Credit rating

Credit rating (신용평가/信用評價) is to evaluate the credit worthiness of an issuer of specific types of debt, and to indicate a certain symbol within the rating scale, e.g., from AAA to D. Credit ratings are determined by credit ratings agencies (CRAs) to give investors useful information on the likelihood of default of the specific debt, i.e., bonds, debentures, CPs, etc.

The credit rating represents the CRA's evaluation of qualitative and quantitative information for a company or government; including non-public information obtained by the credit rating analysts.

Key words
credit rating, CRA, rating symbol, default, structured financial products (구조화금융상품), CRA reform

Statutory ground
Subject to the recent amendment (by Act No. 11845 on May 28, 2013) to the Financial Investment Services and Capital Markets Act (자본시장 및 금융투자업에 관한 법률, the "Capital Markets Act"), the application for credit rating business and licensing requirements, duties and responsibilities of credit rating agencies shall be regulated by the new Act.

Prior to August 29, 2013, CRAs were governed by the Act on the Use and Protection of Credit Information (신용정보의 이용 및 보호에 관한 법률, the "Credit Information Act"), whose English translation as of May 2011 is available here. The Act regulates other credit information businesses than credit rating business (신용평가업) - credit inquiry business (신용조회업), credit investigation business (신용조사업) and claims collection business (채권추심업).

The regulatory supervision of CRAs has been shifted from the Credit Information Act to the Capital Markets Act to ensure fair and transparent credit rating for the purpose of investor protection, and to enforce fair disclosure of credit rating methodologies and credit rating report to relevant investors. Also it was necessary because the External Credit Assessment Institutions (ECAI, 적격 외부신용평가기관), which are designated by the Financial Supervisory Service in accordance with the Basel II and global standards like IOSCO Code, have to do credit rating of the State, local governments, corporations, legal entities established by special laws and non-profit organizations for BIS Rule-regulated banks. In general, credit rating services are regarded as indispensable to overcome the 'informational asymmetry' (정보의 비대칭성/情報 非對稱性) in the capital markets. However, in the aftermath of global financial crisis triggered by the U.S. sub-prime fiasco in 2007 and 2008, CRAs have been criticized for their wayward rating practices around the world.

With respect ongoing discussions on the performance of credit rating agencies, see more about the CRA reform.

Credit Rating Agencies
In Korea, credit rating business shall be licensed subject to the Capital Markets Act. There are three CRAs: KR (한국기업평가), NICE (한신정평가) and KIS (한국신용평가). SCI (서울신용평가정보) with no credit rating service of unguaranteed bonds joined in 2000. Credit rating service market, amounting to 79 billion won in 2010, is currently divided almost evenly by KR, NICE and KIS, with around 0.5 percent of which belonging to SCI.


 * Korea Ratings: Founded in 1983, capital 24.4 billion won, whose 73.55% owned by Fitch Ratings, 170 analysts and staff as at 2011 yearend.
 * NICE Investors Service: Separated from the Credit Rating Division at National Information and Credit Evaluation, Inc. (한국신용정보) re-established in 2007, capital 5 billion won as of 2010 yearend.
 * Korea Investors Service: Founded in 1985, re-established as a Joint Venture with Moody's Investors Service in 1998, KIS capital 5 billion won whose 50% plus one share owned by Moody's and remaining shares owned by NICE Holdings as of 2010 yearend.
 * Seoul Credit Rating & Information Inc.: Founded in 1992 by the purely private investors, capital 17.8 billion won as of 2010 yearend.

Credit Rating Symbols
CRAs assigns letters and symbols to an issuer or debt instruments such as corporate bonds, asset-backed securities (ABS), commercial papers (CPs). The rating scale is varied at each CRA, but anything lower than BBB- rating is considered as speculative or junk bond.

Bond ratings
KR explains its rating symbols and definitions as follows:
 * AAA: Capacity for timely payment is extremely strong.
 * AA: Capacity for timely payment is very strong, but somewhat less than ‘AAA’
 * A: Capacity for timely payment is strong, but somewhat susceptible to external changes in the future.
 * BBB: Capacity for timely payment is adequate, but more likely to be weakened by future market changes.
 * BB: Capacity for timely payment faces no immediate problems, but speculative in its future stability.
 * B: Capacity for timely payment is poor and speculative.
 * CCC: Contain the possibility of default.
 * CC: Contain more possibility of default.
 * C: Highly likely default
 * D: In default at the present time
 * The ratings from ‘AA’ to ‘B’ may be modified by the addition of a plus(+) or minus(-) sign to show relative standing within the major rating categories.
 * The rating outlook is only to issuers or long-term debts, excluding structured products, and varies from Stable, Positive, Negative, Evolving, to None.

Commercia Paper ratings
KR evaluates CPs in the order of the best creditworthiness to the worst A1, A2, A3, B, C, D.

Depending on the rating watch, KR assigns three types of arrows: ↑ (Positive Review), ↕ (Evolving), ↓ (Negative Review), respectively.