Credit ratings in the Norwegian investment grade corporate bond market : a qualitative exploration

2020

The Norwegian bond market is relatively well-functioning despite a low prevalence of credit

ratings. In order to define the creditworthiness of issuers, other sources of information have

developed. The Norwegian Fund and Asset Management Association (Verdipapirfondenes

forening, VFF) has developed an industry standard for fixed income funds to which all

members must adhere. The industry standard has previously accepted shadow ratings and

information from Nordic Bond Pricing to define the investment universe for fixed income

funds. However, a specification of the industry standard was announced in June 2020.

The specification states that VFF Money Market Funds and Fixed Income Funds can only

hold a maximum share of 10 percent of unrated industrial and utility bonds from July

2022. Hence, there is an increased focus on credit ratings in the Norwegian bond market.

Using qualitative data, we analyze the impact of credit ratings on relevant bond market

players. We explore the prevailing perception of credit ratings and the potential outcome

of the VFF industry standard specification. The study is restricted to the investment grade

corporate segment of the Norwegian bond market, as the specification primarily applies

to this market segment. Our findings suggest that issuers benefit from a credit rating in

terms of potential lower credit spreads, improved corporate governance, and better access

to funding. However, issuers are subject to direct and indirect costs when obtaining a

rating. For investors, credit ratings have an informational value and may also impact their

investment universes. Credit rating agencies benefit from a growing business when issuers

obtain ratings. Moreover, credit rating agencies’ analyses of issuers’ creditworthiness

reduce asymmetric information between issuers and investors. This increases market

transparency and may lead to more efficient investment decisions. Additionally, ratings

can attract more investors, which eventually can increase market liquidity.

Keywords – Credit ratings, Norwegian bond market, VFF