(Bloomberg) — A rating upgrade is usually a cause for celebration. So why when Moody’s Ratings bumped up its rating for Japan’s SoftBank Group Corp. did the company bristle?
In 2020, SoftBank withdrew its request for a Moody’s rating. Despite that Moody’s still decided to cover the company’s debt as an “unsolicited rating.” On Wednesday, it raised that rating to Ba2 from Ba3. In reaction, SoftBank attacked the rating, saying that it was “based solely on their subjective assumptions and hypotheses, with no reasonable factual basis.”
While Moody’s debt rating rose, the rating still labeled SoftBank debt as non-investment grade, unkindly referred to in the bond world as “junk”.
Taketoshi Tsuchiya, chief executive officer at Fujiwara Capital Co., said Moody’s had reconfirmed SoftBank’s speculative-grade status. But SoftBank — having swung back to profit and secured funds to redeem several years’ worth of bonds — saw the rating as a slight. Tsuchiya said it implied “it might have trouble repaying its debt,” which could mislead markets. He believes that is the real reason why SoftBank is upset.
Is criticism of ratings uncommon?
Not particularly. During the global financial crisis, there was a backlash against rating companies that had given overly generous ratings to mortgage-backed securities that then defaulted. During Europe’s sovereign debt crisis, governments accused rating companies of worsening market turmoil by downgrading ratings. And when Moody’s cut the US government’s credit rating in May, White House National Economic Council Director Kevin Hassett blasted the move as “backward-looking.”
Does the system have flaws?
Many agencies use an “issuer pays” model, in which a company or government pays the rating company to assess the creditworthiness of its debt. While this gives the rating company greater access to financial information, it raises concerns about potential conflicts of interest. However, in the case of SoftBank, the rating was unsolicited — the company didn’t pay for the rating and refused to provide financial information. As a result, it’s easier to argue that the rating lacks a basis.
“The structure of the ratings agency system is quite fraught with conflicts of interest,” said Zuhair Khan, a portfolio manager at UBP Investments. “This is a good example of why there needs to be a fundamental rethink of the business model of who and how ratings are paid for.”
Ratings and Investment Mandates
In Japan, many regulations and investment mandates require investment-grade status to purchase bonds. In the US and elsewhere, the high-yield bond market is far more developed, and global practices are different.
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