print 16.03.2011

Credit-Rating litigates Commission’s deprival decision

Credit-Rating has litigated the decision adopted by the State Commission for Securities and Stock Market of Ukraine on withdrawal of the status of authorized rating agency from Credit-Rating, as this decision has been adopted with no proper reasons, flagrantly violating required procedures and in the interests of third parties. Credit-Rating will secure applicability of its ratings for regulatory purpose in a trial. The agency has also stated that those of its credit ratings, which assignment is not mandatory pursuant to the effective legislation, remain valid irrespectively of the outcome of disputes regarding the agency’s status.

The inspection of Credit-Rating’s activities which was earlier conducted by the Commission has revealed insufficient legislative and regulation base for the requirements relating to ties of rating agencies with participants of the financial services market. On March 11, 2011 there have been adopted 3 protocolary orders for enhancements of legislative and regulation base of rating agencies’ activities. Stanislav Dubko, Credit-Rating CEO thinks that ‘before the relevant normative changes be adopted, any of authorized rating agencies has no capacity to meet the existing requirements, hence the withdrawal of the status of authorized agency in a selective manner from Credit-Rating shall be deemed as purposeful actions aimed at forced redistribution of a market share to the benefit of certain players’.

Credit-Rating will seek not only for nullifying the Commission’s decisions in a court, but also to determine the extent of involvement of IBI-rating, Rurik, and Expert-Rating in these actions. In the past 10 months these entities, having obtained the authorized status, failed to win a material share in Ukraine’s rating services market. In this period the three have altogether produced 22 credit ratings reached a record of 28, whereas Credit-Rating remained the leader by both assigning new ratings (48) and by overall number of existing ratings (576). Credit-Rating CEO Stanislav Dubko thinks that ‘new players in the market have overestimated importance of the status of authorized agency, having simultaneously underestimated the value for potential clients of such factors as reputation and independence, experience and track record, quality of analysis and availability of a time-proven statistics of defaults’. In Mr Dubko’s opinion, disability of the new players to withstand the fair competition with the market leader has induced their coordinated unfair actions which may be represented by both public discrediting of Credit-Rating and by exercising other options available in a highly corrupt country.

For the short period of time, IBI-rating, Rurik, and Expert-Rating have distorted standards of rating activities in Ukraine. High quality and impartiality of rating assessments have been challenged by prior guaranteeing the client to get high ratings. Rating procedures applied by some agencies may directly provision for agreeing on rating level prior to the rating analysis, which brutally breaches international requirements and practices. The actions of the three have sparked an early unknown ‘rating shopping’ in the market – when some clients seek for a more submissive rather than for a cheaper agency. There have been cases of client exchange between IBI-rating and Rurik (one agency rates the entity affiliated with other agency, and vice versa), with Rurik having capacity to form its customer base due to administrative pressure on the clients from the side of Vadim Kopylov, who is the first deputy minister of the Ministry of Economic Development and Trade of Ukraine, whose direct relatives have explicit ties with this agency. Besides, Vadim Kopylov is attributed in mass-media to have control over certain banks, which is the ground for a severe conflict of interest in Rurik’s activities.

Credit-Rating notes that the institutional immaturity of the competitors entails discrediting of independent rating activities in Ukraine as such, especially when objective preconditions for development of rating services market have evolved. Under substantially softened regulatory requirements for mandatory ratings, a considerable rise in demand for independent ratings has been observed. An unprecedentedly large number of defaults of bond issuers in 2008-2010, which to a great extent was prompted by imperfect system of investors’ risk assessment, has resulted in a long-lasting stagnation of Ukraine’s debt market. The use of issue ratings by investors has become one of the most important factors for restoring confidence in instruments of the stock market. Over 70% of all ratings assigned by Credit-Rating in the past 3 years have had no mandatory character enjoying a demand of a market nature.

Credit-Rating believes that the rating services market must function basing on the principles of free competition among several national rating agencies on condition that their independence and objectiveness of rating analysis are secured. The system of information disclosure of rating agencies should allow investors to evaluate quality of rating analysis of any of the authorized rating agencies. The participants of the financial market should rely on credit ratings to the extent of their confidence in the analytical process of a given authorized rating agency. An important factor for building a firm confidence in rating agencies should be reinforcement of their market reputation, and their disclosure of the information that would allow for judging adequacy of their ratings produced.

The strategic efforts of Credit-Rating will be aimed at securing compliance of reformation of the state regulation of rating services market with the international principles approved by International Organization of Securities Commissions (IOSCO). For the national rating system to be integrated into the European rating market, the changes in legislative regulation of rating services market shall take account of purposes of regulation and of development trends of this market in the EU. To achieve these goals Credit-Rating continues cooperation within its membership with the European Association of Credit Rating Agencies (EACRA). The Credit-Rating’s growth strategy encompasses broadening of application of credit ratings by the market in Ukraine, and expansion of its presence in Europe.

Information on all credit ratings assigned in accordance with the National Rating Scale may be found in THOMSON REUTERS and BLOOMBERG information systems.

For more information, please contact:
Department of Information and Communications 
Sergey Rozumyak +38044490 25 50 
SRozumyak@credit-rating.com.ua 
Denis Rudenko
DRudenko@credit-rating.ua