Adding fuel to a growing controversy among rating agencies, Fitch Investors Service Inc. has followed Standard & Poor's Corp.'s lead and will issue ratings to borrowers that could be higher than those of their home countries.
The shift in policy is important because ratings are a key factor in determining the interest rate a borrower pays, either on loans or on debt issues such as bonds.
The move opens the door to lower-cost borrowing by banks and corporate borrowers in emerging markets.
However, rating agencies are increasingly at odds over whether such a move is warranted.
"There's clearly an ongoing debate, and different people have looked at it differently," said Gabriel Torres, director in the sovereign ratings group at Fitch.
"I don't think the debate is by any means finalized," he said.
In April, Standard & Poor's announced that in countries that have reduced the risk of inflation by linking their own currencies to the dollar, it would issue individual ratings that might be higher than the sovereign, or country, rating.
Until Fitch acted, however, other rating agencies had declined to follow Standard & Poor's lead, except under extremely limited conditions.
"Our view remains that the circumstances in which banks or corporates will be able to enjoy foreign currency ratings higher than their sovereign will remain very limited," stated IBCA Ltd., a London-based rating agency, in a recent release.
"We don't see the logic of a general exemption, although we are willing to go above the sovereign ceiling on a case-by-case basis, depending on the country, industry, and legal structure of the deal," said David Levey, a managing director in Moody's Investors Service's sovereign ratings group.
Still another rating agency, Thomson BankWatch, has expressed a similar view. "Except possibly for a few rare cases, we do not support the proposition that nonsovereign borrowers in some dollarized economies may be rated above the sovereign itself," the agency said in a release.
Fitch said the most likely candidates for higher ratings would be borrowers from emerging markets in Asia, Latin America, and Eastern Europe, especially exporters with U.S. dollar or other foreign currency income and subsidiaries and business partners of multinational corporations.
"The circumstances have to be very specific, and corporations will have to meet all the benchmarks," said Peter Jordan, a Fitch managing director.
These, Fitch said, include:
Hard-currency earnings from high-rated jurisdictions.
Hard-currency assets in highly rated jurisdictions.
A strong international parent company.
A strong international strategic partner.
The rating agency added that it would also take into account a country's "historical respect for legal, contractual, and property rights" when assigning ratings.
