Bond Credit Rating Quality Inspection, Problems And Improvement

The 2008 financial crisis raised questions about the reputation of international rating agencies.The public did not think the rating agencies played a proper role in revealing credit risks.Rather,the crisis was exacerbated by the procyclical behavior of rating agencies.The domestic rating agencies and rating industry is still in its infancy,the history of development is not long,and the quality of practitioners and industry is far less mature than the international counterpart.As the current domestic bond rating take the issuer payment model,the rating agencies' income rely on the bond issuer,the issuer naturally hope that rating agencies give a higher rating,in order to contract business,different rating agencies have motivation to meet the issuer's demand,So there is no lack of rating shopping phenomenon.Whether the rating agencies in China can objectively and justly reveal the risk of the target rated,namely,the quality of the rating,is doubtful.International rating agencies believe that the higher rating quality is mainly reflected in two points:accuracy and stability.Accuracy refers to the relationship between rating result and default result.For bonds with same term,the bonds with higher ratings result are in lower credit risk with lower default rate.Stability means:Rating results need to stay fairly stable for long periods of time,with no frequent changes and sharp adjustments.Considering the difference between domestic rating industry and international rating industry,this paper argues that the quality of rating should reflect the other three requirements:comparability,incremental information and timeliness.Comparability refers to the fact that the same rating results from different rating agencies for the same type of bond correspond to considerable credit risk and eventual default rates.The three major international rating agencies have their own ratings grade symbols and definitions.In contrast,domestic ratings symbols and definitions of credit risk are uniformly defined by PBOC.Therefore,domestic rating agencies should give same rating result when facing equal credit risk.Otherwise,the credit rating will increase Investors' burden of decision.Incremental information means that rating can convey to the market the information unavailable on the open market,allowing investors to further grasp the credit risk.As domestic information disclosure quality is not as good as foreign,conveying more information to market is required function of rating agencies.Timeliness means that when a new circumstance that affects the solvency of the issuer arises,the rating agencies can timely follow up and disclose it and convey to the market the new credit risk information through rating adjustment.As domestic bond is not long term,demanding of stability is not high,but due to frequent macroeconomic and policy changes led to changes in the issuer fundamentals,timely adjustment of the rating is more in line with market requirements.So the stability of the domestic rating is not analyzed,but in the fourth chapter we add case studies of default to test the timely adjustment of the rating.Combining above five requirements of the rating quality:accuracy,stability,comparability,incremental information,timeliness.This paper empirically analyzes the accuracy,comparability and incremental information of domestic credit rating,and analyzes the timeliness of domestic rating adjustment through case studies.The first way to test the quality of rating is the direct test method.This is the usual method of the three major international rating agencies.That is,the rating accuracy is judged according to the default rate of the clients of the same rating notch.If the statistics show that the default rate of high-rated bonds is significantly lower,it means the rating can distinguish between Bonds with different risks.The direct test method is based on the final default result to judge the quality of the rating,and thus is the most convincing method.The second way to test the quality of ratings is indirect test method.Indirect test method is to use other variables such as yield rate,interest rate,credit spread to replace the default rate as a criterion.Due to rigid payment of domestic bond,there is a small number of default cases so it is difficult to directly test the quality of the rating.That is why besides using the direct test method based on default ratio,indirect test method come into use in this paper.The indirect test method assumes that the information accumulated by many investors in the market about the issuer's credit is highly sufficient.The investors' pricing of the bonds includes the risk factors.With higher risk the bond investors will demand higher yield,thus the credit spread should be larger.Credit spread can be used to represent the true credit risk so as to test the quality of the rating.The spread of high-rated bonds should be significantly less than the low-rated bond.This paper using the above two ways simultaneously to test the quality of ratings.As the default samples is few,using two ways combined can prove the result of each other.In the direct test method,the accuracy and comparability of ratings were analyzed using the default rate.However,because the number of breaches was too small so the reliability of the conclusions obtained was insufficient,and indirect test was supplemented.In the indirect way,credit spread is used to stand for risk.Doing empirical analysis from the perspective of rating and credit spreads and case analysis from the perspective of rating and default cases to test rating quality.If there is a high degree of correlation between ratings and credit spreads,the spread between different rating notch is significantly inconsistent,indicating that the ratings are accurate.If there is no significant difference in credit spreads between different rating agencies for the same rating,it indicates that the ratings of different rating agencies are comparable;if the rating can play an additional explanatory role for spreads,indicating that ratings reduce the asymmetric information in the market,investors make investment decisions to some extent,depending on the rating information;If rating agencies can adjust the rating result and announce default risk ahead of default,indicating that the rating is timely.The empirical results show that the quality of the domestic rating reflects accuracy,comparability and incremental information requirements to some extent.However,Accuracy level leaves much room for improvement compared to international rating agencies.For the Comparability,CCXI company?Lianhe Credit Rating and Shanghai Brilliance Credit Rating are comparable with each other,while Dagongcredit have some differences with the above three agencies.For Incremental information,ratings do convey additional non-public information to the market.Case analysis of default cases shows that there is room for improvement in the timeliness of rating adjustment.At the end of this article,some suggestions for rating quality improvement are put forward.