Temasek objects to proposed S&P rating criteria

Singapore

TEMASEK Holdings has raised objections to Standard & Poor's proposed criteria for rating investment holding companies (IHCs), saying that S&P's stated objectives "are not advanced by the proposed framework".

Under the framework, Temasek said, Singapore and Hong Kong would be lumped under Equity Market Group 3 alongside Greece, Cyprus and Latvia. Markets in EMG 1 are supposedly the least volatile in terms of asset liquidity and those in EMG 4, the most volatile.

Another objection AAA-rated Temasek raised is that in terms of industry risk, all IHCs would be regarded as "moderately high risk" or category 4 that includes risky companies in the metals and mining and oil and gas industries. The proposed industry risk assessment has five categories, with 1 being very low risk and 5 being high risk.

S&P in November requested comments on its proposed criteria for rating IHCs. It said that its objectives are to help market participants better understand the key risk drivers for IHCs, enhance the comparability and consistency of ratings, and improve transparency about how S&P assigns them.

An S&P spokeswoman, in response to BT queries, said that the groupings do not relate to a country's economic stability or sovereign rating. She added that "we classify listed equity investments into four equity market groups by country, based on the volatility we have observed in that country's main stock market index over the past 30 years".

S&P said that it expects the implementation of the proposed criteria to affect about 10-15 per cent of IHC ratings.

Temasek in its feedback said that its "view is that volatility should not be used to measure liquidity, ie the willingness and ability to liquidate assets".

"We believe that long-term volatility is not an appropriate indicator of the actual liquidity of stocks in a country, and of the actual liquidity of a portfolio, at a particular point in time. Instead, the liquidity of an IHC's portfolio should be assessed based on the number of days needed to divest assets listed on the respective stock exchanges, ie the time needed to liquidate the portfolio, to meet non-discretionary payments."

Temasek said that as a responsible long-term investor and forward-looking institution, it agrees with S&P's objectives.

"However, we are of the view that these objectives are not advanced by the proposed framework. Fundamentally, an individual company should be objectively credit-rated based on its underlying credit quality, using credit metrics across business and financial aspects."

The business aspects of an IHC should include the resilience and credit quality of its portfolio, as well as the management and governance structure of the IHC, added Temasek.

"The financial aspects should include portfolio liquidity, cash flow, debt maturity profile, sources of liquidity, overall funding and capital structure, and ability to meet payment obligations as and when they fall due.

"The proposed framework departs from the principle that credit rating should be based on the individual company's underlying credit quality, and gives rise to serious concerns."

For the year ended March 31, 2014, Temasek's portfolio reached S$223 billion. Singapore and China remained its two largest countries by underlying assets, at 31 per cent and 25 per cent respectively. Australia is third at 10 per cent. Exposure to North America and Europe was 14 per cent.

Financial services make up the single-largest sector in Temasek's portfolio, at nearly a third, while telecommunications, media and technology came in second at nearly a quarter.