SEC cuts minimum paid-up capital of credit rating agencies

The Securities and Exchange Commission has reduced to P10 million the proposed minimum paid-up capital requirement for credit rating agencies from the original plan of P50 million which was deemed too high by the industry.

SEC Chairperson Lilia R. Bautista said the Commission decided to reduce the required minimum paid-up capital to P10 million to give way to numerous requests from various credit rating agencies.

Bautista said a number of credit rating agencies still oppose the required P10 million paid-up capital, saying such amount is way too high considering their regular operating requirements.

The Philippine Rating Services Corp. however, is in favor of the proposed P10-million paid-up capital, saying this could be a good benchmark for capitalization of credit rating agencies.

Philrating earlier objected to the proposed P50-million minimum paid-up capital because the amount was higher than the minimum requirement for some financial institutions (such as rural banks, lending investors) whose transactions with the public are of a greater and wider magnitude.

Philratings said the quality of a credit rating and the credibility of the rating process have nothing to do with capital. "It is the knowledge, skills, ability and good judgment of analysts and the rating committee which are of the essence," the company said.

The credit rating agency said the level of paid-up capital should be the amount required to start the business and bring it to a point of relative financial self-sufficiency that can be sourced from equity funds or from borrowings.

At present, credit rating agencies don’t have a minimum paid-up capital requirement.

The imposition of a minimum paid-up capital was incorporated in the SEC’s new set of rules governing the regulation of credit rating agencies to ensure that they provide an informed and balanced assessment of an issuer’s credit quality.

A credit rating agency is any independent body engaged in the business of assessing an issuer’s ability to pay interest and repay capital in a timely manner. Credit rating is required for all issuers of commercial papers.

To ensure that a rating is accurate during the course of a normal business cycle of an issuer, the SEC said a credit rating agency should monitor on a continuous basis each issuer whose securities it rates and raise or lower ratings to reflect significant changes in credit quality.

A credit rating agency, the SEC said, is required to advise an issuer in advance of any proposed change in the rating, provided, however, that a credit rating agency may withdraw a rating without prior notice based on lack of information or receipt of material adverse information.

If a credit rating agency decides to downgrade a rating, it should withdraw the rating upon request of the issuer but only after it has been publicly disseminated.

The rules also provide that credit rating agencies have to be accredited by the SEC and must disclose their criteria used to rate securities as well as their limitations. – Zinnia dela Peña