Corporate Credit Rating 'Rapid Downgrade' Controversy... Liquidity Crisis Triggered by Credit Rating Agencies? (Comprehensive)

29 HanShin Ratings and 21 NaShin Ratings Downgraded in Three Months of Rapid COVID-19 Spread
Faster Than 2007 Financial Crisis Pre-Storm...Mass Downgrades Feared After Q2 Results
"Concerns Over Corporate Financing Deterioration and Financial Market Liquidity Crunch...Potential Crisis from Rating Agencies"

[Asia Economy Reporter Kwon Haeyoung] Domestic credit rating agencies are accelerating the downgrade of corporate credit ratings (including rating outlooks) since the outbreak of the novel coronavirus disease (COVID-19). The pace is faster than during the 2008 global financial crisis. There is growing fear that a tsunami of credit rating downgrades will hit after June, when regular credit evaluations are completed and companies finish their second-quarter operations. Concerns have even arisen that the rapid downgrades of credit ratings could worsen corporate financial burdens and trigger credit and liquidity crunches in the financial sector, potentially sparking a crisis originating from the credit rating agencies.

According to the financial sector on the 22nd, Korea Ratings lowered the credit ratings and rating outlooks of 29 companies over the past three months since February 18, when the 31st confirmed COVID-19 case, a Shincheonji Church member in Daegu, the epicenter of the outbreak in Korea, was reported. During the same period, NICE Investors Service downgraded the credit ratings and rating outlooks of 21 companies.

This pace is considerably faster compared to just before the 2008 global financial crisis. The global financial crisis, triggered by the subprime mortgage (non-prime home mortgage) default crisis, began on July 18, 2007, when Bear Stearns, one of the five major U.S. investment banks, announced the bankruptcy of two hedge funds. From that point over three months (July 18, 2007 to October 20, 2007), Korea Ratings and NICE Investors Service downgraded the credit ratings and rating outlooks of 20 and 17 companies, respectively. In the recent three months of rapid COVID-19 spread, the credit rating agencies downgraded approximately 45% and 23% more companies than they did in the three months before the global financial crisis, which was considered the prelude to a 'perfect storm' (a massive economic crisis).

Park Eui-taek, Head of Coverage at Deutsche Bank Seoul Branch, said, "Credit rating agencies, which were criticized for inaccurate and delayed downgrades just before the 2008 global financial crisis, are now downgrading corporate credit ratings faster than ever before." He added, "There is a concern that these downgrades could lead to deterioration in corporate financial structures and credit tightening in financial markets, potentially causing a financial crisis similar to that of 2008."

It is pointed out that a vicious cycle could occur: credit rating agency downgrades → increased corporate borrowing costs and financial expenses → difficulties in issuing corporate bonds and obtaining loans → worsening corporate financial structures → credit and liquidity tightening in financial markets. According to the Korea Financial Investment Association, the domestic corporate bond market has doubled in size over the past 10 years, growing from KRW 149.4886 trillion at the end of 2010 to KRW 300.994 trillion as of yesterday, so credit rating downgrades have a greater impact on corporate financing conditions. Kim Yong-beom, First Vice Minister of Strategy and Finance, also noted last month that if domestic corporate credit rating downgrades become widespread, volatility in the funding market could increase.

Credit rating agencies maintain that the real economy shock caused by COVID-19 is severe and unpredictable in terms of when it will return to normal, so they have no choice but to issue warnings to the market. An industry insider explained, "Economic conditions have worsened, and since the end of last year, the business outlook has been negative. On top of that, the external variable of COVID-19 struck at the beginning of this year. During the regular credit evaluation period from April to June, as companies' credit is comprehensively reviewed, the number of downgrades in credit ratings and rating outlooks has increased."

The default rate, which is the ratio of defaults occurring within a certain period after investment-grade ratings are assigned, is also higher compared to 2007. For NICE Investors Service, the default rate for speculative-grade corporate bonds rose from 0% in 2007 to 2.27% in the first quarter of this year.

Recently, there has been criticism that credit rating agencies' mass downgrades of corporate rating outlooks and credit ratings are a cautious behavior. After being criticized for failing to proactively reflect crises during the global financial crisis and the 2013 Dongyang incident and being accused of 'rating business,' they are now responding with a 'let's just downgrade first' approach.

The market is concerned about the second half of the year and beyond. This is because credit rating agencies may continue to downgrade corporate credit ratings after completing regular credit evaluations and the second-quarter financial statements. Credit rating agencies often downgrade credit ratings six months after lowering rating outlooks. This issue is not limited to Korea. The Financial Stability Board (FSB) also warned that when major companies' credit ratings are downgraded, market preference for safe assets may spread again, potentially causing liquidity shortages.

A financial sector official said, "While the government is actively supporting companies facing bankruptcy risks due to COVID-19 through unprecedented financial support, excessively rapid mass downgrades of credit ratings deepen the crisis." He emphasized, "Since the FSB has also warned of a crisis originating from credit rating downgrades, credit rating agencies must exercise caution in adjusting corporate credit ratings to contain the crisis."

This content was produced with the assistance of AI translation services.