How credit rating agencies influence investment decisions - SEC DG

The Director General Securities and Exchange Commission, SEC, Lamido Yuguda has said credit rating agencies, CRAs, play an important role in infrastructural development by providing independent assessments of the creditworthiness of subnational governments and other borrowers; information, which are utilised by investors to make informed investment decisions on optimal capital allocation.

Yuguda, who stated this in his goodwill message at the 2023 edition of DataPro Annual International Rating Webinar with the theme, Role of Sub-nationals & Credit Rating Agencies in Infrastructure Development; held in Lagos, added, “The synergy between the subnational governments and credit rating agencies will potentially play a major role in promoting sustainable infrastructural developments, create a favourable investment climate and advance the country’s quest for rapid transformation.”

According to the SEC DG, “In the past few years, there were some concerns on the roles of rating agencies in the global financial system. For example, rating agencies were challenged with respect to their roles in the 2008 financial crisis. Some critics had argued that rating agencies were too lenient in their ratings of subprime mortgage backed securities, which contributed to the crisis.

“The Commission is not unaware of these concerns, and is committed at ensuring that registered rating agencies operate in a fair and transparent manner. We have taken a number of steps to protect investors and promote confidence in the debt capital market by strengthening our oversight function on rating agencies through Issuance of new regulations and amending existing ones to improve the quality and transparency of the entire credit ratings.

He explained, “Other notable reforms in the debt capital market introduced by SEC include developing rules on book building, shelf registration, green, social, and sustainability bonds, checklist templates to guide market operators for fixed income transactions, reviewing cost of registration fees for fixed income and collaboration with the Association of Issuing Houses in Nigeria (AIHN) to streamline the issuance process.

“These initiatives have enhanced the average issuance period and improved the price discovery process for the debt issues. As a result, the value and volume of debt issuances by sub-national and corporates have tremendously increased over the years. For instance, the value of state bond issued and registered by the SEC from 1978 to 2022 rose from N20million to N1.13trillion respectively.

Keynote Speaker, Mr. Kehinde O. Ogundimu, CEO, Nigeria Mortgage Refinance Company Plc, said, “The development of infrastructure in cities and regions across the world is critical to economic growth and social well-being. Consequently, securing the funding needed to support infrastructure development is a major issue for governments and policymakers around the world.

Ogundimu asserted, “The world spends more than $2.5 trillion a year on infrastructure, an amount significantly lower than $3.7 trillion a year that will be needed through 2035 just to keep pace with projected GDP growth.

“Successful infrastructure delivery demands close alignment and collaboration between a wide range of participants, each with its own agenda and interest. This means that no single player acting alone can effect real change in infrastructure development.

He continued, “Mobilising private funding for infrastructure projects is crucial to bridge the infrastructure gap across the globe. Consequently, we need improved transparency in the infrastructure project generation process, higher certainty concerning the framework conditions for project execution and reduced risk for the operation phase. A long-term infrastructure pipeline and better, broader, and more independent cost benefit analysis are the major levers to pull to accomplish this goal.

“Accordingly, experts have recommended the following: Alignment of infrastructure funding and capital market development through long-term bond market development, superannuation, and pension fund preferences, and Enhancing investment attractiveness through higher asset utilization: For this, price signals should guide supply and demand for infrastructure; full cost recovery should improve the attractiveness of private investment; and new technologies can enhance asset utilisation.

“The economic benefits associated with infrastructure investment can be powerful and sustainable. Increased infrastructure investment can bring a wide range of long-lasting and mutually reinforcing benefits. In the short term, spending on infrastructure projects can create jobs and increase real GDP growth, while the ongoing maintenance and repair activities that are necessary to support infrastructure systems can create permanent and well-paying jobs for the middle-class.

Delivering his welcome address, Mr. Abimbola Adeseyoju, Founder, DataPro Limited, said the goal of the webinar is to provide an annual platform for all stakeholders within the Capital Market and others in affiliated sectors of the economy to brainstorm on how the African continent and by extension the West African countries and Nigeria can utilize the value proposition of the Credit Rating Industry as an enabler of economic development and prosperity.