SEC readies strict rules on credit rating firms

The Securities and Exchange Commission (SEC) has drafted the proposed rules imposing strict regulations on credit rating agencies under the Securities Regulations Code (SRC).

The proposed rules will govern the accreditation of credit rating agencies as well as the rating criteria they will use and the monitoring of rated issuers.

In its proposed implenting rules, the SEC has limited the issuance of credit ratings to accredited credit rating agencies.

Under the rules, the SEC also requires credit rating agencies to continue monitoring issuers whose securities have been rated to ensure that the rating would remain accurate during the course of a normal business cycle.

The rating, according to the SEC, would be based on the likelihood of default by the issuer, the nature and provisions of the debt obligation and the protection afforded by the obligation in the event of bankruptcy, reorganization or other arrangement under the law and other factors affecting the creditors.

Moreover, the SEC said credit rating agencies would further rate issuers based on economic risk, industry risk, market position, business diversification, management and strategy, financial risk, capital structure, leverage and financial flexibility.

To apply for accreditation, the SEC said credit rating agencies will be required to have a minimum paid-up capital of P50 million.

The agencies will also be required to submit the list of shareholders, business activities, ownership structure, code of conduct to ensure independence of rating.

Aside from these, agencies would also submit their rating scales and the agency’s operating procedures, rating policies, rating criteria and other rationale it would use for issuing a rating.

The SEC’s proposed rules also detail the credit rating requirements of issuers of commercial papers.

According to the proposed rules, all issuers of commercial papers amounting to more than P50 million would be required to get a credit rating from any of the accredited credit rating agencies prior to the issuance of the debt papers.

The SEC said issuers of commercial papers P50 million and below would be required to meet a 1.21:1 current ratio or at least 0.5:1 acid test ratio and a net profit margin of at least three percent or an average annual return on equity of at least eight percent.