The AMF's sixth annual report on credit rating agencies covers the period 2008-2009 and deals with recent developments. AMF Chairman Jean-Pierre Jouyet commented: "Never before have credit rating agencies come under such critical scrutiny. Their responsibility for the subprime crisis had already been singled out.
The current controversy concerns the amplifying role played by their sovereign ratings and the timing of their announcements. The AMF has constantly called for ambitious reform of rating agency regulation, long before this second wave of criticism emerged".
On the basis of this assessment, the European Commission tabled a draft Regulation on credit rating agencies (CRAs), which was adopted by the European Parliament in April 2009. With effect from 7 June CRAs can apply to be registered with national competent authorities, including the AMF. They will not be subject to effective supervision until they have been registered.
In addition to reviewing regulatory developments, the AMF report looks at corporate credit ratings, structured finance products and sovereign debt. It itemises the measures taken by CRAs to improve the reliability and integrity of their ratings.
Regulatory developments
The new European Regulation seeks to mitigate the risks of conflicts of interest, improve rating quality through stricter requirements on agencies' methodologies, and make the rating process more transparent.
It gives national competent authorities wide-ranging powers to impose penalties. However, it will be revised in autumn 2010 to take account of the formation of the new regulatory body, the European Securities and Markets Authority (ESMA).
Corporate credit ratings
Credit spreads and credit quality have been heavily impacted by the financial crisis, investor risk aversion and the worsening economic climate. Since late 2009, prompted by the effects of fiscal deficits on markets, investors have focused on sovereign risk. The sudden steep downturn in the sovereign debt market affected risk premia, particularly in the financial sector, and hence the quality of corporate credit.
In France the number of rated entities at end-2009 was 349. In all, 32% of rated groups are publicly listed, most of them in the CAC 40 index. For this reason, rating changes may have a significant impact not only on bond markets but also on equity markets.
The report points to an increase in the net number of downgrades in France. For all CRAs combined, there were 4.5 downgrades for 1 upgrade in 2009. Nonetheless, the average rating of French issuers still reflects a moderate, or even low, level of risk, since only 12% of issuers and 8% of outstandings are rated speculative. The downgrades have taken a heavy toll of the banking sector, which accounted for as many as 60% of total rating cuts in 2008. However, they have also had a significant impact on the non-financial sector, especially in 2009.
© AMF - Autorité des Marchés Financiers
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