[Edaily Marketin KIM YEON-SEO, LEE GEON-EOM ] There are calls for the public to recognize that credit ratings are not a guarantee of principal repayment on corporate bonds, but rather an indicator of a company’s risk of default. While credit rating agencies clearly bear responsibility for failing to reflect the risk of insolvency at a Joongang Group affiliate in a timely manner, critics point out that efforts are also needed to accurately inform investors about the meaning of credit ratings and the possibility of principal loss.

According to the financial investment industry on the 7th, controversy is mounting over the timeliness of credit rating agencies’ assessments as credit ratings have been successively downgraded following the materialization of financial distress at Joongang Group affiliates. Critics argue that the ratings failed to adequately reflect changes in credit risk, such as declining liquidity, increased refinancing burdens, and weakened capacity for support from the parent group.

Controversy has also arisen over so-called “belated downgrades,” as some JoongAng Group affiliates—which had maintained investment-grade ratings—were abruptly downgraded to speculative-grade following JTBC’s default. The key issue has become whether credit ratings properly functioned as an early warning system to signal changes in risk prior to actual defaults.

Credit rating agencies determine credit ratings by comprehensively considering not only financial statements but also cash flow, short-term liquidity, the maturity structure of debt, access to capital markets, and the potential for support from affiliates. Therefore, critics argue that even if no negative equity was identified in the financial statements, the agencies should have more promptly reflected deteriorating refinancing conditions or increased short-term repayment burdens in their ongoing assessments and rating outlooks.

Since credit ratings are based on companies’ disclosures and financial performance, a certain degree of lag is inevitable. In response, some argue that even if it is difficult to adjust ratings immediately, credit rating agencies can proactively signal risks to the market by changing the rating outlook or placing a company under review for downgrade. There are also growing calls in the market for credit rating agencies to provide more specific details regarding the key basis for their ratings and potential downside risks.

“Credit Ratings Should Not Be Treated as a Guarantee of Principal Repayment”

However, the credit rating industry argues that, separate from the agencies’ responsibility for their assessments, the perception that credit ratings serve

as a guarantee of principal repayment

must also be corrected. A credit rating is a relative indicator that reflects a company’s debt repayment capacity and probability of default at the time of evaluation, categorized by grade. It can be downgraded at any time if the company’s business environment, financial condition, or financial market conditions change.

Even receiving an investment-grade rating does not mean the company will not default or that the principal will definitely be repaid. It simply means that, at the time of the assessment, the company’s ability to repay debt is relatively stronger than that of companies with speculative-grade ratings. Investors are advised to examine not only the credit rating but also the issuer’s cash flow, debt level, and refinancing plans.

Consequently, there are calls to more clearly explain the meaning and limitations of credit ratings during the corporate bond sales process. Specifically, issuers must explicitly disclose that credit ratings do not guarantee the principal, along with the possibility of principal loss due to a rating downgrade or default, as well as liquidity risk—the difficulty of selling corporate bonds promptly on the secondary market.

In particular, when selling corporate bonds to individual investors, it is necessary to clearly explain that they are financial products distinct from deposits. Corporate bonds are not covered by deposit insurance, and if the issuing company fails to repay the principal and interest, investors bear the loss. It is pointed out that investors must be fully informed that the higher the coupon rate of a non-investment-grade bond, the greater the likelihood of default and the risk of loss.

There is widespread concern that measures to restrict the issuance of non-investment-grade corporate bonds or the assignment of credit ratings based on the insolvency of individual companies should be approached with caution. This is because tighter regulations could hinder even the normal fundraising efforts of companies with limited financial capacity. There is also a possibility that corporate funding demand could shift to the private placement bond or electronic short-term bond markets, where disclosure and investment information are relatively scarce.

An official from a credit rating agency stated, “Regulating issuance based on individual defaults is like cutting off an arm because it hurts,” adding, “This could provoke backlash not only from non-investment-grade companies but also from investors who have historically accepted high risks to earn returns.”

Introducing separate safeguards at the credit rating stage could also lead to the unintended consequence of companies with weak financial structures being uniformly excluded from the capital markets. If credit rating agencies, mindful of regulations, hesitate to assign ratings or delay evaluations, it could make it even more difficult for those companies to access the regulated corporate bond market. The explanation is that this could result in pushing companies into markets with insufficient information rather than eliminating risk.

Market participants emphasize that, rather than blanketly blocking corporate bond issuances, both the rating agencies’ responsibility for assessment and the underwriters’ duty to provide explanations must be strengthened. Rating agencies should promptly reflect changes in liquidity, refinancing prospects, and the ability to receive support from affiliated groups in their ratings and outlooks, while underwriters must fully explain that credit ratings are not a guarantee of principal and that losses are possible.

“We must first change the perception that corporate bonds are safe assets similar to deposits,” the official said. “Credit rating agencies must assess changes in risk in a timely manner, and distributors must explain these changes thoroughly so that investors can independently assess the risks and returns.”