The recent sharp downturn in the global economy will soon affect credit ratings, in turn weakening returns and increasing the risk for investors, according to a report released by the international credit rating agency, Moody’s Investment Service.
Credit ratings are assigned on the basis of extensive economic analysis by the agency mainly to determine revenues available to the issuer to cover debt service. The more money available to cover the debt service, the higher the rating.
The announcement of downgraded credit ratings may have an effect on several companies that are planning to list their corporate bonds on the Cambodian Stock Exchange (CSX) this year, as investors become more risk-averse and cash liquidity becomes an issue, at least until the COVID-19 pandemic is over.
In response, many of the companies that are planning to list on the local bourse
will be backed by the Asian Development Bank’s (ADB) Credit Guarantee and Investment Facility (CGIF) which are key components
of the Asian Bond Markets Initiative (ABMI) for ASEAN+3 cooperation.
The guarantee was established to promote economic development, stability and resilience of financial markets in the region along with sustained development of deep and liquid local currency and regional bond markets.
It was described by the ADB as “irrevocable and unconditional commitments to pay bondholders upon non-payment by the issuers throughout the tenure of the bonds. This commitment is backed by CGIF’s equity capital which has been fully paid in by all of its contributors”.
For the moment, the guarantee has maintained its “AA” credit rating by global rating agency Standard & Poor’s (S&P) awarded in February this year.
The “AA” rating is the second-highest bond rating by S&P and is deemed “investment-grade”, meaning that banks are allowed to hold them and that the investment is low-risk, (the rating is equivalent to an “Aa” rating by Moody’s).
It is hoped this investment guarantee will provide companies more security for their corporate bonds on the local bourse and stop a similar situation that caused the 1997-1998 Asian financial crisis and make the regional financial system more resilient to volatile global capital flows and external shocks
According to Moody’s Vice-President Peter McNally: “The magnitude of shocks to asset performance will vary by asset class and by geography.
With individual transaction structures, including a specific bond’s position in the capital structure of a transaction will influence the timing and severity of any credit impact.
“These factors guide the prioritisation of Moody’s credit analysis, according to the high and moderate vulnerability of an asset class to the current credit shock, with the securities that rank at the junior end of the structures seeing a bigger negative impact than those at the senior end,” he added.
After two decades of strong performance, Cambodia’s economic growth is expected to drop to 2.3 percent in 2020 before expecting to rebound to 5.7 percent in 2021, assuming that the pandemic ends and economic activity normalises, according to the ADB’s Country Director for Cambodia Sunniya Durrani-Jamal in a recent statement.