Sovereign ceiling ratings mean that no private firm from a certain country can receive a higher grade than its own sovereign. The logic of the ceiling entails that no good guy can be born in a bad family. In practice this should result in a reward to “bad” firms in the developed countries and a punishment to “good” companies from the developing nations. What do you think about it? Comments, literature and critics are welcomed.
Hi Victor:
We are just publishing a paper about this issue. "Corporate Credit Spreads and the Sovereign Ceiling in Latin America" (forthcoming, in Emerging Markets Finance and Trade).
Attached, you will find a working paper version of that article.
Hope it helps
Demian
Theoretically, this assumption is based on a premise that if domestic credit collapses, there will be a collapse of domestic currency followed by the inability of the companies to pay their foreign creditors even if their production capacities are sound.
Empirically, there is little or no support to this hypothesis.
Perhaps as an exception, rather than a rule, some firms with sufficient foreign affiliation and dealing with foreign currency have obtained higher ratings than the sovereign where they are domiciled. I worked on the rating of Shelter Afrique by Moody's and the awarded rating was higher than the Kenya country rating because of the foreign ownership, which was denominated in dollars.The assets were also denominated in foreign currency, dollars and euros.
However, the ceiling to sovereign risk is understandable. Under intense pressure, governments will exercise their sovereignty to stabilise currencies and countries, including controls and moratorium on foreign currency transfers. Matters of public interest always come first. Perhaps the rating agencys in "piercing" this ceiling may consider this risk to be lower in some contexts.
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