Beacon Credit Rating Agency (Beacon Ratings) is the first credit rating agency incorporated in Ghana and granted regulatory approval by the Securities and Exchange Commission (SEC) under Section 209 of the Securities Industry Act 2016, (Act 929) as amended by the Securities Industry (Amendment) Act, 2021 (Act 1062) to provide credit rating service and related services to assist the financial system to operate efficiently in Ghana
Beacon Ratings undertakes an independent business analytics and credit rating services and provides actionable insights and opinions on corporate entities and issues to enhance the capital, money, insurance, and credit markets by assisting investors, lenders, insurance policyholders, and trade creditors to make safe, sound, informed and judicious decisions.
Rating Services
| Corporate Sector
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Corporate rating: It provides information on credit risk of corporate entities to assist investors, lenders, creditors and other market participants to make sound business decisions.
Issuer rating: It provides information on credit risk of issuers of financial instruments to assist investors to determine the credit quality of issuers to make informed investment decision. |
| Financial Sector
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Mutual funds rating: It provides information on mutual funds’ risk-returns, stability, and capital protection information to enhance investment decisions.
Insurance companies rating: It provides information on insurers’ financial strength and capacity to pay claims to existing and potential insurance policyholders for insurance policy purchase decisions. Financial institutions rating: It provides information on safety and soundness of financial institutions to depositors, investors, and customers for banking decisions. |
| Financial Instruments
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Corporate debts/bonds rating: It provides information on expected risk-returns to prospective investors for investment decisions.
Structured finance rating: It provides information on the degree of credit protection, enhancement, and mechanisms available on underlying assets for timely servicing of debt obligations to potential investors. Commercial paper/certificate of deposit rating: It provides information on short-term key drivers including liquidity position, liquidity back up, and credit enhancement of the issuer to investors. |
| Grading Services
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Initial Public Offering grading: It provides opinion on risk-returns, operating performance, financial strength and other related issues to investors for long-term equity investment decisions.
Equity grading: It provides analytical insights into the fundamentals and valuations of listed entities for investment decisions. |
Origin
The first credit rating agency was set up in New York in 1841 to rate the ability of merchants to pay their financial obligations. This was taken over by Robert Dun which published the first rating guide in 1859. The second agency was established by John Bradstreet in 1849 which merged with first agency to form Dun & Bradstreet in 1933. In 1900 and 1916, John Moody established Moody’s Investors Service and Poor’s Publishing Company respectively. Standard Statistics Company and Fitch Publishing Company were set up in 1922 and 1924 respectively. Poor and Standard merged together in 1941 to form Standard and Poor’s. Since 1970, a number of credit rating agencies have been set up all over the world including countries like Malaysia, Thailand, Korea, Australia, Pakistan, Philippines and India.
The origin of credit rating agencies shows that they developed as information businesses, closing the knowledge gap between borrowers and investors, publishing information about creditworthiness of borrowing entities which assisted investors in making credit decisions. Essentially, credit rating agencies developed as a response to asymmetric information.
Meaning of credit rating
Credit ratings are opinions about credit risk. Standard & Poor’s ratings express the agency’s opinion about the ability and willingness of an issuer, such as a corporation, state or municipal authority, to meet its financial obligations in full and on time. Credit ratings also provide opinion on credit quality of a debt instrument issued by a corporate entity or municipal authority bond, and the relative likelihood that the issue may default.
A rating once issued by an agency does not remain valid for the entire life of the debt instrument. Whenever the risk characteristics of the instrument changes, the rating must be reviewed: upgraded or downgraded.
Credit rating is widely recognized to be among the most critical methods for assessing creditworthiness. It plays a key role in financial markets by closing the informative asymmetry between lenders and investors, on one side, and issuers on the other side, about the creditworthiness of corporate entities (corporate risk) or countries (sovereign risk).
Credit rating agencies
Credit ratings are issued by Credit Rating Agencies (CRAs). CRAs specialise in analysing and evaluating the creditworthiness of corporate and sovereign issuers of debt instruments. In the current financial architecture, CRAs (External Credit Assessment Institutions) have an expanded role to play as per the Basel Committee on Banking Supervision (BCBS)’s capital standards for banks under Basel II and III to assist in computing banks’ regulatory capital for credit risk.
The rating agencies fall into two categories: recognized and non-recognized. The former is recognized by regulatory and supervisory agencies such as Securities and Exchange Commissions and Central Banks in each country for regulatory and supervisory purposes. In the United States, as at 2016, nine CRAs of which the best known are Moody’s and Standard and Poor’s (S&P) and Fitch Ratings are recognized by the Security and Exchange Commission (SEC). The majority of CRAs such as the Economist Intelligence Unit (EIU), Institutional Investor (II), and Euromoney are non-recognized.
Importance of credit rating
Credit ratings establish a link between risk and return, as such provides a yardstick against which to measure the risk inherent in a rated debt instrument. Investors use credit ratings to assess the risk level and compares offered rate of return with expected rate of return to optimise risk-return trade-off, hence, the need for credit rating in a financial system. Thus, credit rating:
(a) Assists investors to make sound investment decisions.
(b) Assists debt instruments issuers to price issues fairly, correctly and appropriately.
(c) Assists regulatory agencies such as Bank of Ghana and Securities and Exchange Commission to determine eligibility criteria for debt instruments. For example, SEC requirement for mandatory credit rating of commercial papers.
(d) Serves as a marketing tool for highly rated corporate entities as it creates confidence in existing and potential clients, business partners, investors and the public.
In an efficient capital market, returns on investments matches associated risks. Debt instruments with higher ratings offer lower rates of return and those with lower ratings offer higher rates of return. Thus, the availability of unbiased credit rating directly assists in forming an efficient market.
A corporate entity whose debt instrument has been rated and published would follow rational and sound financial and business practices as the rating agency keeps a close watch on the entity’s performance and would not hesitate to lower the ratings if circumstances so warrant.
In general, credit rating is expected to improve efficiency and quality consciousness of the capital market as it establishes a meaningful relationship between quality of debt and yield from such debt.
What credit rating does not constitute
Credit rating is not a recommendation for purchasing, selling or holding of debt instruments. Decisions to invest in debt instruments must be based on (i) expected rate of return, (ii) risks associated with the investment, and (iii) risk profile of the investor. Of these three issues, credit rating provides information on only one of them, namely, credit risk associated with the investment.
Credit rating agencies does not conduct a comprehensive audit of operations of debt instrument issuing entities. Though the rating agency does make a complete study of information made available and tries to gather data on various aspects of the entity, it cannot certify that all the information provided are true and fair.
Credit rating does not create fiduciary relationship between the rating agency and users of the ratings.
Role of credit rating in the capital market
- Credit rating reduces information asymmetry between debt instrument issuers and investors by providing information on the rated debt instrument and the entities.
- Credit rating assists in solving an important principal-agent problem by capping the amount of risk the agent can take on behalf of the principal.
- Credit rating assists in solving collective action problem of dispersed debt investors by monitoring performance of rated debt instrument and entities, with downgrades serving as a signal to take action.
- Credit rating effectively reduces the burden on investors to research the creditworthiness of debt instruments or issuers.
(e) Credit rating assists portfolio managers in making investment decisions and lenders in credit decisions.
