Thread by @finshots

For the first time ever, a credit rating agency in China is forced to pay ~$8 million for bond defaults of a construction firm.

Why?

A thread...

You see, Credit Rating Agencies (CRAs) are independent entities that evaluate a borrower's creditworthiness. They tell you about a borrower’s state of affairs and offer you an objective assessment of their repayment ability.

And if a company is rated by a CRA, the chances of scoring a loan increase rather disproportionately. So, most corporates actively seek out CRAs to get a rating and pay them good money in the process. Of course, it’s not a bribe. It’s just professional fees.

However, the whole arrangement where corporates pay the rating agencies for getting their creditworthiness evaluated does look a bit suspect. What if there’s a conflict of interest? What if CRAs are too generous in rating a company?

And this is exactly what happened in China. Many companies defaulted on repayment obligations within weeks of receiving an AAA rating (meaning the likelihood of default was near negligible).

So, in a bid to make CRAs more accountable, China is forcing Dagong Global Credit Rating Co. to repay 10% of at least 494 million yuan of combined debt claims to more than 400 individual bondholders of Wuyang Construction Group Co.