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March 19, 2019

The AAA ratings debate 320 Fahrenheit ≠ 320 Celsius

Global and national rating scales serve different needs
Absolute number of AAA ratings does not indicate quality, but default and stability rates do

There has been a lot of debate recently on the relatively large number of AAA ratings that Indian credit rating agencies (CRAs) have assigned compared with their counterparts in developed countries such as the US.

 

Such a comparison is incorrect because it is an artificial construct.

 

It would be tantamount to equating the scale of a FIFA World Cup with Santosh Trophy.

 

Or Fahrenheit with Celsius.

 

Which begs answers to three obvious questions:

 

  • Is it right to directly compare global and national scale ratings?
  • What are the reasons for the high number of AAA rated companies in India, or fewer on a global scale?
  • Does it necessarily indicate weak assessment standards?

Before we come to the answers, it’s important to remember these aspects:

 

  • Investors in developed economies consider investment options across the world. Credit risk assessments that benchmark issuers across the world on a global scale provides them with valuable and comparable information to make investment decisions.
  • A national rating scale provides a more granular benchmarking of issuers and factors in domestic realities such as support from stronger national or international parents, and from the government.
  • It is also important to consider the depth, width and angularities of each national debt market when assessing AAA rated companies by numbers.

 

We believe any informed discussion should begin with these aspects.

 

And finally, it is not the number of AAA rated companies that determines the quality of ratings or the underlying credit, but the probability of default that the ratings exhibit over a period of time. This is captured and quantified by the ‘default and stability rates’ put out by CRAs.