[Reader-list] Understanding the politics of credit rating

[lalitha kamath]

Municipal bonds and borrowing on the market depend heavily on good
investment ratings. in turn these seem to depend on ability to raise revenues
to certain 'target' levels. if 'targets' cannot be achieved, ratings
fall. If this is really such a linear (and simplistic) process then credit rating companies could strongly influence many future
decisions (capital investment, investment on O&M etc). When a Moody's downgrades a public utility's rating, for instance, where does the utility turn, as in the case of Escom in S Africa below? 

I have recently been fascinated by the notion, practice and politics of credit
rating. All Indian cities, big and small, seem to want a rating these days in preparation for developing top class infrastructure.
There are some processes in particular I'm not clear about:
1) How ratings are determined, monitored and revised especially given the difficulty of getting accounting,
financial and other info from cities on an ongoing and current basis
and then of actually understanding and interpreting how these systems work in practice. 
2) The kind of influence ratings companies could have on service provision in cities and towns 
3) To create ratings, what are the rationalizations, simplifications, and transformations that need to occur to create a language and systems that serve credit rating analysts? In this process of translation (linguistic and other), what gets left out? 

I'd appreciate any clarifications, ideas or sources of literature people can give me on understanding this better.
cheers
lalitha


http://www.reuters.com/article/rbssFinancialServicesAndRealEstateNews/idUSLD59815420080813

S.Africa's Eskom to seek World Bank funds - paper
Wed Aug 13, 2008 2:43am EDT

JOHANNESBURG, Aug 13 (Reuters) - South Africa's Eskom [ESCJ.J] could seek to borrow up to $1 billion a year from the World Bank over five years after a ratings downgrade made it more difficult to borrow on financial markets, the Business Day newspaper reported.

The newspaper said on Wednesday the power utility would turn to the World Bank due to tough global markets and after a Moody's downgrade, which will likely raise the cost of borrowing money it needs for a major upgrade.

It quoted Eskom Finance Director Bongani Nqwababa as saying the state-owned company was "rechecking" its funding strategy and was likely to focus on borrowing locally from development agencies such as the World Bank and African Development Bank and from export credit agencies.

Eskom officials could not immediately be reached for comment. A World Bank spokeswoman said the bank was in an "ongoing dialogue" with Eskom but declined further comment.

Business Day did not provide a source for the $1 billion a year figure.

Eskom is to spend billions of dollars to boost power capacity as demand outstrips supply in Africa's biggest economy.

A wave of blackouts has cost South Africa billions of rand in lost productivity and unnerved foreign investors.

Ratings agency Moody's said on Monday it had cut Eskom's local currency rating to Baa2 from A1 and cut the foreign currency rating to Baa2 from A2. The outlook for all ratings was negative.

The agency blamed the four notch local currency downgrade on a deterioration of Eskom's stand-alone credit profile due to an aggressive capital investment programme and the fact Eskom was not able to raise tariffs as much as it had requested.

The National Treasury has budgeted 60 billion rand ($7.72 billion) over the next three years to help Eskom pay for its 343 billion rand, 5-year expansion programme. (Writing by Rebecca Harrison; Editing by David Cowell)

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