Impact of legislation on bank loan ratings in Asia: Hong Kong, Singapore and Australia

Abstract

Moody's Investors Service has rated bank loans, that is, loans made by banks, since the mid-nineties. The rating agency began to do so as convergence between the capital markets and syndicated loan markets caused institutional investors to develop an interest in bank loans as an asset class. Moody's now rates more than USD615.0 billion of such loans. When rating any debt instrument, Moody's considers both the probability of default and, in the event of default, the severity of loss. The severity of loss is a function of the structural features of particular debt instruments, such as its seniority, its position in the borrower's capital structure, and its security package. Because bank loans, for speculative grade issuers at least, are frequently secured, the nature and amount of collateral is often a focus of the analysis. The quality of the collateral package may, in extreme cases, elevate the loan rating by as much as three notches above the level where it would otherwise be. Such an outcome is, however, very dependent on the predictability of the legal environment in which creditors would have to enforce their rights. Moody's has recently undertaken research on the legal environment with respect to insolvency in Hong Kong, Singapore and Australia. The results of this research have allowed Moody's to develop a methodology for rating bank loans which is consistent with approach to rating bank loans in North America but differs from it in some important respects. Key differences relate to the valuation of particular asset classes.