World practice of using ratings

Ratings are widely used in the global financial markets to compare companies in different sectors of the economy and for investment decision-making. In addition, the state uses credit ratings for regulatory purposes.

Credit ratings appeared in the USA in the first half of the 19th century in the period of development of new territories in order to increase the demand for bonds of railway companies. In particular, they were used for the active attraction of private capital into the financial market, as the railroad construction was going on at the expense of private investors, almost without the state resources being attracted.

It was at that time that the foundations were laid for the creation of the first rating agency, namely Standard & Poor's. In the context of the situation existing at that time, Henry Poor published ‘The history of railways and channels of USA’, a paper, in which he tried to organize the financial and operational statements of the companies operating in the railway sector. Such information proved to be necessary to the market and subsequently became popular, which helped to develop and publish such a research on a regular basis. The rapid development of the world economy and its globalization contributed to the spread of demand for rating services in Europe and Asia. In the 70s years of the twentieth century the state regulation of rating evaluations was consolidated at the legislative level in the United States, which was eventually followed by most countries of Eurasia.

For today, credit ratings are used in all the EU countries for regulatory purposes in the determination of capital requirements. The benchmark is the latest revision of the recommendations of the Basel Committee on Banking Supervision (Basel-II and Basel-III). According to these documents, credit ratings have to be taken into account when calculating the amount of regulatory capital (ratings characterize the level of credit risks of the assets in which the capital is placed).

In the insurance legislation of a number of countries the accounting of assets in the reserves is only possible provided that they have a rating, sometimes there are requirements to its minimum level, as well. In the Netherlands, if the pension funds insure their assets, reserves have to be set up on a mandatory basis in order to cover for the risks of non-payment in the event of the insurance case. In Canada, the need for an additional capital increase of life insurers depends on the credit rating of the assets that are taken into account when calculating the adequacy and completeness of capital.

In Japan, credit ratings are used for calculating a solvency margin of insurers, while in Australia, they are used when calculating the regulatory capital requirements to life insurers.

Some countries also use credit ratings when classifying the assets advisable for investing, as well as in the context of the allowable concentrations of assets, such as collective investment institutions and non-governmental pension funds. In Canada, ratings are used to identify securities that can be used as collateral for lending. Information on the grade of credit rating is often present in the list of the data mandatory for disclosure to the public.

For example, in many countries, the grade of rating is required to be disclosed in an issue prospectus. Some countries use the simplified prospectus standards for those issues that have been assigned an investment grade rating. A large number of financial institutions (primarily banks) use credit ratings when determining the expediency of lending to a borrower. The practice of accounting of credit rating is also quite common when determining an interest rate on the loan, or the conditions of the collateral provision. In this case, the higher the credit rating, i.e. the borrowing company is rated as more reliable, the better the borrowing terms can be.

In the case of a public offering of securities (stocks, bonds), the availability of a credit rating is an important, though not always a mandatory condition for successful attracting of investments. In this case, the investor takes into account not only the grade of credit rating as such, but even the fact of its presence as the latter indicates on the openness of the issuer.

Thus, a credit rating as such is an important condition for the open market and is widely used at the international level, namely:
  • for regulatory purposes;
  • when negotiating with an investor and attracting funds, both through public borrowings, as well as in the form of loans;
  • for improvement of risk management systems in the financial institutions specializing in investment lending.

For today, in Ukraine there are three international agencies that are recognized by the National Commission on Securities and Stock Market, namely: Standard & Poor's, Moody's Investors Service, Fitch Ratings. Thus, the grade of the rating evaluations that these rating agencies can use when determining ratings in the territory of Ukraine was approved by the decision of the National Commission on Securities and Stock Market N 2314 of 27.12.2007