The securities and Exchange Organization has given the go-ahead for creating credit ratings agencies to increase market transparency as a first step to acquiring the trust of foreign investors, according to head of the organization Mohammad Fetanat.
Iran’s bond market is expanding rapidly and needs to soak up money. The SEO hopes providing credit ratings on Iranian debt will put foreign investors’ doubts to rest.
“Individuals and companies interested in registering a credit ratings agency can get a permit from the SEO,” SENA news agency quoted the SEO chief as saying.
Credit-rating agencies assess the creditworthiness of bond issuers - companies or, as in this case, countries who borrow money by issuing bonds. The ratings are given to large-scale borrowers and are an indication to buyers of this debt how likely it is to be paid back.
The score card can also affect the amount that companies or governments are charged to borrow. It affects the interest rate that a security pays out, with higher ratings leading to lower interest rates.
Iran’s bond markets are growing fast. According to Fetanat, 189 trillion rials ($5.4 billion) worth of Islamic bonds are currently on offer in securities markets – five times more as compared to three years ago. If these baby steps are to lead somewhere, credit ratings are a must.
Registering a credit ratings agency needs at least 50 billion rials ($15 million at current market exchange rate) of equity and applicants will be vetted by the SEO for their ‘expertise’.
Seeking Foreign Help
As Iranian businesses lack experience in running a credit ratings operation, the SEO is hoping foreign firms would get involved.
“We prefer this happens with the participation of people who have the technology to do so, as ratings methods need expertise and a high scientific level, so it is better that ratings agencies operate through joint ventures,” said the executive. “We have allowed for cooperation with foreign ratings agencies if they accept our conditions.” He did not elaborate on the conditions.
The global credit ratings market is dominated by three names—Standard & Poor’s (S&P), Moody’s, and Fitch Group—though there are many other smaller agencies, especially in Europe. S&P and Moody’s are based in the US, while Fitch is dual-headquartered in New York City and London, and is controlled by Hearst. They hold a collective global market share of roughly 95% with Moody’s and Standard & Poor’s having approximately 40% each, and Fitch around 15%.
Iran is in talks with Moody’s Investors Service and Fitch Ratings about restarting sovereign credit ratings for the country, Economy Minister Ali Tayyebnia said in May.
The agencies have long abandoned assessing Iran. Fitch withdrew its B+ sovereign rating, the fourth-highest junk grade, for Iran in 2008 following the maturity and full repayment of its last sovereign Eurobond that year. Moody’s withdrew its B2 rating on Iran in 2002, according to data compiled by Bloomberg.
Rating agencies use different systems involving a long list of letters. A top mark is AAA or Aaa and down to BBB or Baa3 is also safe. Lower grade bonds from BB or Ba1 down to C is speculative - or “junk”—which is the last grade Iranian government debt has held.
The SEO wants a credit rating for every listed company. But it has stopped short of mandating it for now. Fetanat says having a rating will become mandatory. But the SEO is going to start slowly. Banks are likely to be the first group in line to get ratings, “as most are listed on exchanges,” and issue bonds regularly, according to the SEO chief.
