Table Speech

The Viewpoint, Effect and Significance of Credit Ratings

August 31,2005

Director and General Manager of the Business Development of the Japan Credit Rating Agency Ltd.,
Mr. Kiyoshi Tsuboi

Credit ratings are only 20 years old, and I wish to speak on its significance, effects and the viewpoint from which this is done.

The definition of credit ratings is to report by simple marks (such as AAA, BBB) the certainty of repayment of principle and interest of bonds, etc. or in other words, the distance to default. Such credit ratings must be made by a neutral credit rating agency, and is called an opinion, but more on this later.
Such ratings began with corporate bonds, but today it has expanded into the field of CP (commercial paper) and short term promissory notes.

Today, such ratings are also made not only for private corporations, but for public corporations, medical institutes, schools etc. Ratings are also made for shares and bank loans. Originally, such business was done by the loan departments of individual banks, but I am surprised that is now entrusted to credit rating agencies.

In Japan, there are 5 credit agencies allowed by the Japanese Government.
They are S&P (Standard and Poor’s), Moodys, and Fitch, which are foreign organizations, JCR and R&I, are the 2 Japanese. Although not formally authorized by the government, the Mikuni Office also makes credit ratings.
I mentioned of our ratings being opinions. At times, our rating may differ from that made by other credit rating companies. As our conclusions are our opinions, the results may differ. There are currently 10 electric power firms in Japan, and our JCR the top rating of AAA, but some rating agencies give only AA+ or AA to some of them. This expresses the fact that these marks only represent our opinions.

Recently in America Enron collapsed, and investors sued the credit rating agency for misleading them by rating it AA+ or AA, but the court decided that the credit raters were only giving their opinion and were not responsible for any loss. As it is only a given opinion, the investor invests at his own risk, and although there have been a number of similar court cases, the court has turned all of them down.

For businesses that obtain a credit rating, the true reason for this is to enable to gather capital. Recently, many organizations ask us for a credit rating, as it becomes easier for them to issue CP (Commercial Paper).

There are 2 reasons. First, it costs little to issue CP’s, but without a credit rating this is not easy. Secondly, electronic CP’s have been started from this March, and the total has already exceeded 20 trillion yen.

From the standpoint of management, one can grasp his firm’s standing in his industry by his credit rating. Management can, by obtaining a credit rating, strive to improve its standing. It is also helpful for public relations.

Syndicate loans also are more easily obtained by having a good credit rating.
From a credit rater’s viewpoint, the important matter is the profitability of an enterprise, and how it can improve its cash flow. Then it’s liabilities, as it is the balance between its profitability and liabilities which is enable to add to its cash flow which determines its credit rating.

We analyze documents presented to us by the applicant, visit the applicant, interview the management and the work is dune by a plural number of analysts. The rating is decided by a team of 5 analysts who from a committee for this purpose. Whether to go public with the results is up to the applicant.

We not only provide the rating marks to the applicant, but a full report on the rating process.