Retail investors will have to pay for credit ratings

As reported in Banking Day on Friday, Corporate Scorecard has obtained a licence from ASIC to provide wholesale credit ratings. Perhaps Corporate Scorecard can fill the gap in the retail market that has been left by the three CRAs? But then again, perhaps not.

Corporate Scorecard not only has a different methodology for determining its credit ratings, it also has a different business model for the distribution of the ratings. It is the latter that is more critical for retail investors.

Corporate Scorecard uses a quantitative model for the calculation of credit ratings. It is simply a process of feeding financial data into the model and getting a credit rating out. There is no consideration of the possibly more subjective, qualitative factors that, for the major ratings agencies, can account for more than 50 per cent of the decision making process for determining a credit rating.

Nonetheless, the critical consideration for retail investors about a Corporate Scorecard credit rating is whether they want to pay for it or not.

Corporate Scorecard does not charge the companies it rates for the credit rating; it charges each and every investor who wants to know what the rating is.

No doubt most retail investors will continue to rely on name recognition when making their investment decisions. As always, this will be far from ideal.