EUROPEAN

1
EUROPEAN PARLIAMENTARY FINANCIAL SERVICES
FORUM
IN ASSOCIATION WITH THE KANGAROO GROUP
The Role of Rating Agencies in European and
Global Financial MarketsStandard Poors
background presentation to the Market Briefing of
the European Parliamentary Financial Services
Forum chaired by Mrs Christa Randzio-Plath MEP
Brussels, 20th May 2003
Presented by Jeanne-Françoise de Polignac
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EUROPEAN PARLIAMENTARY FINANCIAL SERVICES
SP Europe
FORUM

• In Europe since 1984
• 7 Offices and over 500 employees
• Over 2,000 European entities rated
• Over 80 of European capital market debt rated

IN ASSOCIATION WITH THE KANGAROO GROUP
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EUROPEAN PARLIAMENTARY FINANCIAL SERVICES
What is a credit rating?
FORUM
A Standard Poors Rating is Standard
Poors opinion on the willingness and future
ability of a borrower to make full and timely
payment of interest and principal (borrowed sum)
on a financial obligation in accordance with its
terms.
IN ASSOCIATION WITH THE KANGAROO GROUP
A Rating is not
advice or a recommendation to buy, sell or hold
the security in question, a company audit, nor a
credit scoring.
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EUROPEAN PARLIAMENTARY FINANCIAL SERVICES
The Role of Rating Agencies
FORUM
Credit Ratings play a key role in Mitigating
information asymmetry Providing investors with
independent, relevant and updated financial
information on issuers and issues Allowing
issuers to access debt capital markets and to
diversify their funding requirements.
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EUROPEAN PARLIAMENTARY FINANCIAL SERVICES
Ratings Scale
FORUM
Long Term
Short Term
Highest Credit Quality -----------
AAA
AAA
AA
AA
A-1
AA
A
AA-
BBB
A
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Investment Grade Cut-off point ----------------
____________
A-1
A
BB
A-
A-2
B
BBB
CCC
BBB
BBB-
CC
A-3
_____________________
BB
C
BB
B
Default -----------
D
BB-
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EUROPEAN PARLIAMENTARY FINANCIAL SERVICES
European Ratings by Sector
FORUM
IN ASSOCIATION WITH THE KANGAROO GROUP
Source Standard Poors, September 2002
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EUROPEAN PARLIAMENTARY FINANCIAL SERVICES
European Ratings by Country
FORUM
IN ASSOCIATION WITH THE KANGAROO GROUP
Source Standard Poors, September 2002
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EUROPEAN PARLIAMENTARY FINANCIAL SERVICES
The Rating Process
FORUM
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EUROPEAN PARLIAMENTARY FINANCIAL SERVICES
Rating Methodology
for Industrials
FORUM
2 broad categories considered
Financial Risk Financial policy Profitability Cap
ital Structure Cash flow protection Financial
flexibility
Business Risk Industry characteristics Competitive
position Management Business Strategy
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EUROPEAN PARLIAMENTARY FINANCIAL SERVICES
Default Statistics 2002
FORUM
IN ASSOCIATION WITH THE KANGAROO GROUP
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EUROPEAN PARLIAMENTARY FINANCIAL SERVICES
Rating through the business cycle
FORUM
Defaulted debt as a percentage of rated debt,
1981-2002
IN ASSOCIATION WITH THE KANGAROO GROUP
Source Standard Poors, 2003
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EUROPEAN PARLIAMENTARY FINANCIAL SERVICES
Issuer Pays - Model
FORUM
IN ASSOCIATION WITH THE KANGAROO GROUP

• SP has no link with any financial institution
  or brokerage
• Rating decisions are collegial decided by a
  Rating Committee
• Analyst remuneration is not based on the
  performance of the issuers or ratings they work
  on
• Analysts are not allowed to own securities in
  companies with which they regularly interact
• Code of Ethics requires that all non-public
  information remain confidential
• Influence of individual issuers on SP is
  limited 37 000 issuers doing business with SP
  and no single issuers accounts for more than 1
  of revenue

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EUROPEAN PARLIAMENTARY FINANCIAL SERVICES
Regulatory Treatment of Rating Agencies
FORUM

• In the US, the SEC has designated Nationally
  Recognised Statistical Rating Organisations
  (NRSROs) since 1975. NRSRO ratings are used
  widely in U.S. regulations.
• Recognition is based primarily on a rating
  agencys reputation and the recognized use of its
  ratings in the U.S. financial market
• NRSRO designation is intended to reflect the view
  of the marketplace as to the credibility of the
  ratings
• SPs ratings are widely used and treated with
  high regard from investors outside the U.S.,
  including Europe, where the NRSRO status does not
  exist and ratings are not as imbedded in
  regulations.

IN ASSOCIATION WITH THE KANGAROO GROUP
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EUROPEAN PARLIAMENTARY FINANCIAL SERVICES
Current International Regulatory Developments
FORUM

• SEC Review of Rating Agencies
• In January 2003, the SEC presented its Report on
  the Role and Function of Credit Rating Agencies
  in the Operation of Securities Markets to US
  Congress, as mandated by the Sarbanes-Oxley Act
  of July 2002.
• A Concept Release, a consultation document, is
  forthcoming and addresses further study regarding
  the Information Flow, Potential Conflicts of
  Interest, Alleged Anticompetitive or Unfair
  Practices, Reducing Potential Regulatory Barriers
  to Entry and Ongoing Oversight.
• Congress Hearings of April 2003
• The SEC has been requested to produce a report
  for Congress on the Utility of NRSRO ratings,
  Monopoly Power, Fair Disclosure the NRSRO Status
  and Conflicts of Interest. This Report is due by
  early June 2003.
• IOSCO review
• The International Organisation of Securities
  Commissions (IOSCO) will present a high level
  principles on rating agencies by September 2003.
• G7/G8, Financial Stability Forum, IMF
• Basel II Capital Accord
• Basel II sets out recognition criteria for ECAIs
  (External Credit Assessment Institutions)

IN ASSOCIATION WITH THE KANGAROO GROUP
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EUROPEAN PARLIAMENTARY FINANCIAL SERVICES
Current EU Regulatory Developments
FORUM

• On-going Dialogue with European Regulators
• SP enhanced dialogue/consultation with the
  European Commission, CESR, National Regulators
  (UK, Germany, France, Spain, Netherlands) and
  initiating dialogue in other EU jurisdictions and
  globally, e.g. Russia.
• Financial Services Action Plan
• Capital Adequacy Directive (CAD III, the EU
  implementation of Basel II)
• Market Abuse Directive. Consultation at level 2
  with CESR and Commission
• Oviedo Agenda
• French and German focus on Rating Agencies
• Project de Loi de Sécurité Financière
  proposes monitoring, but not supervision by the
  newly created Autorité des Marchés Financiers
  AMF
• Germany - a Working Group may be set up.

IN ASSOCIATION WITH THE KANGAROO GROUP