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Introduction

Companies issue CPs to raise short-term financing for working capital requirement. As a way of facilitating development of the CP market into a sector of the financial system where companies with strong credit standing raise short-term financing, the government requires that CPs be rated by licensed credit rating agencies and the ratings be disclosed to the market to protect investors and to improve the quality of financial institutions’ intermediary services.
Korea Investors Service’s CP rating focuses on issuers’ short-term credit standing and provides evaluation of issuers’ ability to make timely repayment, which is expressed as alphanumeric symbols.
Korea Investors Service rates CPs issued by some 200 entities a year. Korea Investors Service enjoys the greatest trust from investors with the lowest investment grade default rate among domestic credit rating agencies.

Objects and Benefits

Entities that want to short-term capital through merchant banks, securities companies, and banks by issuing CPs have to get ratings from licensed credit rating agencies.
CP ratings are used as a basis for CP issuance qualification screening and for determining conditions for CP issuance. In addition to these basic utilities, CP ratings are utilized for the following purposes as well:

  • Financial institutions such as banks and consumer finance companies utilize corporate bond ratings in their credit evaluation
  • Institutional investors including investment trust companies and funds utilize corporate bond ratings as a basis for their investment decisions
  • Government agencies and government-funded companies such as the Public Procurement Service and Korea Electric Power Corporation use CP ratings as a criterion in screening suppliers and contractors
  • Companies use CP ratings as a basis for estimating creditworthiness of their counterparties in various transactions
  • Financial institutions and companies use CP ratings as a basis in determining interest rates (or yields)

Types of Ratings

  • Plenary Rating : Plenary rating is conducted upon receiving request from companies that are planning to issue CPs. Issuers that are seeking CP rating for the first time apply for rating shortly before their CP issuance, but frequent issuers that issue CPs throughout the year have to get new ratings within six months of the latest balance sheet date.
  • Periodic Rating : Periodic rating is official review of existing ratings that Korea Investors Service conducts regularly to incorporate half-yearly business results and other changes in the issuers’ credit quality into ratings. Periodic rating should be completed within six months of the half-yearly settlement dates of the issuers. Every credit with valid CP rating is subject to periodic rating regardless of request from the issuers.
  • Occasional Rating : Occasional rating is official review of existing ratings that is conducted whenever there are changes that have significant bearing on the credit quality of the issuer. Occasional rating is conducted to communicate updated credit information to the market in a timely manner. Watchlist is also managed through occasional rating.

Rating Scale and Definitions

CP rating scales is composed of 6 categories from A1 to D. A1 through A3 are classified as investment grade, which indicates adequate debt service ability, whereas B and C are classified as speculative grade, which indicates substantial vulnerability to changes in the external environment.


Valid Period and Disclosure

CP ratings are valid for one and a half year from the latest balance sheet date upon which the ratings are based.
CP ratings are released through diverse disclosure channels including KOSCOM, Korea Securities Dealers’ Association, Bloomberg, Reuters, Yonhap News, Korea Merchant Banking Association, and major institutional investors and media.

Watchlist

Korea Investors Service introduces 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.

Directions of Expected Change

  • Possible Upgrade : When there are factors that warrant potential rating upgrade
  • Possible Downgrade : When there factors that warrant potential rating downgrade
  • Direction Uncertain : When there are factors that warrant potential rating change but the direction is unclear
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