Identifying the risk

With the introduction of the credit rating service Caricris, Rory Rostant reports on how investors may now be more willing to do business in the Caribbean

Take the best blue chip companies across the Caribbean and now ask any of the top global rating agencies - Moody's, Standard & Poor's or even Fitch - to give them a credit rating. Or ask them to compare one regional borrower with the next.

Chances are they are going to come up short on any scale used, simply because these global companies aren't equipped with the information to do so.

That's where Caricris, Caribbean Information and Credit Rating Services, based in Trinidad & Tobago, comes in: to give an insight into the risks associated with lending to particular companies and countries across the region.

In global business jargon, a credit rating comments on the capacity and willingness of a debtor to pay its obligations in full and on time, or put another way, it's an opinion on the credit worthiness of a debt issue or issuer.

A foreign investor looking to diversify and which perhaps wants to add the Caribbean to its portfolio would only see a clutch of global ratings, all at the lower end of the spectrum, says Caricris CEO and chief ratings officer Venkat Raman.

A Caribbean rating agency, analysts say, would differentiate debt issues in the region, differences that would not normally be picked up by global rating agencies. It would also provide the debt markets with the facility to compare credit worthiness of Caribbean borrowers with the credit worthiness of other borrowers in the region.

When compared to larger, stronger economies and global corporations, ratings given by global agencies might not be giving a true picture.

Prior to the launch of Caricris, the only credit rating agency available in the Caribbean were the global ones. 'For regions across the Caribbean, which comprise many small national economies, global scale ratings are inadequate,' says a Caricris document, adding that a regional rating scale is able to put local and regional issues in context, unlike a global scale rating.

Raman says that from having talks with Miami investors, they indicated that this was the type of information they needed to move ahead. He said their position was 'yes, we want to see the global ratings but we would also want to see those of the local rating company'.

'Who knows, we are probably driving away a lot of investors because they don't have the information on the ground,' he said.

Filling the void

Set up in October 2004, Caricris is the world's first regional scale credit rating product whose stated aim is to fill the rating void left by the big global guns.

Caricris' shareholders include central and commercial banks across the region, multilateral financial institutions like the Caribbean Development Bank (CDB) and the Inter-American Development Bank (IADB) as well as insurance and mutual fund companies.

These diverse entities put together US$3m to start the company through a private equity placement in January 2004, which was oversubscribed. The technical consultant to Caricris, Crisil, the first rating agency to be set up in India in 1987, and the fourth largest ratings agency in the world after S&P, Moody's and Fitch, was hired because of its experience in working in emerging markets like Malaysia and Israel.

Caricris also sought to win over the confidence of investors by following global best practices: a ratings committee made up of regional experts which will be independent of the board of directors.

For most Caribbean investors, the relevant frame of reference is often limited to a country or the Caribbean region, and the feeling is that what would be useful is a benchmark whose credits compare with one another, either within the Caribbean or within each country.

Furthermore, debt issues are rated in relation to one another, so when international ratings agencies rate Caribbean debt on a scale that includes developed countries like the US, that usually means that issues from the region are pushed down the scale.

Caricris, Raman says, is not looking to replace the global ratings but complement it. 'What we are trying to do is bring a level of comparison to the investor by making the frame of reference the Caribbean, not the world's,' is how Raman puts it.

'For global investors, global scale ratings are significant but for those who want to come to the Caribbean, what is the point giving a comparison with the rest of the globe?' he asks. Foreign investors, too, looking at the Caribbean will also objectively want to compare credit in making investment decisions.

Trinidad & Tobago Central Bank Governor, Ewart Williams, believes an entity like Caricris was long overdue and notes that the financial sector in the Caribbean has been growing very rapidly.

In Trinidad & Tobago, in 2004, there were some 60 mutual funds with more than TT$20bn under management. Over the past five years on the market for corporate and sovereign debt, there have been close to 200 bond issues registered by the Trinidad & Tobago Securities Exchange Commission (SEC), amounting to about TT$40bn.

A regional credit rating will not only improve financial transparency but give a boost to the capital markets, Williams says, and, as a result, can play a significant role in investment decisions.

'In mature markets, the value that investors place on such ratings is evident from the impact that they have on the issuers' ability to access capital,' he argues. While many companies still prefer bank financing, capital markets are still seen as the most efficient way to raise money.

Raman says the Caribbean needs an integrated bond market - and so also needs a rating agency to make it work. 'What you need for a bond market to work is information and that information is not available now,' he said. What bond markets do for a market is diversify the sources of funds and bring in efficiency by reducing the cost of funds for the borrowers.

It's no secret that in the Caribbean disclosure of financial information is extremely inadequate for investors to make appropriate and timely investment decisions. In developed countries, financial markets are characterised by the public disclosure of information but, in the Caribbean, the investor is given data on a need-to-know basis. Raman says Caricris will attempt to address this.

The unanimous regional view is that coverage of firms by these global agencies, particularly for non-sovereigns, is very thin and the rating scale of debt-issuing entities is not extensive and even worse for emerging markets.

Most of these ratings, analysts agree, are for foreign currency borrowings calibrated on a global frame of reference.

Caricris is already carving a market niche. Chairman, Terrence Martins, says the company is ready to accept credit rating mandates from sovereigns, corporates and financial institutions, which are planning to issue bonds, commercial paper and other debt instruments.

He believes that regional scale ratings will enable a higher degree of differentiation in the credit worthiness of regional issuers than is possible on the global rating scale used by S&P, Fitch and Moody's.

According to Ram Ramesh, Caricris director and CEO at Caribbean Money Market Brokers, a regional investment outfit, the company has already obtained ratings request from entities - government as well as private - from across the region, including companies from Barbados and Jamaica. And more are in the pipeline, says Raman.

Ramesh is of the view that international investors can turn to Caricris when looking to invest in the region and he hopes they would subscribe to it.

A regional rating agency, he says, is the best way to let investors understand risk in the Caribbean. Not only is it intrinsic to the region but will take into account its own peculiarities, he adds.

Rory Rostant is a business editor at Newsday in Trinidad.