Markets
Making the best of credit ratings
Cheah Chor Sooi 
Credit ratings are increasingly used by companies as part of due diligence checks and to verify international clients, says Tan (right). with Lai adding that lenders, business partners or investors would be keen to gain access to their risk profiles in the form of credit score/rating
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CREDIT score is commonly used by financial institutions to conduct credit assessment on individuals or smaller business loans. Using a consistent scoring/rating system will enable banks to automate their decision-making process in view of the high transaction value and volume of loan applicants.

Although a similar credit score concept can also apply to listed companies – more profoundly known as credit rating – it typically serves as one of the many criteria in the context of credit assessment alongside other factors which include business operations, management strength and business track record.

Very broadly, credit reporting agencies (CRA) such as RAM Credit Information Sdn Bhd (RAMCI) usually have large information databases of individuals and businesses which are listed companies.

This enables RAMCI to provide access to credit information tapped from the Companies Commission of Malaysia (CCM) such as capital structure; shareholders’/directors’ profile; company encumbrances; financial information; credit information such as past litigation history, bankruptcy and legal suits; conduct of payment with banking as well as trade creditors.

“Credit score/rating on individuals and companies can be derived based on the above information by using a methodology to derive an objective and consistent risk profile measurement of the entities,” RAMCI CEO Dawn Lai tells FocusM.

Notwithstanding credit score/rating, RAMCI goes further to recommend a comprehensive credit report which comprises business overview, financial analysis, credit history and industry outlook to complement credit score/rating.

“Any lender, business partner or investor that has been dealing with listed companies would likely be keen to gain access to their risk profiles in the form of a credit score/rating or credit report,” Lai points out.

In addition to their credit score/rating, the payment behaviour of listed entities towards their bank loans – or even to their trade creditors (vendors or suppliers) – also forms part of the assessment on their credibility.

“It is also important to make reference to industry-related indicators to look out for any market information and the business outlook of the particular listed company,” she asserts.

RAMCI, together with RAM Holdings Bhd – its institutional partner – jointly conduct quarterly business sentiment survey, the RAM Business Confidence Index, which covers more than 3,000 companies across five main industries on expectations in the aspects of turnover, profitability, business expansion, hiring and access to financing, among others.

RAMCI’s database covers almost all active companies, including the 903 companies listed on Bursa Malaysia. The key challenge to provide an updated credit score/rating on companies is the availability of updated financial information as financial strength is part of the input parameters for generating credit score.

“Typically, a copy of the financials would only be made available at CCM about seven to nine months after the financial year-end, upon the completion of audit, compliance and filing process,” reveals Lai.

There is no qualm that credit rating is an invaluable tool for understanding a listed company, especially its financial health, according to Singapore-based DP Information Group general manager Sonny Tan.

The company’s DP Credit Rating is a statistical risk model based on the concept of probability of default (audited financial statements are a pre-requisite for its rating to be generated).

 

Creditworthiness

Tan further views credit rating as functioning in reciprocity. While listed companies use their credit ratings to demonstrate their financial strength, thus securing more favourable access to finance, banks and financial institutions will use credit rating to assess a listed company’s creditworthiness prior to offering finance.

“Our credit ratings are used by companies as part of their ‘know your customer’ procedures where they are used to identify and verify the ID of their customers,” Tan says. “Credit ratings are increasingly used by companies as part of due diligence checks and to verify international clients.”

Aside from credit rating, he deems a company’s payment behaviour as providing insights into its financial position.

“If a company is not making prompt payment, then it may indicate deeper problems within the business,” suggests Tan. “It is also important to assess the profile of a listed company’s suppliers and customers to see if they are over reliant on one company.”

On standards front, RAMCI’s Lai says it is imperative for CRA to meet international practice benchmarks, especially those followed by its counterparts in developed economies.

“RAMCI is the first and the only CRA in Malaysia to achieve ISO/IEC 27001: 2013 certification [since January 2017],” she enthuses. “This is an international standard and accreditation for Information Security Management System.”

The certification confirms that RAMCI’s rigorous approach to information management, security and compliance is based on the latest international best practices, controls and industry standards, and it underlines its status as Malaysia’s leading credit bureau.

DP Information’s Tan opines that it is imperative for a credit rating agency to possess the highest level of integrity as the information it provides is relied upon by lenders, borrowers and investors.

“Security and confidentiality are critical concerns as much of the information provided to credit rating companies is commercially sensitive,” he asserts. “To protect its data, credit rating companies must ensure they have the highest level of data security to safeguard the interests of both the borrowers as well as lenders.”

What does credit score/rating entails?

THERE is a distinction between credit rating and credit score although they may be used interchangeably in some cases. Credit rating usually conveys the creditworthiness of a business or government, while credit score – also an expression of creditworthiness – is often used for individuals.

Typically, credit rating which is often expressed as a letter grade (Standard & Poor’s credit rating scale ranges from AAA [excellent] and AA+ to C and D), while credit scores are expressed in numbers (the FICO scores range from 300 to 850 of which the higher the score, the better).

In essence, both credit score and credit rating are designed to show creditors a borrower’s likelihood of repaying a debt. Hence, they are sometimes referred to as risk scores given they help lenders assess the risk of a borrower not being able to repay his debt as agreed upon.

Similarly, the scores enable financial institutions to decide on whether or not to offer credit or what the terms of the offer (such as the interest rate or down payment) should be like.

All-in, credit ratings and credit scores are created (and paid for) by independent third parties on behalf of creditors or investors who request for the credit rating/score.

In general, the scores are generally affected by elements in credit report such as:

• Payment history for loans and credit cards (including the number and severity of late payments);

• Credit utilisation rate;

• Type, number and age of credit accounts;

• Total debt;

• Public records such as bankruptcy, civil judgments, or tax liens;

• Number of new credit accounts recently opened; and

• Number of credit report inquiries. 



This article first appeared in Focus Malaysia Issue 249.