Credit ratings sought for floating-rate note issues as competition increases

Sean Kennedy

FIERCE competition among issuers of floating-rate debt instruments for investors' dollars is pushing banks to seek ratings for their issues to boost their appeal.

Increasingly discriminating investors are seeking more than just a solid yield and good track record when they buy floating-rate notes (FRNs) and floating-rate certificates of deposit (FRCDs), according to Thomson BankWatch Asia president Philippe Delhaise. Thomson BankWatch specialises in rating banks and bank issues and its issue ratings have been officially recognised by the Hong Kong Monetary Authority (HKMA).

Issues with a sufficiently high rating from Thomson BankWatch qualify for liquefiable status.

Issues rated appropriately by Standard and Poor's or Moody's Investors Service qualify for liquefiable asset status and, more importantly, for access to the liquidity adjustment facility (LAF).

The recognition of Thomson BankWatch comes at a time when issuance is ballooning. According to the HKMA, holdings of negotiable certificates of deposit have soared. Total outstandings of Hong Kong dollar NCDs at the end of August came to $48.3 billion, representing a growth rate of more than 50 per cent. Growth for all of 1993 was only 24 per cent, the HKMA said.

This means that medium and long-term funding is being squeezed as investors are expected to absorb a surging amount of paper. The territory's largest deposit-taker, Hongkong Bank recently hit the market with a record $3.2 billion FRCD, and wasted no time in qualifying for LAF privileges.

It has been joined by Wharf and Standard Chartered Bank, which both are seeking ratings for a total of $3.1 billion in deals this month.

Banks must maintain a proportion of their assets in liquid assets such as cash or government bonds or other qualifying and rated instruments. Gold and cash are ranked at 100 per cent, and marketable debt securities are included as liquid assets if they carry a qualifying credit rating.

The advantage to investors of holding paper rated by Standard and Poor's or Moody's Investors Service and qualifying for the LAF is that they can engage in 'repos' or repurchase agreements with the HKMA. It offers them more flexibility and gives the HKMA another tool to control liquidity.

'I think LAF access is crucial,' said one banker active in both the fixed and floating-rate markets.

'Unlike fixed-rate issues, with floating-rate deals you're talking about the banking system taking up no less than 75 per cent of the paper. 'These banks would like to hold paper eligible for the LAF. I think this is going to be the start of a trend.' Issues qualifying for the LAF are in an elite group. Apart from Hongkong Bank's FRCD, only Exchange Fund bills and notes make the grade.

This goes some way to explaining Wharf's plans to gain a rating for its $1.5 billion FRN launched at the beginning of this month. Wharf, rated A by Standard and Poor's, is one of three rated Hong Kong corporates. It wants to enjoy liquefiable asset status but it is also seeking LAF access to make its paper more attractive in the secondary market.

So does Standard Chartered Bank, whose $1.6 billion FRCD was launched on Tuesday through arranger Standard Chartered Asia. 'This specific issue will be rated by Moody's Investors Service,' Standard Chartered Asia director Philip Cracknell said.

After the launch of the issue, he said, the LAF factor had contributed to its success. 'It's quite expensive getting a rating, but it seems a lot of banks we've spoken to are attracted because the issue has access to the LAF,' he said.

Exchange Fund bills and notes qualify under category A as Repo securities for the LAF. Hong Kong dollar debt instruments issued by the Mass Transit Railway Corp (MTRC) and the Provisional Airport Authority and Hong Kong dollar instruments rated triple-A by Standard and Poor's 'or equivalent' qualify under Category B. Category C covers other Hong Kong dollar debt instruments considered acceptable to the HKMA with a rating of A-from Standard and Poor's or A3 from Moody's if issued by a bank or A or above if issued by a non-bank issuer.