SEC grants first domestic credit rating licence

SEC grants first domestic credit rating licence

The Securities and Exchange Commission (SEC) has issued the first credit rating licence to an indigenous company in Ghana, which will allow for an independent evaluation of the creditworthiness of debt securities on the Ghana Fixed Income Market.

This will be a boost to development of the corporate bonds market, given that corporate bond issuers must find a rating agency to rate their debt – which investors rely on to decide whether or not to buy a company’s securities.

According to the Deputy Director-General of SEC, Deborah Agyemfra, the first licence was issued to Beacon Credit Rating Agency before the official issuance of credit rating agency (CRA) guidelines.

“One thing we want as a regulator is to be ready by issuing the guidelines. It is up to the market players in this space to take advantage of the guidelines and apply,” the Deputy Director said in an interview following the Judicial Service Edition of Time with the SEC.

“There was an application before the guidelines were issued, which we looked at and granted a license. It is a Ghanaian company. So, for new applications we will use these guidelines to grant the licence,” she explained.

Per the 2022 budget, the Domestic Credit Rating Agency (DCRA) will be operationalised in 2022 as part of the several initiatives which will be undertaken to boost development of the corporate bonds market.

Establishing the DCRA will promote credit-culture, risk-based lending and equitable pricing of debt instruments. Indeed, operations of the DCRAs will also reduce information asymmetry between market participants and facilitate investment decisions by helping investors obtain relevant information to achieve a balance in the risk profile and assist firms to access capital.

Cumulatively, data from the Ghana Stock Exchange indicate outstanding corporate securities on the bond market as of September 2021 were about GH¢11.47billion – which far exceeds the full-year period of 2020 at GH¢9.92billion. “SEC is yet to undertake any processes for the approval of any other applications,” Ms. Agyemfra noted.

Rating agencies assess the credit risk of specific debt securities and the borrowing entities, especially their ability to meet the principal and interest payments on their debts – and then assign ratings indicating the level of confidence that the borrower will be able to honour its debt obligations as agreed with investors.

Part of the guidelines requires a rating agency not to issue any kind of promise, warning, or threat about potential credit rating action to influence rated entities, obligors, originators, underwriters, arrangers or users of the CRAs credit ratings to put improper pressure on them to perform or refrain from taking an action.

The ratings are used in structured finance transactions such as asset-backed securities, mortgage-backed securities and collateralised debt obligations. Rating agencies focus on the type of pool underlying the security and the proposed capital structure to rate structured financial products. The issuers of the structured products pay rating agencies to not only rate them, but also advise them on how to structure the tranches.

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