In year 2014 June 9th, Malaysia ex- Finance Minister Datuk Seri Najib Razak announced that in the beginning of 1 January 2017, the mandatory requirement for credit rating will be remove. Before the year 2017, corporation which wish to issue bonds were required to seek for a rating from either Rating Agency Malaysia (RAM) or Malaysia Rating Corporation (MARC). But start from year 2017, the ruling provided flexibility to issuers a choice whether or not opt for credit rating. In this report I would like to discusses is the removal of the credit rating requirement for bonds good for the industry.
Based on the Credit Rating Agency Survey Result, 2014 that done by CFA Institute, it shows that 67% of the members agree that investors have become more cautious regarding the use of credit rating done by the credit rating agencies in their investment processes. (CFA,2014) In another words, instead of rely on the credit rating to make investment decision, investor should do their own research too. Removal of the credit rating requirement is an opportunity to investor reduce the reliance on credit rating and allows them to do their own research. One of the best example is subprime crisis, investors loss their investment because of over- reliance on credit rating.
Besides, the removal of mandatory credit rating requirements will benefit certain companies that are larger capitalized, reputable and with good track records for example, Genting Malaysia Berhad. Because of the removal of credit rating requirement, such companies are expected to issue bonds at a much faster pace through the bond market Not only that, reputable companies also able to save cost when issuing bond. It is because reputable companies are able to attract investor with or without having credit rating as marketing tool to enhance its image. Although seeking for credit rating may increase the image of the company, a reputable company are well know enough to attract the investors therefore there is no necessary for a reputable company to spend extra money to enhance its image by seek for rating from rating agencies
In additional, rating is done based on the present and the past historical data of the company. And we cannot assume the history will repeat itself, prediction of the company health through rating is temporary and anything can happen after the rating agencies had rate to the company. Therefore, rely on rating for future results may result mispresenting the risk on the investment. Many changes take place in economic environment, political issues and government policy which directly affect the performance of a company.
One the other hand, as mention that credit rating can act as a marketing tool in improve a company image. Companies with rated by credit rating agencies are allow to improve their own image and create a better image in dealing with its investors. Generally, investors feel confident in company with higher rating. Thus, a company that are not reputable but having a higher rating it still able to attract investors. The reason behind was simple, because of the help from credit rating, it able to increase the awareness from the public.
Furthermore, credit rating provide motivation to the company for growth as the promoters feel confident in their own effort and are encouraged to undertake expansion of their operation or new projects. (Smriti Chand) Companies which wish to be rate are motived due to their wish to obtain a higher credit rating, because with a higher rating it allows mobilize funds from public easily. Hence, issuer are motivated to growth for their business in order to promote confident to the investor.
Last but not least, although the credit rating requirement had been removed, there are company still willing to be rated by credit rating agencies. The reason is because credit rating would affect the cost of borrowing. The most creditworthy issuers which the blue chip companies are benefited in the rating. Consequently, a bond with higher credit rating always carrying the lowest yield. Since the risk of default is low, the compensation made by the issuers to the lender (bondholder) are low as well, which explained why companies still willing to be rated.
In conclusion, I decided to take a stand against the removal of mandatory credit rating. It cannot be denied that by removing the mandatory credit rating, it not only provides advantages to the issuers as well as the investors. However, in the same time it provides disadvantage to the issuers and investors as well. Every coin has two sides, everything has its pros and cons, we cannot judge an issues just based on one side. Therefore, there was two sides for bond industry as the credit rating requirement had been removed.
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