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Korean credit agencies hit by allegations of favoritism

Updated : 2014-06-23 17:51

Korean credit agencies hit by allegations of favoritism

By Park Si-soo
Korean credit rating agencies are under fire for giving “overly favorable” assessments to domestic companies.
There are many companies, including Hyundai Motor, Kia Motors, KT, SK Telecom, S-Oil and POSCO, whose credit ratings assessed by Korean agencies are six notches or more higher than those given out by internationally recognized agencies such as Moody’s, Standard & Poor’s (S&P) and Fitch.
GS Caltex shows the biggest gap of eight places, raising questions about how seriously investors should take Korean agencies’ evaluations into consideration when making decisions, according to CEO Score, a business consulting firm that compared 33 Korean firms’ credit ratings suggested by major agencies at home and abroad.
Three domestic agencies subject to the research were Nice Investors Service, Korea Investors Service (KIS) and Korea Ratings.
The comparison was carried out shortly after KIS downgraded POSCO’s credit rating to AA+ from AAA two weeks ago. The event triggered controversy because the reasons it cited to justify its ratings cut were the same the world’s three most creditable rating agencies ㅡ Moody’s, S&P and Fitch ㅡ cited two years ago to lower the rating of the country’s biggest steelmaker.
“It has been many years since we began to take local agencies’ reports as just a reference, not something we take seriously before making a decision,” a stock analyst said on the condition of anonymity. “We have our own credit ratings of companies that are not assessed by creditable overseas agencies. We usually make a decision based on this.”
Park Joo-keun, president of CEO Score, pointed out the limited freedom of domestic rating agencies in terms of evaluations of Korean companies.
“These agencies make a living from the fees Korean companies pay in exchange for having their credit rates evaluated,” he said. “In this income structure, they may feel pressured to give some favors to their clients.”
A local credit rating agency officer refuted the allegations.
“It’s not true that our evaluations are favorable to (Korean) companies,” the officer said. “Our evaluation system has been proven to be fair and balanced.”
A credit rating helps investors assess cash flow, business prospects and the potential investment value of underlying securities, bonds and other debt paper. Credit rating agencies assist investors, regulators and others in identifying price discrepancies, security risks, risk management, capital allocation and trading.
CEO Score said there are more than 10 big Korean companies whose average credit ratings suggested by the three domestic agencies are five or more notches higher than the average ratings of Moody’s, S&P and Fitch.
Hyundai Motor and KT equally enjoy the highest rating of AAA among domestic agencies, while their ratings fall by seven notches to BBB+ among the overseas agencies.
SK Telecom is also assessed at AAA here, but it falls to A- overseas. Kia Motors, Lotte Shopping, E-Mart, POSCO, LG Chem, S-Oil and Hyundai Steel are similarly rated.
The country’s second-biggest oil refiner GS Caltex has the biggest gap of eight notches, being assessed at AA+ domestically and BBB- abroad.
Meanwhile, the Financial Supervisory Service (FSS) plans to impose hefty penalties on local credit rating agencies for inaccurate ratings that benefit their corporate clients.
The FSS said last week that local agencies were found to have “sold” favorable grades and delayed unfavorable ratings on corporate clients in return for their business.
The regulator plans to finalize its punishment of domestic credit rating agencies during a meeting next month.

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About bambooinnovator
KB Kee is the Managing Editor of the Moat Report Asia (www.moatreport.com), a research service focused exclusively on highlighting undervalued wide-moat businesses in Asia; subscribers from North America, Europe, the Oceania and Asia include professional value investors with over $20 billion in asset under management in equities, some of the world’s biggest secretive global hedge fund giants, and savvy private individual investors who are lifelong learners in the art of value investing. KB has been rooted in the principles of value investing for over a decade as an analyst in Asian capital markets. He was head of research and fund manager at a Singapore-based value investment firm. As a member of the investment committee, he helped the firm’s Asia-focused equity funds significantly outperform the benchmark index. He was previously the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. KB has trained CEOs, entrepreneurs, CFOs, management executives in business strategy, value investing, macroeconomic and industry trends, and detecting accounting frauds in Singapore, HK and China. KB was a faculty (accounting) at SMU teaching accounting courses. KB is currently the Chief Investment Officer at an ASX-listed investment holdings company since September 2015, helping to manage the listed Asian equities investments in the Hidden Champions Fund. Disclaimer: This article is for discussion purposes only and does not constitute an offer, recommendation or solicitation to buy or sell any investments, securities, futures or options. All articles in the website reflect the personal opinions of the writer.

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