SEC introduces guidelines for credit rating agencies

The Securities and Exchange Commission has introduced a draft guideline for the operations of Credit Rating Agencies (CRA) in Ghana.

This is in furtherance of its long-awaited desire to facilitate and regulate the establishment and operations of credit rating agencies in Ghana, since declaring its intentions for close to a decade now.

The guidelines extend its regulations to the operations of foreign credit rating companies in other countries that wish to issue ratings for Ghanaian securities and entities.

Among the criteria for eligibility is that the foreign company must have an established branch or subsidiary in Ghana; the group as a whole is subject to external regulation that imposes appropriate standards on the operation of the CRA; those standards are followed by the branch or subsidiary in Ghana; and adequately enforced by the home regulator.

Wielding full rights and authority to either accept or revoke an application for licensing, the Securities and Exchange Commission (SEC) may deny an application, given that the conditions are not being satisfied by the Credit Rating Agency.

Under licensing of Credit Rating Agencies, the guideline stipulates that applicants shall, in addition to meeting other requirements have at least half of the directors of the Rating Agency with experience and qualifications relevant to credit rating and analysis.

Listed under the guidelines for corporate governance, the Ratings Agency shall form a Ratings Committee. The Ratings Committee will among other duties review the work of rating analysis; make final decisions on the ratings for issuance by the CRA; determine the methodologies used by the CRA; review methodologies no less frequently than a year; and review the ratings and transition report (when published).

Operation of Credit Rating Agencies

Typically, credit rating agencies exist to assess the creditworthiness of entities. This is in terms of having the capacity to settle their obligations to other parties in the financial market. Rating agencies provide risk measures for various entities, and this allows investors to understand the credit risk of various borrowers.

Following the model for analysing credit worthiness of entities, a set of indicators are considered by Rating Agencies. Broadly, these include overall financial performance indicators; liabilities and assets of corporate entities, and generally the overall performance of the economic environment within which the entity operates.

Credit ratings provide distinction between investment grade and non-investment grade. For example, a credit rating agency may assign a “AAA” credit rating as its top “investment grade” rating for corporate bonds and a “BB” credit rating or below for “non-investment grade” or “high-yield” corporate bonds.

As a corollary, the big three international credit rating Agencies- Standard & Poor (S&P), Fitch Ratings and Moody’s which control around 95% of the credit ratings in global financial markets have consistently provided credit ratings to corporate entities as well as governments’ debt securities on the capital markets.

Considering the impact of credit ratings, the current narrative suggests a harsh rating stance for debt instruments issued by African governments and corporate entities. Thus, funnelling the urgency for African countries to provide frameworks and guidelines for credit agencies in their territories.

Nigeria is the first country in West Africa to establish guidelines for credit rating agencies. Being operational for a while, this has therefore set the example for other African countries such as Ghana to consider the viability in providing guidelines for the operation of Credit Rating Agencies.