Launched earlier this year, Europe-based ARC Ratings is set to issue its first sovereign rating. Alexandra Mousavizadeh, managing director and chief executive officer, tells Deepak Patel it will start these with India by this month-end. ARC has CARE Ratings as its Indian partner, beside domestic rating agencies in Brazil, Malaysia, Portugal and South Africa. Edited excerpts:
How is ARC Ratings different from 'the big three' - S&P, Moody's and Fitch?
Our setup is completely different. CARE Ratings can do national (India) scale ratings and ARC will do international scale ratings, as we are regulated by the European regulatory system. We are an international body, sitting on top of these local agencies. Moody's, Fitch and S&P have a top-down approach, where they are present in their headquarters but have very little presence on the ground. They come and do the analysis and then fly out. They do not have a long-standing relationship with the issues on the ground, specially in emerging markets. They do not know the operating environment.
What about the sovereign credit rating? When will you start it?
We are rolling out our first sovereign rating soon and are going to start with India. In a couple of weeks, we will be presenting our methodology. By the end of November, we will be issuing our first rating on India. We think it is the most promising country for the need for international ratings. With our collaboration with CARE, we think we will be able to provide better ratings, with a proper understanding of local mechanics. Without criticising the big three, they have a very standard, stale, silo-ed way of looking at the sovereign credit rating of any country. They are much more focused on gross domestic product (GDP) per capita, which boxes India into lower ratings. We are also looking at a country's GDP flows and its potential growth. We will also look at the balance sheet of an economy and it will also be much more dynamic. Also, we are going to be extremely transparent. No black box; we are going to tell how and why we reached our rating.
You are in partnership with five countries' rating agencies. Is it possible that more will join?
Yes, we have been approached by four-five other rating agencies. The whole thing is in the process. We have to establish that they have the right size. They have to adhere to certain standards. We are trying to expand ourselves in order to get information about the local environment,without compromising on our international standards.
Some new regulations passed by the European Parliament say sovereign credit ratings can only be given three times a year and only after the markets are closed. What is your opinion?
This issue is critical for the way we issue ratings. Because of the rating announcements, you risk moving or potentially pushing the markets in a direction where you want to avoid. You don't want to create panic on the markets. During my tenure in Moody's, we used to issue these on Friday night, after the markets are closed or at 5 am on Friday before the markets are open. We respect this decision and will implement this across the board. The new rule regarding the issuing of ratings only three times a year is a new one. European Securities and Markets Authority (ESMA) wants to create more transparency as to when the markets can expect a ratings change. So, the markets can have some kind of visibility on when we are going to assess the sovereign ratings. If there is something that happens like the Russia-Ukraine crisis, you always have the leeway to call the rating committee that day. You just have to explain it. Everyone will understand because you have to take a decision on whether that event is credit-positive or a credit-negative.
During the 2008-09 crisis, a lot of companies which had brilliant ratings from 'the big three' went bust. What are you doing to not repeat those mistakes?
We think we have the solutions. At hindsight, there are a lot of things that the agencies did not take into account - like a lot of balance sheet questions. When you are trying to assess a country, we think you have to take a country's bank balance sheet into account. Spain, Italy, Greece could have been avoided. Still, I will say that it was not an easy call because you have a European Union construct, so it was not clear as to how things will fall, how much support Germany will give. Every country has its own set of problems. Compared to other agencies, we will take care not to give too much weight on GDP per capita for the emerging countries. We will also factor in the dynamism of the economy.
How is ARC Ratings different from 'the big three' - S&P, Moody's and Fitch?
Our setup is completely different. CARE Ratings can do national (India) scale ratings and ARC will do international scale ratings, as we are regulated by the European regulatory system. We are an international body, sitting on top of these local agencies. Moody's, Fitch and S&P have a top-down approach, where they are present in their headquarters but have very little presence on the ground. They come and do the analysis and then fly out. They do not have a long-standing relationship with the issues on the ground, specially in emerging markets. They do not know the operating environment.
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In comparison, all our presence is on the ground. We have a long-standing relationship with a company (CARE) which has been here for 20 years. Our knowledge comes from these relationships.
What about the sovereign credit rating? When will you start it?
We are rolling out our first sovereign rating soon and are going to start with India. In a couple of weeks, we will be presenting our methodology. By the end of November, we will be issuing our first rating on India. We think it is the most promising country for the need for international ratings. With our collaboration with CARE, we think we will be able to provide better ratings, with a proper understanding of local mechanics. Without criticising the big three, they have a very standard, stale, silo-ed way of looking at the sovereign credit rating of any country. They are much more focused on gross domestic product (GDP) per capita, which boxes India into lower ratings. We are also looking at a country's GDP flows and its potential growth. We will also look at the balance sheet of an economy and it will also be much more dynamic. Also, we are going to be extremely transparent. No black box; we are going to tell how and why we reached our rating.
You are in partnership with five countries' rating agencies. Is it possible that more will join?
Yes, we have been approached by four-five other rating agencies. The whole thing is in the process. We have to establish that they have the right size. They have to adhere to certain standards. We are trying to expand ourselves in order to get information about the local environment,without compromising on our international standards.
Some new regulations passed by the European Parliament say sovereign credit ratings can only be given three times a year and only after the markets are closed. What is your opinion?
This issue is critical for the way we issue ratings. Because of the rating announcements, you risk moving or potentially pushing the markets in a direction where you want to avoid. You don't want to create panic on the markets. During my tenure in Moody's, we used to issue these on Friday night, after the markets are closed or at 5 am on Friday before the markets are open. We respect this decision and will implement this across the board. The new rule regarding the issuing of ratings only three times a year is a new one. European Securities and Markets Authority (ESMA) wants to create more transparency as to when the markets can expect a ratings change. So, the markets can have some kind of visibility on when we are going to assess the sovereign ratings. If there is something that happens like the Russia-Ukraine crisis, you always have the leeway to call the rating committee that day. You just have to explain it. Everyone will understand because you have to take a decision on whether that event is credit-positive or a credit-negative.
During the 2008-09 crisis, a lot of companies which had brilliant ratings from 'the big three' went bust. What are you doing to not repeat those mistakes?
We think we have the solutions. At hindsight, there are a lot of things that the agencies did not take into account - like a lot of balance sheet questions. When you are trying to assess a country, we think you have to take a country's bank balance sheet into account. Spain, Italy, Greece could have been avoided. Still, I will say that it was not an easy call because you have a European Union construct, so it was not clear as to how things will fall, how much support Germany will give. Every country has its own set of problems. Compared to other agencies, we will take care not to give too much weight on GDP per capita for the emerging countries. We will also factor in the dynamism of the economy.