[Edaily Marketin LEE GEON-EOM KIM YEON-SEO Reporter] It has been confirmed that the criteria for calculating the “upgrade-to-downgrade ratio”—a key indicator in the “Credit Rating Changes” reports published by the three major domestic credit rating agencies—vary from agency to agency. While some credit rating agencies exclude companies with a D rating (indicating default) from their downgrade counts, others include them, making a direct comparison of the upgrade-to-downgrade ratios among the three agencies virtually impossible. Critics point out that the lack of a unified standard, with each agency releasing divergent figures, is exacerbating market confusion.

According to a comprehensive report by E-Daily on the 12th, the three credit rating agencies apply different methods for including defaulted companies in the number of downgrades when reflecting the upgrade-to-downgrade ratio in their “Status of Credit Rating Changes” reports, which are disclosed once a year.

The ratio of upgrades to downgrades is calculated by dividing the number of companies whose credit ratings were upgraded by the number of companies whose ratings were downgraded; a ratio below 1 indicates that the overall creditworthiness of the market is deteriorating. Excluding companies that have defaulted (D)—the most critical negative factor—from the denominator (the number of downgrades) results in a higher-than-actual ratio, creating the illusion that market conditions are favorable.

Currently, Korea Credit Rating Agency (KCR) includes defaults in its calculations, while Korea Ratings ( Korea Ratings Corporation(034950)) excludes them entirely, and NICEHoldings Credit Rating (NICE) uses a hybrid approach. Since this data goes beyond simple market disclosures and is submitted to the Financial Supervisory Service and the Korea Financial Investment Association to serve as a macro-risk monitoring indicator for the authorities, there is significant room for confusion.
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Conflicting Key Indicators… Regulatory Monitoring Has ‘Blind Spots’

Although the criteria of the three agencies differ in this way, no separate verification mechanism exists to filter out discrepancies. It has been determined that the regular business reports submitted by credit rating agencies to the Financial Supervisory Service (FSS) contain only details of rating changes for individual companies; the up/down ratio, which indicates the overall market trend, is not reported separately.

Consequently, even the authorities are forced to rely on statistics published by the credit rating agencies themselves to gauge macro-level credit trends. This is why critics argue that an accurate assessment of risk is impossible when key indicators are calculated in such a haphazard manner.

Even before examining the status of credit rating changes, this “elastic standard” is clearly evident in the first-half regular assessment reports recently released by each credit rating agency. Han Shin Rating, when compiling long-term credit rating changes for the first half of the year, explicitly defined the “downgrade (including defaults)” criterion, thereby including companies that defaulted in the total number of downgrades.

During the same period, Korea Ratings labeled its data as “downgrades (excluding defaults),” completely excluding defaulted companies from its long- and short-term downgrade statistics. Korea Credit Rating Agency (KCRA) also included companies downgraded due to default in its downgrade list, demonstrating that the statistical standards of the three agencies were completely at odds with one another.

Korea Ratings’ report, which completely excluded default cases, most clearly illustrates the blind spot in statistical distortion. Korea Ratings announced that, regarding long-term credit rating changes in the first half of the year, it recorded 17 upgrades and 14 downgrades (excluding defaults), resulting in an “upgrade-dominated” ratio of 1.2.

However, if the three companies that actually experienced long-term rating defaults— JR GLOBAL REIT(348950), TBC, and JoongAng Ilbo—are properly reflected in the downgrade statistics, the number of downgraded companies rises to 17. As the ratio of upgrades to downgrades drops to 1.0, the very premise of an “upgrade-dominated trend” emphasized by HanKiPyeong ceases to hold. Similarly, if short-term rating statistics are recalculated to include seven companies that have defaulted, the number of downgrades surges, completely reversing the result from an “upgrade-dominated” trend to a “downgrade-dominated” one.

In previous years, when the number of defaulting companies was small, such statistical flaws did not come to light. The problem is that this year, a large number of defaults occurred in the first half alone. With a series of sudden credit events—such as JR GLOBAL REIT, previously classified as investment-grade, plummeting from an “A-” rating to a “D” rating overnight—concerns have been raised that the misalignment in the upgrade-to-downgrade ratio, a leading indicator, is clouding risk assessments.

Authorities Say “It’s Fine as Long as It’s Noted in the Footnotes”… Market Calls It “Armchair Bureaucracy”

The Financial Supervisory Service (FSS), which bears responsibility for management and supervision, maintains that there are no regulatory issues. An FSS official drew a clear line, stating, “Even though NICE and Korea Ratings did not include defaults in their downward revision statistics, they clearly specify the number of defaults separately in the main text and at the bottom of the tables,” adding, “Since they did not intentionally omit or attempt to hide this information, it is difficult to view this as a distortion of market conditions.”

In contrast, the credit market’s perspective differs significantly from that of the authorities. This is because institutional investors, when assessing the overall trends and sentiment in the credit market, prioritize intuitive “headline figures”—such as the disclosed upward and downward adjustment ratios—rather than meticulously checking every footnote tucked away in the margins.

This is why the authorities’ attitude—allowing this situation to continue despite market participants being left defenseless against statistics published haphazardly without a unified standard—is drawing intense criticism as a classic example of armchair bureaucracy and administrative convenience.

A credit industry official, who requested anonymity, said, “They are simply following the practices that have been carried over out of habit since previous years, and since the authorities do not make a big issue of it, each credit rating agency maintains its own distinct criteria,” adding, “Given the current market conditions marked by high uncertainty, as we’ve seen recently, there is a need to urgently establish clear disclosure guidelines.”