Credit rating agencies provide independent forward-looking “opinions” to investors on a debtor’s credit worthiness – an obligor’s ability and willingness to service debt in full and in time with respect to a specific financial obligation like a bond, or a class of financial obligations, or a specific financial program such as commercial paper issuance. These assessments are expressed in the form of a credit rating.
Credit ratings may be long-term or short-term depending on the maturity of the instrument, with a distinction being made between the ability to service foreign and local currency debt. Credit ratings may be subject to a downgrade should a rating agency consider that material changes in the financial condition of an issuing entity warrant a rating review.
Rating agencies play an important role in global financial markets: for investors, they aim to provide a mechanism to price risk and monitor exposure. For issuers, having a rating can increase the potential pool of investors thereby potentially lowering the cost of funding. Indeed by providing independent information to investors, rating agencies facilitate access to financing in domestic and international markets.
To date, only a fraction of African countries have obtained a sovereign credit rating from international rating agencies. As of June 2009, the list included Botswana, Cameroon, Cape Verde, Kenya, Lesotho, Malawi, Mauritius, Morocco, Namibia, Rwanda, South Africa and Tunisia. As domestic capital markets develop and there are more instruments to rate, it will be more attractive and cost-effective for the rating agencies to undertake ratings assessments in Africa. More importantly, in a number of African countries, local rating agencies have been successfully established helping to broaden coverage of the local markets.
The financial crisis has brought credit rating agencies under increased scrutiny, due to investment-grade ratings assigned to mortgage-backed securities based on sub-prime mortgage loans whose risks were underestimated. Indeed, critics argue that rating agencies’ models suffer from implicit conflicts of interest, in that they are paid by the issuers and brokers of the securities they evaluated, and more recently proposals for new regulation for their activities have been articulated internationally. These criticisms notwithstanding, it is likely that credit ratings will remain a critical part of the requisite information infrastructure.