- CP Ratings
- CP Ratings
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 ratings focus on issuers’ short-term credit standing and provide 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 rates among domestic credit rating agencies.
Entities that want to raise short-term financing through merchant banks, securities companies, and banks by issuing CPs have to receive ratings from licensed credit rating agencies.
CP ratings are used as a basis for screening qualifications and 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 corporate bond ratings as a criterion in screening suppliers and contractors
- Companies use corporate bond ratings as a basis for estimating creditworthiness of their counterparties in various transactions
- Financial institutions and companies use corporate bond ratings as a basis in determining interest rates (or yields)
CP Ratings are classified into New Ratings and Surveillance – Annual Ratings and Reviews on Credit Event.
- New Ratings : A New Rating is conducted upon receiving a 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.
- Annual Ratings : An Annual Rating is regular review of existing ratings to incorporate half-yearly business results and other changes in the issuers’ credit quality into ratings. Annual Ratings should be completed within six months of the half-yearly settlement dates of the issuers. Every credit with valid CP rating is subject to Annual Ratings regardless of request from the issuers.
- Reviews on Credit Event : A Review on Credit Event is review of a rating that is conducted whenever there is a significant event that may affect the rating. The goal of Reviews on Credit Event is to communicate updated credit information to the market in a timely manner. Watchlist system is also managed through Reviews on Credit Event.
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 capacity, whereas B and C are classified as speculative grade, which indicates substantial vulnerability to changes in the external environment.
| A1 | An ‘A1’ rating indicates the strongest capacity for timely repayment, and this capacity is highly stable. |
|---|---|
| A2 | An ‘A2’ rating indicates strong capacity for timely repayment. This capacity, nevertheless, is slightly inferior than is the case for the highest rating category. |
| A3 | An ‘A3’ rating indicates satisfactory capacity for timely repayment and stability of that capacity. The stability, nevertheless, is slightly inferior than is the case for higher rating categories. |
| B | A ‘B’ rating indicates adequate capacity for timely repayment. This capacity, however, lacks stability and is susceptible to short-term changes in economic conditions. |
| C | A ‘C’ rating indicates clear speculative characteristics. |
| D | A ‘D’ rating indicates insolvency. |
※ '+' or '-' modifier can be attached to ratings through A2 to B to differentiate ratings within broader rating categories.
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 possible change to incorporate changes in factors that affect the issuer’s credit quality.
Global rating agencies, including Moody’s Investors Service, have used the Watchlist as an important part of their ratings processs to meet investors’ needs for timely rating updates.
A rating may be put on KIS Watchlist for possible upgrade, downgrade, or occasionally with direction uncertain along with the rationale behind such Watchlist placements in order to provide investors with an indication of the likely direction.
- 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
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 disclosed through various channels including KIS webpage, Korea Financial Investment Association (KOFIA), KOSCOM, Bloomberg, Reuters, Yonhap News, Investment Banks Association of Korea (IBAK), major institutional investors and media.
