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Rating bungle!


11 June 2015 02:34 am - 0     - {{hitsCtrl.values.hits}}


The fate of the pending debt issues already rated by Lanka Rating Agency (LRA) hangs in balance with the Securities and Exchange Commission (SEC) halting EAP Broadcasting Company Ltd’s (EBC) Rs.3 billion debenture issue on Tuesday.

According to the Colombo Stock Exchange (CSE) sources, there are about four pending debt issues rated by LRA. The documentation seeking listing of these debt securities has already been submitted to the CSE.

Mirror Business learns that the matter was deliberated at length during Tuesday’s SEC Commission meeting, during which the decision to halt EAP Broadcasting’s debt issue until they obtain a rating from an independent rating agency, was taken. 

But a conclusion regarding the pending debt issues rated by LRA was not reached. The SEC Commission must have taken an immediate decision on EAP Broadcasting’s debt issue as it was originally scheduled to open today. 

In the particular case regarding EAP Broadcasting, Mirror Business learns that the two EAP Broadcasting directors, who are also members of the Rating Committee of LRA, did not take part in the rating process of the said proposed debenture. 

However, EAP Broadcasting and LRA share a common Director, Preethi Jayawardane, about whom the company had declared in the prospectus of the said debenture issue. (See box)

Meanwhile, the SEC’s directive to stop LRA from issuing ratings with effect from March 25 was believed to be largely based on the nature of affiliation LRA has with a foreign rating agency. 

The SEC, as the official body regulating rating agencies, says a local rating agency applicant should be promoted by a foreign credit rating agency recognized in the country of its incorporation, having at least five years of experience in rating securities. 

The website of LRA, formerly RAM Ratings Lanka, a wholly-owned subsidiary of Malaysia’s RAM Ratings, says they have a Memorandum of Understanding (MoU) with India’s CRISIL “to obtain the technical assistance and training related to credit rating.”

The rating reports issued by LRA also state that their technical partner is CRISIL India, the largest rating agency in India, of which the majority shareholder is Standards & Poors. 

The website however also states presently LRA is using the rating criteria and methodologies obtained from RAM Holdings Berhad, which was customized to cater to the Sri Lankan market.

However, the SEC appears to be of the view that an arrangement of this nature is not adequate as it is not a fully-fledged agreement between the two entities. 

Meanwhile, Mirror Business learns that the Central Bank, as the regulator of banks and finance companies, is also in a quandary as a few banks and a number of finance companies have obtained ratings from LRA. 

During the last year and the year before, a disturbing trend emerged as a number of listed entities opted to switch their rating agency when they received a not so favourable rating from the rating agency they had hired.  

Though analysts pointed out the possible negative consequences of this trend, the regulator at the time was not seen paying much heed to the development. 

EBC says it will obtain another rating 

EBC in a statement yesterday said it had taken steps to obtain another credit rating in order to reintroduce the debenture at the next earliest opportunity.
The company however stated the prima facie conflict of interest case pointed out by the SEC was non-existent, as the common directors were appointed after the rating was obtained by EBC from LRA. 

“It must be noted that the rating given by LRA on 30 September 2014, re-affirming the ‘BBB’ rating was before all the directors assumed duties on the board of EBC.
Since their appointments, (duly notified to the LRA), EBC has been assured by LRA that these directors have not participated in any rating activities pertaining to EBC,” the statement said. 

It further stated that the review of the latest rating, which happened after this said director assumed duties on the board of EBC, did not change the original rating and therefore, no benefit was accrued to EBC as a result of the appointment. EBC also noted that the disclosure of directors’ positions in LRA was made clearly in the prospectus of the debenture issue. 

“In our view, any form of conflict of interest only occurs where individuals, subject to such circumstances, participate in deliberations relevant to such conflict of interest situations and not otherwise. Both of the situations in our view, do not fall into any such category of conflicts of interest.”

“Therefore, EBC feels that a further, more prominent disclosure, would have been sufficient, if the existing disclosure in prospectus was deemed to be inadequate,” the statement said. 


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