Now what?

This post is a quick follow up to two of my previous posts, Learn from the past and Prevention is alwaysbetter, those were mainly focused on the Credit Ratings.  

Today’s newspaper article puts it that “pursuant to the lapse of its registration, with effect from 1 July 2015, LRA is not entitled in law, to carry on business as a Credit Rating Agency nor review ratings; i.e. LRA is not entitled to carry on the business of assessing and evaluating or reviewing the credit-worthiness of any issue of listed securities or securities to be listed with regard to the issuers’ ability to perform any obligations imposed on the issuer thereon”. However, as of this time of my writing the LRA website still says they are registered under SEC.

The dilemma

However, the raise some serious fundamental questions as to how this will impact many stakeholders who were reliant on LRA’s ratings as well as on LRA as a company. Majority of the ratings issued by LRA were for Banks and Non-Bank Finance Institutions (NBFIs) and hence there is a large segment of depositors who are now left in dark. Moreover, there are a wide range of institutional investors (Unit Trusts, Insurance Companies, Banks, etc) who have invested billions in debentures rated by LRA. Similarly, many of these issuers are now at a decisive point. They will have to now go to another Credit Rating Agency (CRA) and they will have to bear the unexpected costs as a result of the unprofessionalism on the part of the CRA they used. On top of that there must be another segment of potential issuers who were getting their instruments rated with a view to tap the market. Now they will have to change the whole project and its timelines as LRA are not entitled to issue ratings (this will require incurring additional costs). On top of that timing of fund raising is of paramount importance to issuers and such delays are not at all good (I know from my own experience!). On top of that, what about those who were employed by LRA. I don’t think that even if LRA obtains the license again that they will be a viable business in the future.

Bottomline

It has to be noted that the failure of one entity is not just impacting its own industry but it spreads across many players in many industries, especially in the Financial Services Sector. Hence, ethics, professionalism are so important to ensure smooth flow of the system.