Rate me! Rate me! So I can borrow money!

     Credit rating agencies are becoming more and more popular nowadays. We hear a lot about them. But do we really recognize their purpose? What makes them so powerful and essential in the economy of a country? Could their absence or presence affect a country’s performance? 

     Some credit rating agencies abroad give credit rating and grant loans to the Philippine government. An example of which is the World Bank. In the Philippines, different banks do that also. Different firms get evaluated and they are given credit ratings. 

     What do we mean by credit rating agency? Credit Rating Agencies worked for so many years on designing a simple and readily understandable system that would allow any investor to invest in international securities with which they were not directly familiar. 

        Firms are given credit ratings based on their financial statements, profit, liquidity, etc. The higher the rating, the more privileges the firm receives. One of the benefits is lower interest rate. 

Roles of Credit Rating Agencies

• Eliminates information asymmetry
• Provides quality assurance to unsophisticated investors about inherently complex financial products
• Increase the efficiency of the markets
• Lessen the cost for both borrowers and lenders
• Determines the interest rate and price ascribed to a particular tranche
• Provides information for regulatory purposes

"The Big Three"

    There are many agencies that assign credit ratings for different types of users like issuers, investors, broker-dealers, investment banks and governments. But there are those who rise above the rest and they are referred to as “The Big Three”. The big three consist of Standard & Poor (S&P), Moody’s and Fitch Group. Standard & Poor and Moody’s are based in the United States while Fitch has two headquarters – New York City and London controlled by the France-based Fimalac SA. The market share of the big three is 95% - Moody’s and Standard & Poor’s have a market share of 40% each and Fitch’s market share was around 14% to 15%.

 

The Philippine Rating Services Corporation

   In the Philippines, there is only one domestic credit rating agency accredited by the Securities and Exchange Commission (SEC) and the Bangko Sentral ng Pilipinas known as The Philippine Rating Services Corporation (PhilRatings). There are eligibility criteria that PhilRatings should pass before its accreditation like an established rating methodology, a pool of experienced analysts and that the CRA has an established record of independence, objectivity and transparency. Philratings was accredited by SEC after its compliance with the requirements under SRC Rule 12.  It implements a national credit rating system for the betterment of the Philippine capital market. 

       From everything that we have researched and read, we have concluded that these credit rating agencies are of big help to our capital market. Without them, the borrowers will have difficulty borrowing money and they will have to pay high interest due to high interest rates. Without them, lenders will not be certain of the firm where they will lend their money to. They, then, lessen the cost for both the borrowers and lenders. With their presence, too, there is order and organization in the market. There is enough information about the borrowing firm that is available to the lending firm.

·