Nine Dragons and S&P

David Webb’s 14 June 2011 blog, Nine Dragons spotlights SFC regulation of CRAs, raises a legitimate and important question about the timing of credit rating agency press releases, but his analysis misses the mark.

Mr. Webb, former investment banker, small-cap investor and self-proclaimed advocate of transparency and minority shareholder rights in Hong Kong, describes rating agencies as crony “agents” of the companies they are paid to rate because of their access to privileged information. He implies that S&P withdrew ratings on Nine Dragons as a form of #blackmail–a habit of thinking no doubt formed as an investment banker.

What irks Mr. Webb isn’t so much that S&P withdrew the ratings on Nine Dragons (which surely is evidence that S&P is not an agent of the company) as that they did so during trading hours, and those who didn’t get on the S&P website or subscribe to a wire service were caught out. The stock price plummeted 20%, and trading was suspended.

The S&P press release presents a slightly more nuanced picture of its rationale for withdrawing Nine Dragon’s ratings. Register and read it for free on S&P’s website.

During the Asian Crisis, CRAs downgraded Asian companies during NY trading hours without warning. Yes, it was after hours. But that created a whole new set of problems. Local companies were unable to take action to mitigate the damage to their image, and local investors could not defend themselves against stock price volatility, while they slept.

Mr. Webb wants Hong Kong’s Securities and Futures Commission (SFC) to pay more attention to when CRAs release information.

In fact, Hong Kong’s CRA Code does look at the timing of disclosure. Part 3 stipulates that the CRA has a responsibility to report rating updates in a timely fashion, with sufficient clarity and context that their meaning, usefulness and limits can be readily understood by users. For serious equity investors, I think S&P’s press release does that. It states very clearly that Nine Dragons’ finances look to be stable for at least another year.


As the author of Hong Kong’s CRA licensing study manual, I think debates about information release are healthy. The financial markets are increasingly connected, and CRA analysts need to make the diverse population of users aware of what ratings mean and how they are used. They need to anticipate the impact their disclosures will have—even in the equity markets. But, there is a limit to how much CRAs can control after the information is released.

We should remember that CRAs derive significant power from the investor market’s ignorance about credit ratings and debt capital. And, by the way, so does David Webb.

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Comments (2)

  • John Chan


    Where does Webb say anything about cronies and blackmail? You have quite an imagination! He’s right that the agencies are agents of their clients, the issuers – that’s a fundamental aspect of the law of agency.


  • Ann


    In a trivial sense, this is true. And in that sense, research analysts are agents, too. CRAs could also be said to be agents of bond investors.

    Moreover, the agent role is generally small and well-defined. CRA work does not fit this mould comfortably.

    CRA analysis is supposed to be neutral and objective, favoring neither sell-side nor buy-side interests. That is why CRAs have been exempted under securities law from certain constraints normally imposed on sell-side agents. Perhaps they shouldn’t be; stricter controls are certainly the intent of Paper 10, IOSCO Code and other regulatory initiatives taken since 2008.

    But, David Webb’s analysis reflects a very limited perspective. He interprets the withdrawal of ratings as a sign of a breakdown in the relationship. Rating withdrawals can be, and often are, the result of a mutual decision by the issuer and the rating agency.

    His interpretation also ignores the sensitivities of the rest of the market. Corporate ratings are supposed to be valid through the cycle and over the remaining tenor of the bond. S&P had company and note ratings that it didn’t feel would be valid for more than another year, according to the press release. Process controls and fiduciary responsibility obliged S&P to act, and to disseminate the rating decision as soon as possible. That is what they did.

    Anyway, I fail to see what price-sensitive information was disclosed as a result of the press release. I do see that equity investors might not have been cognizant that Nine Dragons’ carried a junk rating on its notes and the company rating was dangling on the edge of the IG cliff. But, those ratings had been there for awhile. Its finances were risky. Riskier credits are expected to have higher stock price volatility.

    Regarding the blackmail argument. Absolutely, David Webb is invoking the old investment banker refrain that CRAs blackmail their recalcitrant clients by taking rating actions (or threatening to) to extract information from them. Had S&P downgraded Nine Dragons, there would be more support for this line of reasoning.

    The history of the #blackmail debate (do CRAs blackmail their clients into surrendering information or do investment banks blackmail CRAs into giving their clients unduly favorable ratings) is rich and interesting. Good keywords for a web search are Moody’s Investors Service, blackmail, the U.S. Department of Justice, and the year 1996.


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