SEC issues guidelines to regularise credit rating industry

The Securities and Exchange Commission (SEC) has issued guidelines to regularise the operations of credit rating agencies (CRA) in the country, allowing for an independent evaluation of the creditworthiness of debt securities on the Ghana Fixed Income Market.

Per the new guidelines issued last week, SEC requires that any foreign company that is licenced as a CRA in another country

Read full articlebut wishes to issue ratings for Ghanaian securities and/or entities, except securities issued by the Government of Ghana, must have an established subsidiary in Ghana.

Further to this, the CRA must demonstrate that it is subject to external regulation that imposes appropriate standards on the operations which are also adhered to by the subsidiary in Ghana; and adequately enforced by the SEC.

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.

“A CRA that is already in business at the time these guidelines are published shall comply in full no later than one year after the date of publication,” a portion of the guidelines reads. “However, any new CRA seeking a licence shall be required to be in full compliance as soon as the licence is granted.”

A CRA shall ensure that the determination of a credit rating is influenced only by factors relevant to the credit assessment. Neither a CRA nor its rating analysts, nor any other employee, shall give advice to issuers on how to structure products in order to achieve a pre-determined rating.

The guidelines further require 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 take or refrain from taking an action.

“A CRA shall take reasonable steps to ensure that rating analysts, members of the Rating Committee and any other person who has an influence on a rating are not subject to improper influence by rated entities, other clients, shareholders, directors or management,” the guidelines state."

Cumulatively, data from the Ghana Stock Exchange indicate outstanding corporate securities on the bond market as of September 2021 was about GH¢11.47billion – which far exceeds the full-year period of 2020 at GH¢9.92billion.

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 structured products pay rating agencies to not only rate them, but also advise them on how to structure the tranches.

At the corporate level, companies planning to issue security must find a rating agency to rate their debt, which is performed at a fee.

Investors rely on the ratings to decide whether to buy or not to buy a company’s securities.