S&P rating scores well

Friday, November 17th 2006, 6:44AM

It's good to see Standard and Poor's make the positive decision to enter the market for rating finance companies and the like in New Zealand.

Regular Blog readers will know some of my views on various "offers" in the market - frankly some of them are rubbish.

The advent of S&P makes you think about what a good rating service should do.

The Reserve Bank alludes to some issues which are a good benchmark for ratings. In its Financial Stability Report it suggests that a rating needs to have the following attributes:

• Be formulated using a well defined process and transparent analytical criteria;
• besubject to regular monitoring of performance to ensure that they accurately reflect credit risks;
• be clearly explained to investors; and
• be comparable across and within sectors, both domestically and globally.

Of all the offers in the market I would suggest S&P is the only one which gets close to this.

Where it falls down is on the fourth point, that it should be comparable "across and within sectors."
S&P is proposing a new scale which has a different set of "codes" to the traditional A, B, C etc model.

A number of institutions have raised this as an issue. For instance how do you compare a finance company with a NZ1 rating versus a listed debt security with a BB rating?

At this stage the answer is not clear. Hopefully S&P will provide some more insight into this question soon.

Two other points worth making are these:
If you are looking at ratings, think about how they fit with the four criteria outlined above.

Also read the Ministry of Economic Development's discussion paper on issues facing the deposit taking sector. Give them your view on the issue of ratings.

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