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.