Fitch local boss wants hurdle ratings out on corporate debt

Sri Lanka may have put in place safeguards to protect the mom-and-pop investor who holds a small amount of corporate bonds but those same safeguards seem to be turning away the institutional investors who account for the bulk of those investments, impeding the development of the corporate debt market.  

One such investor protection aimed at retail investors is the minimum credit rating mandated for corporate debt issuances but the same is acting as a hurdle for much larger institutional investors who may be wanting to take a higher risk for a higher return. 

In Sri Lanka, credit ratings are mandated for issuances of listed securities and such instruments should carry at least one notch above the minimum investment grade rating of ‘BBB –.’

Hence, unless a debt security has a rating of at least ‘BBB’, such instrument cannot be listed in the Colombo Stock Exchange.   

But Maninda Wickramasinghe, Fitch Ratings Lanka Chief Executive and Country Head subscribes to a different view. 

According to Wickramasinghe, 97 percent of the investors in corporate debt issuances are institutional investors and they should be able to decide on the investment based on their risk appetite. 

“If your market is a wholesale market, and it has institutional buyers, do not have hurdle rates. All you are doing is, you are promoting low credit quality to get into the capital market and raise money.  

What you should do is, leave the rating where it is, the market will decide what kind of premium they want to charge”, he said. 

According to Wickramasinghe, not even 3.0 percent investors are retail who invest in corporate bonds.  

Large corporate debentures generally draw tepid interest and sometimes the number of applications does not even exceed 50, demonstrating that these issues are gobbled up by the larger institutional investors who have the scale and want to hold them till maturity. 

Typically mutual funds bring in retail investors into the market with their scale, knowledge and research. Hence, Wickramasinghe is of the view that regulator should leave the wholesale/institutional investors to buy the securities in large quantities according to their risk appetite.  

Sri Lanka’s capital market watchdog, Securities and Exchange Commission, imposed a hurdle rating after a throng of issuers, particularly the licensed finance companies with low credit quality came into the market with senior and subordinated debt issuances when the then government exempted the corporate debt market from withholding tax and corporate income tax. 

“I am sure you are not going to commit suicide and buy a ‘CCC’ rated security or something like that. But if you do, you will do it with some specific knowledge that this business is going to turn around and therefore I am taking a risk. But I also want a 20 percent return. 

So, that is just how markets operate”, Wickramasinghe told a recent seminar organized by the Institute of Certified Management Accountants of Sri Lanka recently where the audience had a few participants from the SEC. 

He cited the case of Sri Lanka’s sovereign bonds, which are in the junk category, trading quite attractively and having liquidity. 

“For example, look at Sri Lanka’s sovereign bond. It is below investment grade but it trades in the Singapore exchange. And even today it is trading at 5.75 (percent). So, it is very liquid and trading”, he noted.