Video ID:
8643
Job Number:
6909
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Description:
A look at the role of credit ratings with Simone Utermarck and Simon Collingridge of Standard & Poor's.
Bookmarks:
0|The role of credit ratings
20|Reaching out to pension funds
88|Communication
112|A fair reputation?
196|Use as a guide?
229|Ratings
287|How are ratings used?
399|Using credit ratings
434|Real worth in what you do?
478|The USA rating
541|Ratings performance
589|Analysing sub prime & EDOs
640|Fixed income survey
727|For more information
Duration:
00:12:48
Recorded Date:
12 November 2012
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Transcript:
Presenter: To talk about the role of credit ratings in the world of pensions, we’re joined from Standard & Poor’s by Simone Utermarck, who’s Associate Director of Investor Relations, and by Simon Collingridge, who is Managing Director, Head of Market Outreach. Simone, first of all, why is Standard & Poor’s reaching out to pension funds?
Simone Utermarck: Well you see we have been in contact with asset managers for quite a while, and our outreach to pension funds really started as a global leadership initiative after the financial crisis 2007 to 2009. We felt there were a lot, there were and actually still are a lot of misconceptions about ratings in the markets, and we just wanted to help make our processes more transparent. Now the contact we have with pension funds ranges from more educational meetings with lay trustees to talking about specific sectors and topics with investment managers. Especially the bigger pension schemes are interested in getting our view on topics such as the economy, the Eurozone, the Eurozone crisis, other countries, counterparty risk of banks, infrastructure and so on. Trustees are also interested in talking to us about their sponsors, because they're often rated by Standard & Poor’s, and they'd like to get the analysts’ view on how the company is doing.
Presenter: It’s not just one way; trustees are communicating back with you, Simone?
Simone Utermarck: We do, yeah. I mean the other benefits that are in the communication we have with pension funds to us are obviously that we learn about how they're using our ratings, how does regulation impact their investment strategy and how they use the ratings, and also of course which topics they would like us to publish research on.
Presenter: Simon, it’s true to say that ratings agency have had a bad name since the fall of Lehman Brothers: do you believe that that reputation has been fair?
Simon Collingridge: In part, yeah, and absolutely there has been much sort of criticism and comment about some of it, you know, based on misperception. I think the first thing we should do is get back to the fundamentals of what a credit rating is, I think that’s the important thing, and I think the clue is in the name: we are a credit rating agency. Our rating is an opinion about the creditworthiness of either an issuer, be it a bank or a corporate, or indeed an individual debt issue, a corporate bond for example. So what we are saying with our rating, what our rating is, is our opinion about the willingness and the ability of an issuer or an issue to meet their payments in full and on time. Also what it provides is a relative ranking of creditworthiness.
So in our opinion someone that we rate single A is more likely and more able to make their payments than someone who’s rated single B, and our focus is therefore around credit. I think during the crisis, and I think as you refer to, people inferred a number of other things, a number of other qualities around our credit ratings, which they were not intended to be and were not, so a large part of what we’re doing, which Simone speaks to, is to try and if you like correct some of this, to correct some of these misperceptions about what we stand for.
Presenter: So are you saying that people should use you only as a guide to where they invest their pension funds?
Simon Collingridge: Absolutely spot on, absolutely should, we, as I say, it’s an opinion about creditworthiness, about the relative creditworthiness of different issuers and different issues. It’s not for example an absolute statement of probability of default, that’s not what it is, nor is it an opinion about liquidity, about market valuations, it is purely focused on credit and creditworthiness, and I think that’s a large part of what we’re trying to emphasise as we reach out even more to all forms of investors, including pension funds and pension trustees.
Presenter: Do the ratings you give always have to lag the market, Simon?
Simon Collingridge: I think you're absolutely right that ratings, our analysis is based on fundamental analysis, and therefore as a result one of the things is our ratings tend to be fairly stable. Does this mean that we always are behind the market: absolutely not. Let me give you one very current and really quite newsworthy example which is the views on the divergence in creditworthiness in the Eurozone. We started downgrading, for example, Greece and Italy in 2004, and at that time, and some while afterwards, the market was valuing those bonds, debt from those countries, pretty much on a par with German bunds. Quite clearly that has changed now.
So that’s one very clear example where we very much did not lag; however, and having said that, absolutely, and you're spot on to say it, our ratings are based on fundamental analysis and therefore as a result will probably not move as much and as frequently as other sort of market indicators.
Presenter: So how are ratings actually used by pension funds?
Simone Utermarck: Well you see credit ratings are one of several tools that pension funds use to assess and manage the credit risk in their portfolios. So for example trustees and directors that are part of a pension fund’s investment committee tend to set the guidelines for investment management in a statement of investment principles and procedures. Investors also often use ratings to assess the credit risk associated with potential investments they're considering. For that reason credit, ratings really are relevant to the discussions they have with their investment managers and also the investment consultants. Whether the focus is on policy design, you know, establishing guidelines for eligible investments, or matters concerning the performance of internal and external asset managers, we really believe, or we think that it helps to know, to understand the nature of credit ratings, their functionality, their limitations, and we think it makes those discussions much more efficient.
Simon Collingridge: I think perhaps I'd add to that as well, and it goes back to something we spoke about earlier, that the ratings represent a relative comparator of creditworthiness, and it’s a fairly if you like simple language. There’s a lot that lies behind a rating, you know, single A is an awful lot of methodology, analysis and fundamental analysis, but it actually is a very clear, we believe, benchmark, which enables pension funds to make comparisons which will assist in their overall investment strategy, which might be set at we want to look at anything that’s rated single A or above for example, so it is a clarity of language which we think makes life easier potentially for pension funds and pension fund trustees.
Presenter: So do you believe then that pension funds are using credit ratings in the right way, Simon?
Simon Collingridge: I wouldn’t necessarily say that, I go back to what I said previously, that historically perhaps, and it’s something we’re trying to address, people have used ratings or inferred characteristics in ratings which weren’t there. I think the more that we can do to make our ratings and everything that lies behind those ratings clear and transparent, it will become an increasingly helpful tool, we believe, in their, not necessarily their analysis, but certainly the way in which they set strategies for their funds and so on and so forth.
Presenter: So have pension funds actually told you they believe there is real worth in what you're doing?
Simon Collingridge: They do. I think most, a lot of our dialogue historically has been with asset managers, where if you like the level of analysis at an individual issue or a bond level takes place, and so that type of engagement has not normally occurred with pension funds. So I think increasingly we’re finding that they are interested, given that, you know, your opening question of where the perceptions and awareness of us has perhaps increased for good or bad, I think they are becoming more engaged perhaps than they were historically, which we think is a very good thing. As Simone says, you know, it’s one of a number of tools, and the more understanding and knowledge they have about how that tool works, one would hope and think the better for them.
Presenter: When the USA lost its AAA rating, you were regarded as somewhat pariahs on the global scene. How did you react to that?
Simon Collingridge: Well, firstly I'd say not necessarily; it was, you know, a generalisation. You know, we gave our view about the creditworthiness, the relative creditworthiness of the United States, and people agreed with that opinion or didn’t agree with that opinion. At the end of the day, the critical word there is opinion, it was our opinion. I think to go back to Simone’s point about the use of credit ratings in mandates for example, you know, what we found I think is a lot of people did not automatically rid themselves of their investments in the United States simply because we had downgraded it, as perhaps mandates might have suggested, and that indicates, we hope, a deeper understanding of what those credit ratings stand for.
Presenter: So it’s certainly stimulating the correct areas of discussion?
Simon Collingridge: I believe so. You know, I think ratings are important, but they're not as important as some people think they are, and they are more important than others do.
Presenter: How have ratings performed then over the downturn?
Simon Collingridge: The vast majority of our ratings have performed through the crisis or downturn of 2007 to 2009 and subsequently pretty much as we would have expected that they would do. With the exception of, and the very strong exception of, those securities rated to US mortgages, so, you know, US mortgage bank securities, which did not perform as we would have expected and indeed as we would have wished. However, everything else, corporate bonds on a global basis, you know, banks, sovereigns, even securitisations in Europe, where the default levels in this period, in a highly stressful period, I would add, both from a recession perspective and in terms of property valuations, have performed very well and default levels have been extremely low.
Presenter: Did you change anything in the way that you analyse subprime and CDOs (collateral debt obligations)?
Simon Collingridge: Well, let me start if I may by answering the question in the round, in that we have done a lot to revise criteria over the last three, four, five years, across the board, with the primary focus of enhancing clarity and transparency, to make it clearer to people how we arrive at our ratings, or what lies behind them, which we believe in itself is a good thing, but also to enable greater comparability between ratings of one type of issuer and another. So the specifics of the mortgage related security, you spoke about, yes we have, and I would say that certainly the assumptions that underlie such ratings now are undoubtedly more conservative than they would have been four, five years ago.
Presenter: Now I understand that S&P have carried out a survey amongst fixed income investors, what were the main headlines, what did you find?
Simone Utermarck: Yeah, we did a global survey among fixed income investors, and among these investors were also pension funds, and indeed 90% of the pension funds interviewed actually said that they were using agency ratings in their investment policies and also in the mandate guidelines they give to their external advisors. We've found that most of the pension funds interviewed are actually using Standard & Poor’s ratings, and another interesting finding for us was compared to the last survey we've done in 2010, we actually managed to confirm and even improve our competitive position in the eyes of pension funds.
They like the quality of communication with us; they like the way we respond to them as investors, the way we provide a clear rationale behind the ratings for individual credits; they like the high quality of our research and the criteria; they said another thing they like is the qualitative but also quantitative analysis we do and also the recovery analytics. Overall they said that the things they liked or valued most about our ratings are the quality of the ratings and especially the knowledge and experience of our analysts.
Presenter: So Simon, if people want to know more, what should they do?
Simon Collingridge: If they want to know more, they should do a number of things, they should make contact with us directly. We have websites, both free of charge and subscription based. We publish a great deal on every subject, whether it be sort of what if analysis, about what may happen, research on sectors and so on. So I would urge them to come to our site, to come to us directly and read what we write, meet with us, and we would love for people to understand even more what we do than they do currently.
Presenter: Simon and Simone, thank you very much indeed.
Both: Thank you.
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