A rate cut expected for weak conglomerate units and public corporationsKorea’s financial regulators plan to hold a public forum to explore the introduction of a stand-alone corporate rating system on Feb. 9, heralding the imminent implementation of a program that alarms Korean conglomerates.
The envisioned stand-alone rating system is widely expected to weed out nonviable chaebol affiliates which have inflated their corporate ratings through links with parent firms with better ratings.
The government task force has finalized a schedule for the public forum, a procedure that usually aims to examine the industry’s reaction to the proposal before introducing a new regulatory system.
The new rating system is to help investors better check the viability of listed companies in general. Public criticism has long been mounted over the current rating system, especially the low credibility of Korean ratings companies.
“A new system is being reviewed to reflect the special environments that govern the local companies,” said an official at the task force, which was launched in October last year under the supervision of the Financial Supervisory Service.
Conglomerate units are expected to suffer a ratings cut following the introduction of the system, as many of them rely heavily on their parent firms to bolster their status. It is estimated that the credit ratings for such firms have been inflated by two to three notches. In worst cases, some companies with slashed low ratings would find it virtually impossible to issue corporate bonds.
The FSS has not revealed the timetable for the stand-alone rating system yet, with its officials hinting at the possibility that both the existing and new ratings would be publicly announced.
Korean investors have long been familiar with the inflated ratings in a market dominated by large-scale conglomerates with their sprawling affiliates through interlocking governance structures.
The distorted ratings system, however, has spawned skepticism about the fairness and credibility of local ratings agencies. Last year, the FSS investigated the top three ratings companies ― NICE Investors Service, Korea Investors Service and Korea Ratings ― in response to the growing public criticism over their dubious decisions that inflated the ratings of serveral debt-laden companies to investment levels.
Foreign investors interested in the Korean market in general and local credit ratings agencies in particular are also closely watching the adoption of a new system as much is at stake.
By Yang Sung-jin (
insight@heraldcorp.com)
