Pakistan Credit Pakistan Credit Securities and Exchange Securities - - PowerPoint PPT Presentation

Pakistan Credit Securities and Exchange Pakistan Credit Rating Agency Securities and Exchange Commission of Pakistan

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Tuesday, September 6, 2011

Regulators…IN ACTION Regulators…IN ACTION

CRAs, …… , play a critical “gatekeeper” role in the debt market…because of (their) systemic importance and the l l d ( h ) h reliance placed on (their ratings), ….the activities and performance of CRAs … , are matters of national public interest , as CRAs are central to capital formation, p investor confidence, and the efficient performance…of the…economy”

US Congress (Dodd‐Frank Wall Street Reform and Consumer Protection Act, January 5, 2010)

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A New Paradigm…

Dodd Frank

Integrity Skill Set

Clean Bill of Health …But need improvement Good….BUT Needs to be Better….

Dodd Frank Act DRIVEN Accountability

Focus on Enhanced Focus on transparency Regulatory Oversight

A NEW PARADIGM….in the making

Regulatory Oversight CRA Initiatives CRA Business Model

• Separation of ratings from non rating advisory functions

CRA Business Model

• Separation of ratings from non‐rating advisory functions
• Separation of business solicitation and execution

Governance Structure

• Independent directors of the board

Q lit f R ti P A l it i i Quality of Rating Process

• Annual criteria review
• Training of credit analysts
• Exception recommended where CRA’s size is small

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Region – An Overview

Soveraign Ratings [S&P]

Region – NUMBERS SPEAK N b 2010 2008 2000 2007 USA Numbers 2010 – 2008 2000 – 2007 GDP Growth (Average) 0.4% ~ 3.5% Pakistan GDP Growth (Average) 3.0% 5.5% NPLs (2010) 14.0% 7.0% India GDP Growth (%) 8.0% 7.0% NPLs (%) 2.7% 7.0% Bangladesh GDP Growth (%) 6.0% 5.5% NPLs (%) 7.9% > 15%

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India – A Proactive regulatory regime for CRAs CRAs

• ROBUST ECONOMY ‐ RATINGS STILL have to face the test of economic distress…..
• Significant penetration (CRISIL from less than 1,000 to above 11,000 ratings)
• An MoF‐led commission (Dr. K.P. Krishnan Report ‐ Dec 21’09) comprising all stakeholders

KEY Commission Findings – CLEAN BILL OF HEALTH FOR INDIAN CRAs Area under focus Recommendation (SEBI, RBI, Industry bodies) sat & deliberated Upon the CRAs….. Area under focus Recommendation Regulatory Oversight SEBI (to be the lead regulator) + Standing Committee (having other regulators as members) Transparency Disclosure of Fee in greater detail Transparency Disclosure of Fee in greater detail Conflict of Interest Separation of ratings from other CRA businesses Quality of Rating Process Process & Compliance audits (bi‐annual) Compliance with IOSCO US CRA regulations in 2007 India – CRA regulations in

trast….

US – CRA regulations in 2007 EU – still in process place in 1999 – Updated 2010

In Cont

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Bangladesh – Emphasis on high‐ li l i l i quality legislation

• Limited penetration of
• The Youngest in the

Limited penetration of Ratings…Expected to grow rapidly The Youngest in the Regional Ratings Industry

• Comprehensive

regulations & undertakings

• Enhanced

Disclosures

Mandatory Ratings CRA Ratings for regulatory

Robust Regulatory Framework

ALL IPOs issued @ premium Unrated Exposure penalized

purposes

• Regulator driven

(SECB + BB) business volumes

• Regulatory

Curbs on Rating Shopping

Unrated RW” 125%

• All Asset Backed

Securities (ABS)

• All Financial

Institutions (in Institutions (in case of an IPO)

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Pakistan – The CRA Default Experience Pakistan The CRA Default Experience

WHAT made CRA Ratings Falter

• Poor Economy

CRA F ll i C di Q li Real GDP Growth (%) 2008 – 2011 2004 – 2007 < 2.5% 7.25% CRA – Fall in Credit Quality

CRAs 2011 2010 2009 2008 & Before TOTAL

PACRA &

• Stock Market Crash & Closure

i idi h i k

Pakistan Economic Survey

PACRA & JCR‐VIS 8 6 1 2 17

• Liquidity crunch in money market
• Crumbling Law & Order

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PACRA - SNAPSHOT

First & Largest Credit Rating Agency of Pakistan First & Largest Credit Rating Agency of Pakistan

• Established in 1994 as JV between IFC, Fitch Ratings and Lahore Stock Exchange.
• Ab

1050 ti i i i i ti

• Above 1050 rating opinions since inception.
• Technical partner for NCR-Bangladesh (National Credit Ratings Limited).
• Founding member of ACRAA (Association of Credit Rating Agencies in Asia).

g ( g g )

• Drafted NBFI’s regulatory and framework for Bangladesh – World Bank assessment
• Participate actively in finance related forums – Staff College, LUMS etc.
• International Rating for Fitch.
• Market share 54% with over 60% share of Corporate and Debt Instruments.

P d t

PACRA JCR

T t l Products

PACRA JCR

Total

Financial Institutions 65 91 156 Corporates 44 29 73 Mutual Funds 62 47 109 Debt Instruments 61 30 91

• Ratings penetration: Low

Debt Instruments 61 30 91 Total 232 197 429

Ratings penetration: Low

• Corporates: Very Low

* Note the small size. FIR # 58 not included.

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1. Organizational Structure

Creditability

Managing Director RC (5 members)

2. Staffing

Business Management Criteria R & D 2 Rating Teams

2. Staffing

Core Team Composition and Expertise

Accountants 10 MBA/MSc 11 BScs 5

Quants

• 2 CFAs

Policy Development

• 3 dedicated members
• 4 Level-III candidates
• 4 Level-II candidates
• Multiple policies developed

Banking Exposure

• 2 professional bankers
• +50 years cumulative experience
• Credit, Risk, CFO, Ops

3. Pecuniary Matters

Entity Category Profitability Loan Size Asset Size Fees Small <200 <2,000 <4,000 350‐400,000 Medium <500 <5,000 >10,000 400‐450,000 Large <1,000 <10,000 <20,000 400‐600,000 Extra Large >1,000 >10,000 >20,000 600‐750,000 Profitability, Loan size and Asset Size are in PKR mln and fees is in PKR only

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4. Rating Process

PROCESS Creditability Cont.

Well populated RC Analytical Team independent of RC Enhanced documentation Independent Criteria & Research Rating Programs Compliance Audits Internal Code of Conduct Compliance Audits

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WHAT WE LOOK AT WHILE EVALUATING A CORPORATE RATING

Creditability Cont.

PACRA arrives at its ratings by evaluating the following factors:

• 1. Ownership & Governance - Owners credit history –business

acumen & financial strength. Governance structure –distinction in roles - board oversight - processes to avoid conflict of interest. Transparency and accountability measures. 2 Sponsor Support Sponsors commitment is studied and classified as “Core” Strategic” or “Non

• 2. Sponsor Support - Sponsors commitment is studied and classified as Core Strategic or Non

Strategic Investment”. Here we look at the sponsors ability & willingness to provide support in times of crisis.

• 3. Management Quality - Here we study the organizational structure, quality of management, its

bili d l i f ibili d ’ bili h i stability, delegation of responsibility and management’s accountability mechanism.

• 4. Systems and Controls - It is constituent of policies & procedures, control mechanism,

MIS (Reporting), technology

• infrastructure. A clue is taken to their appropriateness and

effectiveness.

• 5. Business Risk- Starting with factors such as current economy, sector performance, entity

positioning, diversification are studied. Then companies’ own strategy of performance is analyzed. 6 Financial Risk Detailed analysis of company capital structure and cash flows is

• 6. Financial Risk - Detailed analysis of company capital structure and cash flows is

undertaken.

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Conflict of Interest

Share holder No interference in the company’s affairs Board Board – Independent 6 (o/o 7) Board Board Independent 6 (o/o 7) Rating Committee RC – Independent No shareholder/BoD representation No reporting to BoD Well Populated RC Well Populated RC

• 3 Apex members

[ 2 independent of rating execution process, while 1 is in transition]

• Heads of Rating Teams (2)
• Analyst/s

d f i i d

• Heads of criteria and R & D

(on invitation) Standard Fee Structure Transparent – in Public domain Single Business Company Single Business Company

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Rating Shopping – Not prevalent Rating Shopping

Not prevalent

Year Total Switch PACRA to JCR JCR to PACRA Entity Rating Action Entity Rating Action National Downgrade FY2011 2 National Investment Trust Downgrade (1Notch) Escort Investment Bank Downgrade ‐ Short Term (1Notch) IGI Funds Upgrade (2Notches) Asia Insurance Upgrade (1Notch) IGI Funds (2Notches) Asia Insurance (1Notch) FY2010 3 House Building Finance Corp Maintain National Fullerton Asset Mgnt Maintain JS Investments (AMC) Downgrade (1Notch) ‐ ‐ FY2009 2 Al‐Baraka Islamic Bank Upgrade (1Notch) ‐ ‐ Dual Ratings ‐ Current

( No difference in rating opinion between two agencies)

1Faysal Bank Limited 2The Bank of Khyber FY2009 2 KASB Funds Upgrade (2 Notches) ‐ ‐ y 3Askari General Insurance Company Limited 4New Jubilee Insurance Company Limited 5East West Insurance Company Limited 6Pakistan Kuwait Investment Company (Pvt.) Ltd. 7Al Baraka Bank (Pakistan) Limited 8Tameer Microfinance Bank

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Timeline Timeline

TRANSITION TO DEFAULT (PACRA Defaults) Key Lifetime Ratings Prior to Default Rating DEFAULT Entity / Issuers Initial Highest One year Last Financial Institutions Network Leasing BBB BBB BBB BBB D Network Leasing

(Mar-00)

(Mar-00) (Jan-06) (Jan-06 (Oct-06) First Dawood Investment Bank Limited BBB (May-98) A+ (Mar-03) BBB- (Feb-09) BB (Nov-09) D (Dec-09) Industrial Corporates D C t Li it d A A BB CC D

Restructured within 90 days

Dewan Cement Limited (Jul-06) (Jul-06) (Dec-08) (May-09) (Nov-09) Maple Leaf Cement Factory Limited A (Oct-07) A (Oct-07) A- (Dec-08) BBB- (Dec-09) D (Dec-09) Shakarganj Mills Limited BBB+ (Feb 08) BBB+ (Feb 08) BBB+ (Feb 08) BB- (Apr 08) D (Nov 09)

Under Restructuring

(Feb-08) (Feb-08) (Feb-08) (Apr-08) (Nov-09) Pace (Pakistan) Limited A+ Jun-07 A+ Jun-07 A (May-10 A (Oct-10) D (Mar-11) Azgard Nine Limited A Apr-04 A+ Nov-08 A- (Mar-10) BB+ (Jun-10) D (Mar-11)

Under Restructuring

Agritech Limited A+ Jun-07 A+ Jun-08 A- (Mar-10) BB+ (Jun-10) D (Mar-11)

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Investor Confidence

R‐1 Make Rating Agencies strong

Investor Confidence

R 1 Make Rating Agencies strong

R‐1.1 Strengthen oversight and regulation R‐1.2 Critical Size

• Essential for structure
• Transparency
• Conflict of Interest
• Accountability
• Quality of people

R 2 Conflict of Interest

y

• Regulatory Oversight

R‐2 Conflict of Interest

R‐2.1 Curb “ratings shopping” R‐2.2 Transparent and equitable fee

R‐3 Self‐regulation

R‐3 1 Creation of ACRAA Pakistan Chapter R‐3.1 Creation of ACRAA Pakistan Chapter

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Market Development

The Fundamental Cannon that must be pursued by markets that aspire to be fair, transparent and affording low systemic risk is to ensure that corporates and businesses desirous of accessing “pubic money” must disclose not only their earnings but also their risk

Disparity in Returns…..??

A h i i b i d d f i l

R‐4 Protection of public interest ‐ Mandatory rating of:

PIBs 14% TAJ Co.

Authentication by independent professionals Earrings: Auditors Risk: CRAs

p

y g f

R‐4.1 New IPOs R‐4.2 Large cap companies (Asset size of over PKR 1bln) R‐4 3 Listed companies

15%

R 4.3 Listed companies

In a phased & progressive manner…… Nos. Company with asset size Within (month)

120

> PKR 5,000 mln 18 months

225

PKR 500 mln – 5,000 mln 24 months

218

< 500 mln 36 months 563 Banks, NBFIs, Funds not included

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Market Development Market Development

R‐5 Bond Market expansion

R 5 1 Put option R‐5.1 Put option R‐5.2 Stickiness with minimum “A” ratings

R‐6 Legislation in harmony with region

India Bangladesh India Bangladesh Higher risk weight (150%)1 and loan threshold level Penalizing unrated exposure with higher risk weight (125%)

R‐7 Mutual Fund Ratings / Rankings

near future. Applies to all corporate loans above INR 10mln 18

Efficient Economy Efficient Economy

New

PACRA – One of the few knowledge

• rganizations in

P ki

Grants New Markets

Pakistan PACRA – Ability to f Referrals to OTHER take up the role of a THINK TANK OTHER REGULATORS for developing the Ratings Business

Further expansion & development of CRITERIA; Sector Research

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THE NEXT STEP THE NEXT STEP….

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Response – SEBI revised guidelines

Q lit f Transparency

• Greater detail

Quality of Rating Process

Transition Studies in

Conflict of Interest

• Code of

Conduct

• Greater detail

in methodology

Studies in greater detail

• Nature of

compensation

• Record

keeping p arrangements

• Chinese Walls –

Rating solicitation & Production

• Ownership

structure structure

In response to the COMMISSION FINDINGS & RECOMMENDATIONS….SEBI issued revised guidelines for CRAs ‐ May 3, 2010 21