Credit Rating Grant

The MAS announced yesterday a grant to defray the costs of a credit rating for Singapore dollar bonds.

Surprisingly the grant is available to both foreign and local companies.

(See http://www.mas.gov.sg/…/Encouraging-credit-ratings-in-the-S…)

Qualifying issuers of SGD bonds who obtain credit ratings from an international credit rating agency (Fitch Group, Moody’s, and Standard & Poor) will be able to claim up to 100% of their credit rating expenses, subject to a funding cap of S$400,000 per issuer.

Singapore is probably the only country worldwide where a public subsidy is available even for private foreign borrowers. The move is laudable as it seeks to deepen its capital markets.

Hopefully the grant will encourage more issuers as well as more investors beyond the traditional pool of institutional investors such as financial institutions and funds.

In an announcement, MAS said it “strongly encourage all issuers in the SGD bond market to rate their bonds. This will help provide greater transparency to investors, broaden the pool of market participants, and grow the SGD bond market. We also urge investors to carry out proper due diligence and understand the credit ratings and other indicators of financial strength of an issuer before investing.”

The second part of the MAS statement bears repeating, investors really need to understand credit ratings and indicators of financial strength before investing. While no class of investors were specifically mentioned the advice was probably more relevant to retail individual investors who cannot afford staff looking at ratings and analyzing credit risks of borrowers on a full time basis. In this case reliance on an independent credit rating agency of repute is of immense help.

However complete reliance on credit ratings is also not advisable. During the Global Financial Crisis some supposedly investment grade bonds defaulted. The jury is still out on what went wrong. Some banks have been fined for mis-selling but the rating agencies must share some of the blame as well.

In other words caveat emptor still applies.

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