The Role of Credit Rating Agencies in Developing Caribbean Corporate and Government Bond Markets

1. The Role of Credit Rating Agencies in Developing Caribbean Corporate and Government Bond Markets Caribbean Connect: High Level Symposium on CSME Barbados: June 28-30, 2006 S.Venkat Raman CEO & Chief Rating Officer Caribbean Information & Credit Rating Services Limited

2. Presentation structure • Key elements of bond market development • The role of rating agencies • CariCRIS: A rating agency for the Caribbean • CariCRIS & CSME

3. What is a credit rating ? What a rating is: • A current opinion on the relative creditworthiness of debt • An debt specific evaluation • Aimed at differentiating credit quality • A response to the market’s demand for information What a rating is not: • Not an audit of the issuing company • Not a one time assessment of creditworthiness of the issuer • Not a general purpose certification of “goodness” of a company • Not a recommendation to buy, hold or sell the rated security

4. Key elements of bond market development • Issuer diversity • Investor diversity • Transparency and disclosure • Accounting standards – to give true financial picture • Corporate governance – for predictability of corporate action • Credit ratings – to provide a comparative framework • Independent regulator • Market infrastructure – brokers, exchanges, settlement systems etc.

5. Role Of Rating Agencies In Debt Market Development– At The Core • Creation of market for corporate credit and pricing of credit risk • Readily usable risk indicator • Tool for price-discovery, particularly for non-sovereign debt • Creating of a proper yield curve • Key information intermediary between issuers and investors • Reduce information asymmetry between investors and issuers • Facilitate comparison of investment options • Facilitate pricing of credit risk • Creation of secondary market in debt • Creates liquidity in bond portfolios • Leads to clarity in pricing of credit risk • Makes structured debt issuances easier • Building of financial awareness • Best practices for company analysis, risk assessment

6. Role Of Rating Agencies - At The System Level • Widen access to funding for smaller businesses • Compliments regulatory oversight • Prioritises regulators’ concern areas • Prudential practises predicated on ratings • Effective self-corrective tool for managements & businesses • Enhances trust and market confidence =>Expands savings pool

7. Role Of Rating Agencies - At The Application Level • Estimation of credit risk • Unbiased opinion arrived at through structured process • Publicly available information • Single, easily comprehensible grade • Basis for scientific risk management in banking sector • Better lending decisions, less NPAs going forward • Fundamental benchmarking for IRB (Basel) approaches • Better pricing of credit risk • Improved loan portfolios lend strength to the banking system • Basis for securitisation • Unlocking liquidity in loan and asset portfolios

8. Rating agencies: Role Vs Obligations • Independence : Real & perceived • Ownership • Governance architecture • Financial independence • Conformance to recognized codes of conduct • Transparency • Integrity in analytics & operations • Investment in market education & development

9. The Caribbean Perspective

10. The need for ratings in the Caribbean • Need for a vibrant bond market • Efficient financial intermediation and credit allocation • Alternate funding source to banks • Financial System Stability • Liquidity & financial crises management • Caribbean • Small sized economies limiting local bond market development • Businesses with appetite for funds and vice-versa • Credit research in public domain relatively scare • Sizeable regional economy • Increasing evidence of cross border financing • The Caribbean needs an integrated, regional debt market • A regional credit rating agency is a critical ingredient

11. CariCRIS • First Caribbean rating agency and world’s first regional credit rating agency • Launched in 2004/2005 • Fruition of an idea long espoused by CARICOM • Promoted by regional Central Banks, CDB, IDB and other pan-regional institutions • Shareholding by CRISIL Ltd., the 4th largest rating agency in the world and a subsidiary of S&P. • Currently ratings being conducted in Barbados, Jamaica, OECS & T&T.

12. CSME and role of CariCRIS Key Themes of CSME • Integration of Financial Markets • Seamless cross-border financial flows CariCRIS role & benefits • Strengthen markets and facilitate unified regulation • Strong impetus to capital market development; • Energise the CSME initiative to create a unified debt markets • Strengthen financial systems through diversified markets • Investor Protection & better Market Discipline • Facilitating regional penetration of companies Increases transparency • Enhance credibility & independent profiling/risk analysis • Increased access to funding sources • Facilitating cross-border investment/lending • Enhanced ability to compare credits across the region • Reduces information risk and facilitates informed decisions

13. The Road Ahead • The Beginning : has been WELL DONE • Rating Agency : needs to stick with its values and mission • Policy Makers & Regulators: Need to act further – to consciously build ratings into financial architecture • Investors & Issuers : The leaders need to show the way

14. THANK YOU Caribbean Information & Credit Rating Services Limited info@caricris.com / www.caricris.com Tel: (868) 627-8879 Fax: (868) 625-8871