Entities that issue unsecured corporate bonds to raise long-term financing for more than a year are obliged to get credit ratings from licensed credit rating agencies and submit the ratings. The goal of such system is to protect investors who lack information about issuers and to induce appropriate bond prices in the capital market.
Korea Investors Service evaluates the long-term creditworthiness of corporate bond issuers and assigns ratings accordingly.
All unsecured bonds except treasury bonds, bonds guaranteed by the national government, municipal bonds, and Bank of Korea’s Currency Stabilization Bonds have to be rated by licensed credit rating agencies to be included in trust assets of banks and investment trust companies. Therefore, companies, consumer finance companies, securities companies, commercial banks, Korea Development Bank, government-funded companies, and pension funds are obliged to get credit ratings from licensed credit rating agencies when they issue unsecured bonds.
Corporate bond ratings are used for investment decisions and to determine the conditions for the bond issuance. Corporate bond ratings are also used as a basis for marking-to-market of bonds included in funds that are subject to marking-to-market obligations. In addition to these basic utilities, corporate bond ratings are utilized for the following purposes as well:
Corporate bond rating is classified into Plenary Rating, Preliminary Rating, Periodic Rating, and Occasional Rating.
Corporate bond rating uses a scale that is composed of 10 broad rating categories from AAA to D that indicate different levels of debt service ability. AAA through BBB ratings are classified as investment grade, which indicates adequate debt service ability, whereas BB through C ratings are classified as speculative grade, which indicates substantial vulnerability to changes in the external environment.
Corporate bond ratings are valid through the maturity of the rated bonds.
Corporate bond rating and the rating opinion are attached to marketable securities registration form. Corporate bond ratings are also released through official disclosure channels including KOSCOM, Korea Stock Exchange, Korea Securities Dealers’ Association, Bloomberg, Reuters, Yonhap News, and major institutional investors and media.
Korea Investors Service introduced Watchlist system on November 1, 1998, which was the first among Korean credit rating agencies. Watchlist is used to indicate that a rating is placed under review for a possible rating change to incorporate changes in factors that affect the issuer’s credit standing. Many credit rating agencies in the world including Moody’s Investors Service are using a watch list as an important part of their credit rating process to meet the need of the market for timely rating updates. When a rating is placed on Watchlist, the direction of expected change (‘Possible Upgrade’, ‘Possible Downgrade’, and ‘Direction Uncertain’) is also posted.
Outlook system was introduced on September 1, 2002. Outlook indicates mid-to-long term (six months to 18 months) prospect on major rating factors at the time the rating is assigned.
Outlook is managed separately from the rating and notch. The direction of actual rating change does not necessarily the same as the direction of Outlook. Outlook is assigned on only long-term ratings. Outlook is not assigned on CP ratings, structure finance ratings, ratings on debts that are currently in default, and ratings of issuers that are subject to corporate workout programs or the Corporate Restructuring Promotion Act. Outlook is not assigned to credits that are on the Watchlist
