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Regulators consider stand-alone rating

Conglomerate units, public firms relying on external support likely to see their ratings drop

Korea’s financial regulators are considering the introduction of stand-alone ratings to weed out nonviable affiliates which have inflated their corporate ratings through their links with parent firms with better ratings.

According to officials at local ratings firms and financial authorities, the new system is being reviewed so that investors could check the viability of listed companies.

The Financial Supervisory Service, the country’s top financial regulator, did not release an official statement about the system, but a couple of FSS officials told the local press the stand-alone rating system is indeed being considered.

“Under the stand-alone rating system, many of the firms with investment grades will see their ratings go down, so the related data was not disclosed because of the impact,” said an official at a rating agency.

The latest move reflects the deep-rooted skepticism about corporate ratings of Korean companies. Although some firms are saddled with debt and faltering businesses, they continue to keep their ratings at investment grade thanks to their connections with financially healthier parent firms or other affiliates.

The FSS is now aiming to change the conventions that seriously misrepresent the overall credit picture of Korean companies, though investors have long been aware of the inflated ratings.

The FSS conducted an investigation into the country’s top three ratings companies ― NICE Investors Service, Korea Investors Service and Korea Ratings ― from mid-August through mid-September. At the time, their credit assessment standards were under criticism as a series of companies with investment ratings sought bankruptcy protection, dealing a blow to the credibility of the system.

Ratings firms said the FSS first floated the idea for a stand-alone rating, but implementing the system is difficult. One of the difficulties are the diverse forms of support exchanged through interlocking affiliates at major conglomerates here. Some affiliates get a lot of financial support, while others remain neutral or relatively independent. This variety makes it difficult to set up universal standards.

The FSS is currently hearing opinions about the new system, exploring various options for implementation and assessing possible fallout in domestic industries as well as the financial market.

The new system is expected to reveal that some of the conglomerates’ units, public companies and financial firms have lower credit ratings than previously thought. Public companies run by regional administrations are particularly vulnerable as the majority of such firms rely heavily on taxpayers’ money to run their operations.

By Yang Sung-jin (