S&P: TEMASEK HOLDINGS IS AS RISKY AS GREECE & JAMAICA

This gets a little technical but important, so the writer begs readers’ indulgence. This report (www.bloomberg.com/news/articles/2015-02-05/temasek-says-singapore-not-greece-in-s-p-critique-asean-credit) highlighted what appears to be a spat between Temasek and the rating agency Standard & Poor (S&P) over the latter’s decision to introduce Standalone Rating to industrial holding companies (IHC). The contention is the Standalone Rating has placed Temasek in the same category as risky propositions such as Greece and Jamaica

What is Standalone Rating?

Standalone credit ratings are not new and had been introduced mostly due to the prevalence of financial institutions fully or majority owned by national, state or municipal governments who enjoyed high credit rating. Standalone ratings rate entities entirely on their own merit without the support implied by being owned by another with a strong credit rating.

In the case of Temasek, it enjoyed a AAA-rating because it is owned by the Republic of Singapore which is rated AAA. Standalone rating meant Temasek is rated on its own merit without the support implied by being owned by the Republic.

Temasek’s problem is Asset Liquidity

Suffice to say by lumping Temasek with the likes of Greece and Jamaica, S&P is saying it is “a moderately high risk” entity without the implicit support of the Republic.

The crux of the matter is Asset Liquidity: the ease of disposing large shareholdings and this is based on 30 year history of stock price swings in Temasek’s key geographical markets. S&P categorized Singapore in the third of four baskets, similar to HK. This is not to say Singapore stock market comprised a lot of risky companies but that the market lacks depth and thus more volatile and risky. Selling a $100m block of shares is an entirely different proposition from selling a $10b block, the latter would have move the price substantially in such a market, resulting in losses. This is the fundamental issue of asset liquidity. The fact that Temasek holds huge controlling blocks of shares exacerbates the risk of asset liquidity. Further, it is not helped that only 24% of its assets are invested in the deep markets of Europe, North America and Australasia.

This is not to say Temasek is a bad credit but that its position rests entirely on, using S&P’s words, “the extreme likelihood of extraordinary support from the government.” As such the Standalone Rating puts Temasek’s risk profile in its proper context and on more transparent basis.

Is S&P being picky?

Perhaps but it should. The elephant in the room in global markets today is that very issue of asset liquidity. The curbs and punitive capital requirements imposed on banks have reduced asset liquidity as they can no longer act as intermediaries in block sale to the extend they used to.

Implicit AAA encourages risky behavior

Implicit AAA rating has a known tendency to encourage risky behavior because the AAA rating is inferred by the strong credit of the owner and not earned by the entity itself. That is to say Temasek did not earn that AAA rating – it is inferred by the Republic. As it is not earned, Temasek has the opportunity to engage in risky behavior since relying on the Republic’s rating, it need not manage to the strict standards of the rating. It is one of the reasons that Standalone Ratings were introduced some 15 years ago.

Conclusion

According to procedure, S&P has notified and sought feedback from companies affected by the changes. Hence, Temasek’s response. However there are a couple of points for the layman.

First social media bloggers’ allusions to high risk behavior by Temasek may appear disjointed, nit picking and less than the standards demanded by the professionals but they are not wrong. S&P has lent credence to them.

Second, Temasek’s protestations laid bare the dichotomy between what the government and what S&P (and perhaps the world) thinks of Singapore as a financial centre.

At root it is about the reputation. To think as the government has implied through Temasek’s responses that Singapore should be on par with the truly great financial centers, especially in light of the recent technical disruptions and penny stock fiasco, seems the height of hubris.

Chris K

* Chris is a retired executive director in the financial industry who had mostly worked in London and Tokyo. He writes opinions and commentaries mostly on economic and financial matters.

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