In simple terms, the role of a rating agency is to independently differentiate credit quality across all industry sectors and investment instruments, with the purpose of providing investors with the information on which to base appropriate investment and pricing decisions. Put differently, a rating quantifies the relative risk of default (expressed in the form of the accordance of a Rating Symbol) over a defined period of time. In the final analysis, a rating agency is judged on the accuracy of its ratings over a prolonged period of time, and its track record for pro-actively (rather than reactively) adjusting its ratings to take into account changing circumstances over time. When the agency can prove that there is a great deal of correlation between its rating symbols and probability of default, then the market can place reliance on these ratings for purposes of establishing investment/counterparty limits, pricing for credit risk and monitoring credit exposures.
Crucially, GCR has now established an unrivalled track record for ratings accuracy in emerging markets. With an overall investment grade default ratio of only 0.9% over the past 10 years (despite severe emerging market crises and “systemic shocks”), this is far and away the most accurate of any agency operating in emerging markets. In fact GCR reflects more favourably than both Moody's and Standard & Poor's US default history, as the equivalent cumulative default rate for all investment grade rated securities of S&P and Moodys was 1.4% and 1.5% respectively (according to the Financial Times 2003 International Credit Ratings publication).
GCR continuously validates its ratings by way of:
Monitoring the correlation between the ratings accorded and the yields demanded on the securities over time
Utilising “back testing” to ascertain the correlation between ratings accorded and actual defaults over time.
In the event of “ratings migration”, GCR also monitors its own actions against those of competitors and then utilises “actual subsequent developments” to ascertain who was most timely/accurate.
The overriding objective is to ensure that the correlation between GCR's ratings and probability of default data is in line with that of S&P and Moodys' US data.
As a result, there is a direct correlation between GCR's ratings and the yields demanded by investors, as evidenced below:
An overview of GCR's regulatory recognition
In developed markets it is the norm for rating agencies to be “accredited” by the relevant market authority (normally the Securities Exchange Commission or its equivalent). Such accreditation is granted once the rating agency has demonstrated its technical competence and market acceptance, and after adhering to all the Authority's laid down guidelines in order to qualify for accreditation. The basic concept is that wherever there is a regulatory requirement for any form of security to be rated, this should be accompanied by a clearly specified accreditation process for rating agencies operating in the market.
In Africa , most countries have yet to implement formal accreditation procedures (largely due to the relatively undeveloped nature of their capital markets). However, over the past couple of years certain of the leading authorities (such as the Financial Services Board in South Africa , the Securities Exchange Commission in Nigeria , the Capital Markets Authority in Kenya and the Reserve Bank in Zimbabwe ) have made it a regulatory requirement for rating agencies to be officially accredited.
Note that GCR is currently the ONLY international rating agency to have qualified for accreditation in all of the aforementioned major African markets.
GCR has also been accepted as a pre-approved rating agency by the IDB-CGAP-EC Rating Fund.
