1. E UROPEAN P ARLIAMENTARY F INANCIAL S ERVICES IN ASSOCIATION WITH THE KANGAROO GROUP FORUM Brussels, 20 th May 2003 Presented by Jeanne-Françoise de Polignac The Role of Rating Agencies in European and Global Financial Markets Standard & Poor’s background presentation to the Market Briefing of the European Parliamentary Financial Services Forum chaired by Mrs Christa Randzio-Plath MEP

2. 2 E UROPEAN P ARLIAMENTARY F INANCIAL S ERVICES IN ASSOCIATION WITH THE KANGAROO GROUP FORUM S&P Europe In Europe since 1984 7 Offices and over 500 employees Over 2,000 European entities rated Over 80% of European capital market debt rated

3. 3 E UROPEAN P ARLIAMENTARY F INANCIAL S ERVICES IN ASSOCIATION WITH THE KANGAROO GROUP FORUM What is a credit rating? A Standard & Poor’s Rating is: Standard & Poor’s opinion on the willingness and future ability of a borrower to make full and timely payment of interest and principal (borrowed sum) on a financial obligation in accordance with its terms. A Rating is not: advice or a recommendation to buy, sell or hold the security in question, a company audit, nor a credit scoring.

4. 4 E UROPEAN P ARLIAMENTARY F INANCIAL S ERVICES IN ASSOCIATION WITH THE KANGAROO GROUP FORUM The Role of Rating Agencies Credit Ratings play a key role in: Mitigating information asymmetry Providing investors with independent, relevant and updated financial information on issuers and issues Allowing issuers to access debt capital markets and to diversify their funding requirements.

5. 5 E UROPEAN P ARLIAMENTARY F INANCIAL S ERVICES IN ASSOCIATION WITH THE KANGAROO GROUP FORUM Ratings Scale Highest Credit Quality: ----------- AA A BBB Investment Grade Cut-off point ---------------- BB B CCC CC C D AAA AA+ AA AA- A+ A A- BBB+ BBB BBB- BB+ BB BB- A-1+ A-1 A-2 A-3 B AAA Long Term Short Term ____________ _____________________ Default -----------

6. 6 E UROPEAN P ARLIAMENTARY F INANCIAL S ERVICES IN ASSOCIATION WITH THE KANGAROO GROUP FORUM European Ratings by Sector Source: Standard & Poor’s, September 2002

7. 7 E UROPEAN P ARLIAMENTARY F INANCIAL S ERVICES IN ASSOCIATION WITH THE KANGAROO GROUP FORUM European Ratings by Country Source: Standard & Poor’s, September 2002

8. 8 E UROPEAN P ARLIAMENTARY F INANCIAL S ERVICES IN ASSOCIATION WITH THE KANGAROO GROUP FORUM The Rating Process Rating Request Analytical Team Appointed Preliminary Research Rating Committee Company Informed Meeting with Management Appeal Process Rating IssuedSurveillance

9. 9 E UROPEAN P ARLIAMENTARY F INANCIAL S ERVICES IN ASSOCIATION WITH THE KANGAROO GROUP FORUM Rating Methodology 2 broad categories considered Financial Risk Financial policy Profitability Capital Structure Cash flow protection Financial flexibility Business Risk Industry characteristics Competitive position Management Business Strategy for Industrials

10. 10 E UROPEAN P ARLIAMENTARY F INANCIAL S ERVICES IN ASSOCIATION WITH THE KANGAROO GROUP FORUM Default Statistics 2002

11. 11 E UROPEAN P ARLIAMENTARY F INANCIAL S ERVICES IN ASSOCIATION WITH THE KANGAROO GROUP FORUM Rating through the business cycle Source: Standard & Poor’s, 2003 Defaulted debt as a percentage of rated debt, 1981-2002

12. 12 E UROPEAN P ARLIAMENTARY F INANCIAL S ERVICES IN ASSOCIATION WITH THE KANGAROO GROUP FORUM “Issuer Pays” - Model S&P has no link with any financial institution or brokerage Rating decisions are collegial – decided by a Rating Committee Analyst remuneration is not based on the performance of the issuers or ratings they work on Analysts are not allowed to own securities in companies with which they regularly interact Code of Ethics requires that all non-public information remain confidential Influence of individual issuers on S&P is limited: 37 000 issuers doing business with S&P and no single issuers accounts for more than 1% of revenue

13. 13 E UROPEAN P ARLIAMENTARY F INANCIAL S ERVICES IN ASSOCIATION WITH THE KANGAROO GROUP FORUM Regulatory Treatment of Rating Agencies In the US, the SEC has designated Nationally Recognised Statistical Rating Organisations (NRSROs) since 1975. NRSRO ratings are used widely in U.S. regulations. –Recognition is based primarily on a rating agency’s reputation and the recognized use of its ratings in the U.S. financial market –NRSRO designation is intended to reflect the view of the marketplace as to the credibility of the ratings S&P’s ratings are widely used and treated with high regard from investors outside the U.S., including Europe, where the NRSRO status does not exist and ratings are not as imbedded in regulations.

14. 14 E UROPEAN P ARLIAMENTARY F INANCIAL S ERVICES IN ASSOCIATION WITH THE KANGAROO GROUP FORUM Current International Regulatory Developments SEC Review of Rating Agencies –In January 2003, the SEC presented its “Report on the Role and Function of Credit Rating Agencies in the Operation of Securities Markets” to US Congress, as mandated by the Sarbanes-Oxley Act of July 2002. –A “Concept Release”, a consultation document, is forthcoming and addresses further study regarding the Information Flow, Potential Conflicts of Interest, Alleged Anticompetitive or Unfair Practices, Reducing Potential Regulatory Barriers to Entry and Ongoing Oversight. Congress Hearings of April 2003 –The SEC has been requested to produce a report for Congress on the Utility of NRSRO ratings, Monopoly Power, Fair Disclosure the NRSRO Status and Conflicts of Interest. This Report is due by early June 2003. IOSCO review –The International Organisation of Securities Commissions (IOSCO) will present a high level principles on rating agencies by September 2003. –G7/G8, Financial Stability Forum, IMF Basel II Capital Accord –Basel II sets out recognition criteria for ECAIs (External Credit Assessment Institutions)

15. 15 E UROPEAN P ARLIAMENTARY F INANCIAL S ERVICES IN ASSOCIATION WITH THE KANGAROO GROUP FORUM Current EU Regulatory Developments On-going Dialogue with European Regulators –S&P enhanced dialogue/consultation with the European Commission, CESR, National Regulators (UK, Germany, France, Spain, Netherlands) and initiating dialogue in other EU jurisdictions and globally, e.g. Russia. Financial Services Action Plan –Capital Adequacy Directive (CAD III, the EU implementation of Basel II) –Market Abuse Directive. Consultation at level 2 with CESR and Commission –Oviedo Agenda French and German focus on Rating Agencies –« Project de Loi de Sécurité Financière » proposes monitoring, but not supervision by the newly created Autorité des Marchés Financiers « AMF » –Germany - a Working Group may be set up.