Why Moody's is buying Africa's largest ratings agency

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Moody's has agreed to buy a 51% stake in Global Credit Rating.
Moody's has agreed to buy a 51% stake in Global Credit Rating.
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  • Moody's has agreed to buy a 51% stake in Global Credit Rating (GCR).
  • GCR is Africa's largest rating agency and accounts for most of all ratings issued on the continent.
  • Moody's wants a piece of it because it anticipates robust demand for credit rating services in Africa and promises not to interfere with GCR produces ratings.

Moody's is planning to acquire a 51% majority stake in Africa's leading credit ratings agency, Global Credit Rating (GCR). The US-based firm is one of the 'big three' western agencies, controlling about 95% of the international ratings business.

The business of producing credit ratings is already highly concentrated between Moody's and Standard and Poor's (S&P). They issue 80% of international ratings between them. But Moody's now wants to get a piece of the pie in Africa's growing domestic capital markets rating business.

So, as Africa's only well-known company in this business, GCR was the obvious choice, according to Moody's.

"We really believe in the Africa growth story. We see a lot of potential for capital markets on the continent, and GCR is a Pan-African champion in this space," said Moody's associate MD Scott Phillips.

He said all the foundations to support the growth of capital markets are now in place in many African economies. As countries embark on big infrastructure drives, governments and companies are looking to raise long-term capital.

"All of that points to a bigger role for domestic capital markets and obviously the need for robust credit rating services," he said.

Moody's wants to increase its relevance in the domestic capital market in the continent. But the problem is that it has no involvement in rating issuers borrowing on the domestic capital markets in local currency.

In fact, Moody's does not have much footprint in Africa. It only has a global ratings office in SA which only deals with ratings for companies and institutions who borrow in the international markets.

It also has a stake in Egypt's Middle East Rating and Investors Service (MERIS).

On the other hand, the Mauritius-based GCR focuses on rating companies and institutions that borrow in local currencies. 

It has operations across many African countries, including South Africa, Nigeria, Senegal, Kenya, Zimbabwe, and Mauritius. It accounts for the majority of all ratings accorded on the African continent.

An acquisition spree

GCR joins a handful of other domestic rating agencies that Moody's recently bought stakes in. It bought interests in rating agencies in China, Korea, India, Israel and Latin America. The last acquisition saw Moody's take a majority stake in Malaysian Rating Corp in 2020.

But Phillips said the agency doesn't plan to start providing credit ratings for domestic capital markets. It will still leave that in the hands of GCR and other domestic agencies it has acquired. GCR will continue to develop its own rating methodologies, issue its own credit ratings, and maintain a separate management team.

"All of the things that make GCR successful today, like the management team, the local people – all of that is really the fabric, the foundation of what GCR is, and we don't want to change that," said Phillips.

Phillips said the benefits of this new relationship will flow both ways. With its larger international exposure and experience in different transactions, Moody's wants to share that knowledge to help grow GCR's operations further.

Through its participation in the GCR board and the investments it plans to make in the business to enhance its credit analysis capabilities, Phillips said Moody's has a lot to bring to the table. 

Navigating credit rating agencies' unfavourable reputation in Africa

Western rating agencies have faced criticism from some quarters for being too harsh on developing countries. Many critics point out that they often disregard problems such as rising unemployment and inequality, overlooking the real risks facing developing economies.

By focusing almost solely on countries' debt levels, critics point out that these agencies force African countries to make the difficult choices between spending their limited resources on reducing poverty and saving lives or servicing a debt.

In Africa, there have been growing calls for the continent to establish its own international rating agency that would understand countries' trade-offs better. But now Moody's is buying a majority stake in GCR.

Phillips said while he does not work on the analytical side of the business where credit ratings of African countries are downgraded or upgraded, he can assure the market that GCR will always be run independently.

"Anything to do with the production of ratings, any production of research, at all of the commercial processes, that's all going to continue to be as it is today for both GTR and Moody's," said Phillips.

Moody's is also sweetening the deal by promising to potentially bring an empowerment partner. It said it is engaging with a South Africa-based BEE partner to provide "substantial equity participation".

It added that together with GCR, it also intends to advance corporate social responsibility initiatives in SA.

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