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The Fig Leaf Rating Agency

July 6, 2012

We have repeatedly cautioned investors in Indian debt paper against relying on the credit ratings of rating agency CARE.  The last time we did that was in the October 2011 piece   It is better to be always wrong than sometimes right https://crediteye.wordpress.com/2011/10/13/it-is-better-to-be-always-wrong-than-sometimes-right-the-rating-agency-paradox/).  In that piece, we had,while reiterating our belief that it is better to avoid the agencies all together, averred that relying on the ratings of CARE would be priceless folly.  Elsewhere we had opined that if one had no choice but to rely on the agencies for analyzing Indian debt paper, the prudent thing would be to rely on rating agencies ICRA and CRISIL (the Indian partners of Moody’s and S&P respectively).  Since then several entities rated highly by CARE have turned turtle.  Earlier this week, media group Deccan Chronicle (a pallbearer of good corporate governance), rated AA by CARE ,defaulted on its borrowings.  Investors have lost big money relying on CARE’s ratings on HCC, Bharti Shipyard etc.     

There is a push factor and pull factor for CARE’s ratings that have no semblance of correlation with actual credit quality.  From CARE’s point of view, assigning high ratings is a business development strategy to secure market share.  But there is a more insidious driver that is usually not noticed – the pull from institutional investors to assign high ratings to provide a fig leaf to their questionable investments.  This is particularly true for funds which raised money from foreign investors with the promise of ultra high returns.  Obviously the foreign investors need to be comforted that their money has been invested in quality paper.  CARE has provided the fund managers / CEOs of such funds with the fig leaf  they seek. 

The fig leaf  is a replica of the fig leaf that international rating agencies provided to fund managers that invested in crappy sub-prime mortgage paper.  Foreign investors who are relying on their Indian fund managers to deliver high returns are due for disappointment in a few years when the principal on their investment becomes due.

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From → Credit Analysis

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