MOODY'S GOES NATIVE


Moody's Investors Service has chosen Brazil as the first local capital market in which it will employ its "national scale" ratings. Traditionally a main player in cross-border transactions, this will be the agency's first attempt in the local markets.

There are several reasons for Moody's choice of Brazil as the debut site for its national scale ratings. "Brazil stood out because it is a big country with lots of potential issuers," explained David Moniz, managing director for Latin America and Canada at Moody's. "We think that its domestic capital market will continue to develop and, in the course of discussions with Brazilian investors, it became clear that credit ratings are going to become more and more important as a tools for doing risk allocations."

A recently enacted regulation from Brazil's Central Bank provides another incentive for local ratings. According to the regulation, there will be fewer disclosure requirements from investment funds if credit ratings indicate that their private sector portfolio comprises mainly low-risk securities.

"Presently very few local issuers are rated," said Marcio Guedes, director of capital markets at Unibanco S.A. in Sao Paulo. "The Central Bank's regulation makes credit ratings much more necessary. In that context, international agencies such as Moody's might play an increasingly important role in the local market."

The national ratings will employ the same set of upper and lower-case letters from Aaa to C as Moody's now uses, except that a modifier will be added signifying the relevant country, for example. Aaa.br for Brazil. Though Moody's will use the same general methodology for national ratings as it does for global ratings, the national scale ratings cannot be used to compare issues from different countries or to similar global scale ratings.

"The national ratings express relative risk within Brazil," explained Christiana Aguiar, director of Moody's Brazil office. "An Aaa.br rating might not translate into investment grade on the global scale and can present significant risk to investors."

This increasing emphasis on quantifying risk factors in the local market could be good news for local securitizations. "There are a number of obstacles for local securitizations that continue to exist," said Aguiar. "But it would not surprise me to see securitizations achieving the highest ratings on the local scale. Because of their complexity, these type deals are one of the best areas for the use of ratings."

The timing of Moody's first local credit rating is still unspecified. "At the end of the day, issuers will be the ones to decide when the first rating comes out," said Moniz.