Authorities explore credit ratings ‘for sale’ in South Korea

An investigation into the failure of South Korea’s Tongyang Group, a large conglomerate, last autumn led to unexpected discoveries. Some 50,000 individual investors lost heavily because credit rating agencies maintained a strong investment grade rating on Tongyang’s debt despite widespread rumours that the company had severe liquidity problems. The group collapsed when it failed to make interest payments on some KRW 4 Trillion of debt.

The Financial Supervisory Service (FSS) recently announced it would levy large penalties on three domestic credit rating agencies for providing inaccurate ratings at the behest of clients. The FSS said the agencies had been “selling” favourable grades and delaying unfavourable ratings in return for business.

Sometimes agencies approached firms saying that they would give favourable credit ratings if they were given contracts to evaluate the companies’ credit worthiness. Some companies contacted more than one credit ratings agency and gave their business to the one who promised the highest grade.

The FSS said that all the three Korean agencies – Nice Investors Service Co., Korea Investors Service Inc. and Korea Ratings Corp. – had followed these practices.

Data compiled by market researcher CEO Score demonstrated that Korean rating agencies have consistently overestimated companies’ financial health.

Last year, Korea’s 33 large enterprises received an average “AA+” grade from the three local rating companies, their second-highest investment grade rating, according to CEO Score data.

However, global credit rating companies Moody’s Investors Service and Standard & Poor’s Ratings Services (S&P) rated the same companies much lower at “BBB+” on average, some six notches down from the credit ratings by local agencies.
As an example, POSCO, Korea’s leading steelmaker, was recently rated as “AA+” by Korean agencies while Moody’s and S&P gave lower ratings of “Baa2” and “BBB+,” respectively. Similarly, Korea’s No. 2 refiner GS Caltex Corp. was rated at “AA+” by the Korean agencies, while Moody’s gave a lower “Baa3” and S&P rated it “BBB-.”

“The rating differences are mainly because large Korean companies can exercise influence on the local ratings firms by offering commissions,” said an official from CEO Score.

The FSS has yet to announce exactly what fines it will levy or whether it will enforce other sanctions as well. However, South Korea’s top financial regulator, the Financial Services Commission say they will root out the practice of credit rating firms taking business in exchange for good credit ratings and will strengthen the penalties for infringement.