Moody's blow for Japanese assurers
Reviewed By Hitoshi URABE
"Moody's blow for Japanese assurers"
By Demetri Sevastopulo, Financial Times
"Japanese life assurers on shaky foundations"
Ken Hijino, Financial Times
The article reports that Moody's this Monday has downgraded eight Japanese life insurance companies. That many at the same time seem to indicate the rating agency is losing faith in the whole industry.
Response from the industry, however, has been very slow. They are pretending indifference, just like when Moody's in February announced that they are placing Japanese Government bond on watch for possible downgrade. While it is natural for politicians to downplay such announcements, especially in public, the life insurers should take it more seriously.
It was decades ago, upon Japan becoming a member of the "developed" countries and when companies timidly began to seek foreign capital, some of the leading Japanese companies began approaching rating agencies such as Moody's and S&P. The companies first asked a rating agency if a preliminary study could be conducted where any rating would only be provisional and the results would be kept confidential, the idea being that if they were to be rated lower than expected, they can simply back off and pretend nothing has happened to avoid embarrassment. Rating agencies gladly accepted the proposal, since they had nothing to lose while earning a chance to charge the client for both the preliminary and formal examination processes.
Times have changed since then, and many of major firms in Japan have come to be rated. And one of the popular phrases in the Japanese corporate arena is "Investor Relations", there are piles of books published, explaining the importance of investors, i.e. shareholders, and how to satisfy them, and they are selling well. There are times, however, that makes you wonder if the sentiment of corporate executives have really changed, when they seem to ignore the comments of rating agencies, especially the comment is unfavorable.
Rating is for the benefit of investors. It is not merely a merit badge, nor advice as a management consultant. It is the agency's view on the probability of the company's debts to be repaid, whether certain contractual obligation would be filled. Accordingly, there is real money and risk involved. If a company gets downgraded, they will face higher cost of capital at best, and risk shortage of cash at worst.
Investors' fund managers are trusted of large sum of money and they are working in a fierce competitive environment. They are also bound by tightly defined rules for daily operation as to how much can be invested into debts at a certain level of rating.
Japanese executives should begin to take these credit ratings more seriously, by realizing that there are many real and potential investors out there whose guidelines allow funds to be invested to securities with relatively high ratings. And as the capital market is becoming more global every day, there is a growing possibility that in the end, these remote investors could play an unexpectedly large role in shaping the future of the company.