Session: Corporate Bond Financing, Credit Risk, Ratings and Governance
Moderator: Professor Patricia Langohr, ESSEC Business School
Professor Katusnori Mikuniya, University of Tokyo & former commissioner of Financial Services Agency of Japan;
Professor Chao Chen, School of Management, Fudan University;
Mr. Blaise Ganguin, Head of Corporate Ratings-EMEA & Managing Director, Standard & Poor’s.
The session begins with the presentation of Professor Katsunori Mikuniya on the topic of the unchanging aspect despite the rapid changes of economic circumstances. During the economic crisis, the banking sector of Japan was seriously injured. There exist some difference on the impact of the crisis between Japan and other countries. In japan’s case, risk concentration was in banking while in the recent global financial crisis, risk concentration was in the market. As to the unchanging aspects from the financial crisis, Professor Mikuniya cited 4 important points: 1. the importance of governance in times of stability;2. the importance of corporate vision and philosophy; 3. the importance of the role of the CEO and board members; 4. the importance of virtuous combinations.
The session continued by the speech carried out by professor Chao Chen from Fudan University. He carries out his speech first aiming on the issues about corporate bond ratings.Corporate bond ratings are essential and determined by the probability of default. Professor Chen then cited a critical issue: The accounting quality matter much to bond rating. As to competition of rating agencies, the issues concentrate on the problems regarding financial market. Take China as an example, the stock holders suffer huge since the financial crisis. China’s corporate bond market has some unique features: china has 6 rating agencies, but each corporate bond is rated by just one agency; there exist 2 types of corporate bond rating: bond rating and issuer’s rating; bond covenants usually do not include financial covenants mostly are general covenances. Through the research on Chinese market, researchers found that very few corporate bond rating changes and bond issuer with better corporate governance such as less pensioner of control rights and cash flow rights have high ratings. To dig deeper, the research also found that better corporate governance is good for stock holders also bondholders and more dynamic and timely uprears of issuers’ credit quality. To conclude, Professor Chen answered problems on how to make bond market and credit quality better in China: better accounting quality and auditing quality for bondholder protection and competition can certainly improve the info quality of credit ratings of corporate bonds.
Mr. Ganguin opens his topic on borrower incentives.In the classic framework, the institutional investor incentive is at some point to return accrued revenues. Pension benefit deductions, private savings, insurance premium paid and sovereign wealth funds determine the rating of investor from the aspect of governments and corporate which generate the real economies. Mr Ganguin continues on answering the question: what a credit rating is and what it is not. The credit rating is a forward-looking opinion collaborative credit risk, an incorporate views relative likelihood of default and a reference to the timely payment of interest and principal. On contrast, a credit rating is not an investment advice, a recommendation to purchase, sell or hold securities, or a comment as to market price or suitability for an investor. What is more, it is not a measure of liquidity or market value nor a way of defining “good” or “bad” companies. More important, the credit rating should not be considered as an audit of the company or its auditors nor a guarantee of credit quality or of future credit risk. At last, for the covenants, it is a “nice to have” but no mitigation against bad credit. Financial covenants are limited to non-investment grade corporate credits. A well-designed covenant package could provide strong protection while a bad covenant package may limit recoveries.