Central Banks, CDB, IDB and other pan-regional institutions Shareholding by CRISIL Ltd., the 4th largest rating agency in the world and a subsidiary of S&P. Currently ratings being conducted in Barbados, Jamaica, OECS & T&T.

11

CSME and role of CariCRIS

Key Themes of CSME
Integration of Financial Markets Seamless cross-border financial flows Strengthen markets and facilitate unified regulation

CariCRIS role & benefits

Facilitating regional penetration of companies Increases transparency Facilitating cross-border investment/lending

Enhance credibility & independent profiling/risk analysis Increased access to funding sources

Strong impetus to capital market development; Energise the CSME initiative to create a unified debt markets Strengthen financial systems through diversified markets Investor Protection & better Market Discipline

Enhanced ability to compare credits across the region Reduces information risk and facilitates informed decisions

12

The Road Ahead

The Beginning : has been WELL DONE Rating Agency : needs to stick with its values and mission Policy Makers & Regulators: Need to act further to consciously build ratings into financial architecture Investors & Issuers : The leaders need to show the way
13

THANK YOU
Caribbean Information & Credit Rating Services Limited
info@caricris.com / www.caricris.com Tel: (868) 627-8879 Fax: (868) 625-8871