Ukrainian companies need universally recognized credit ratings
Credit ratings are well known on the advanced financial markets as a tool assessing the borrower’s solvency. These ratings are determined by special agencies possessing the required methodology and rating scale. A rating agency analyzes the borrower’s financial status and traces all factors with regard to the borrower’s credit capacity. Credit ratings provide an answer to the important question: How probable is borrower’s failure to honor his/their commitments? In other words, they determine the probability of default.
Until recently, the level of development of the Ukrainian financial market did not envision active use of this risk-assessment tool, since market operators were not in the habit of making their loan commitments public knowledge. Ukrainian borrowers familiarized themselves with credit ratings when studying the possibility of accessing international capital markets by placing eurobonds.
Apart from government bonds, Kyivstar GSM was the first Ukrainian entity to issue bonds on a foreign market in 2002. Prior to this, Kyivstar had received credit ratings from two agencies, Moody’s and Standard & Poor’s, in perfect agreement with international practice. In fact, public placement of debt instruments without credit ratings is practically impossible even for the best known international firms. Independent rating assessment is precisely the way to draw the interest of a large number of investors to such securities.
In 2003, the world market situation gave an impetus to major Ukrainian banks and companies wishing to make loans there. Privatbank and Pivdenmash have borrowed $100 million and $107.5 million respectively. Now is the turn of large Ukrainian banks, such as Ukrsotsbank and Ukrsybbank that have just received credit ratings; also, of entities in the gas-and-oil sector (e.g., Naftohaz Ukrayiny, et al.).
The quickly increasing number of bearers of international credit ratings in Ukraine, however, is not adequately practically applied on the domestic market. This is explained by Ukraine’s low sovereign rating ceiling (B1 as per Moody’s and B from Standard & Poor’s), placing this country low on the international rating scale. It is a limitation binding on the first-rate borrowers (by Ukrainian standards), as well as on high- risk ones, meaning they cannot receive high international ratings. This, in turn, makes it impossible to distinguish between them. Under the circumstances, standard international practice prescribes use of a national credit rating scale, whereby sovereign rating is at the highest level and the borrowers are placed within the range of the scale, depending on their reliability (in Russia, Standard & Poor’s operates using both the international and Russian scales).
This approach makes it possible to better distinguish between the issuers of bonds on the domestic market, in order to determine the risks and set higher additional risk interest. At the same time, the most reliable borrowers with the highest investment ratings are allowed access to the least expensive sources of finance. Given a dynamic advance of the stock market and a sharp increase in the number of issuers, with the appearance of hitherto unknown borrowers on the market, both investors and bona fide borrowers are interested in an effective domestic credit rating system. Now that most businesses have appreciated the advantages of bond issues as a kind of loan, defaults by insolvent borrowers could undermine the investor’s confidence and stop the development of the market.
Only large banks having their own analysts can assess the risks and make effective investments in corporate bonds without using credit ratings. The market remains closed to small-time investors, nor does it have an infrastructure to secure the development of pension funds and joint investment institutions, where investments must systematically allow for the issuers’ financial stability and nonpayment risks. Credit ratings allowing quick assessment of various investment risks can attract more domestic investors that cannot make such assessments themselves; the same applies to foreign investors being wary of the Ukrainian borrowers’ reticence and unable to receive information about their actual creditworthiness.
The status of a credit rating system as part of the stock market infrastructure is one of the indices of a given country’s qualitative development. Work in this direction began in Ukraine in 2001 with the foundation of the country’s first Credit Rating Agency that introduced a national credit rating scale and rating procedures for Ukrainian banks, insurance companies, businesses, and municipal entities. In 2003, CRA assigned the first ratings to separate debt instruments, namely issues of bonds of the Arkada Fond Mortgage Company and the state joint- stock company Chornomornaftohaz. Now the potential investor can decide on investing in securities, bearing in mind CRA’s professional risk assessments. Last but not least, Arkada Fond’s E-series bonds were placed first after the First Financial Trade System’s tenders in 2003. Further progress of the stock market depends on an increase in the number of credit ratings and the investor’s better confidence in the debt instruments thus rated.
