[Edaily Marketin LEE GEON-EOM Reporter Kim Yeon-seo] The Financial Supervisory Service (FSS) has launched a surprise on-site investigation into the three major domestic credit rating agencies in connection with the series of defaults by JR GLOBAL REIT and the Joongang Group. This move is interpreted as a thorough review to determine whether the evaluation procedures and methodologies used by the credit rating agencies—which had assigned relatively favorable credit ratings to these companies right up until the defaults—were appropriate.

According to the financial investment industry on the 11th, the Financial Supervisory Service (FSS) is currently conducting an intensive on-site inspection of Korea Corporate Rating ( Korea Ratings Corporation(034950)). The inspection has been extended by three days beyond the originally scheduled timeline to ensure a thorough review. Following Korea Corporate Rating, the FSS plans to deploy inspection personnel to Korea Credit Rating (Korea Credit Rating) sometime next week. Immediately after the upcoming Chuseok holiday, the agency plans to sequentially expand the investigation to include NICEHoldings (NICEHoldings).

This on-site investigation was directly prompted by the controversy over “belated downgrades” that arose during the defaults of JR GLOBAL REIT and the Joongang Group. JR GLOBAL REIT maintained a high credit rating until just before default, despite a sharp plunge in the value of its overseas real estate assets and a massive crisis involving the loss of the benefit of the term (EOD). The Joongang Group also faced criticism that credit rating agencies issued complacent evaluations without issuing preemptive risk warnings as the contingent liability risks associated with project financing (PF) at its core affiliates materialized.

Consequently, the Financial Supervisory Service (FSS) is reportedly conducting an intensive review to determine whether the credit rating agencies accurately assessed the financial condition and liquidity risks of these companies. It is thoroughly examining whether appropriate due diligence was conducted in accordance with internal credit rating procedures and proprietary rating methodologies.

The market interprets this series of on-site inspections as a strong measure aimed at rigorously re-examining the overall reliability of the credit rating system. The prevailing view is that if it is confirmed that credit rating agencies provided flawed evaluations in the default incidents that caused massive investor losses, they will find it difficult to avoid severe sanctions.

An official in the credit rating industry described the situation, stating, “As I understand it, the investigation is focused on determining whether rating tasks were performed appropriately in accordance with established procedures and methodologies.” The official added, “Financial authorities are viewing the issue of credit rating reliability in light of the recent spate of defaults with greater seriousness than ever before, and the industry is on high alert regarding the potential repercussions for the entire sector depending on the outcome of the investigation.”

Meanwhile, the Financial Supervisory Service (FSS) previously investigated Korea Ratings and Han Shin Ratings last year to verify allegations and the facts surrounding Homeplus’s filing for rehabilitation.