LRA clarifies EAP’s debenture rating issue

• Board categorically rejects any suggestion of impropriety as alleged by SEC

The attention of the Board of Directors of Lanka Rating Agency (LRA) has been drawn to the various news reports following a directive issued by the SEC titled ‘Conflict of Interest Arising in the Credit Rating of the Debenture Issue of EAP Broadcasting Company Ltd.’

Whilst the Board of LRA would like to emphasise that LRA respects the decision of the Securities and Exchange Commission (SEC) being the regulator for the capital markets and the valuable suggestions given for improvement, it wishes to make the following announcement to clarify the matters contained in the news reports.

The SEC, in the aforesaid directive has alleged that there is a prima facie conflict of interest in the rating of the above debenture issue by LRA. The SEC has further stated that the said conflict of interest “arises from having a common director on the respective Board of Directors of both the Issuer Company and the Credit Rating Agency and two of the Directors of the Issuing Company being members of the Rating Committee of LRA”.

The Commission has also expressed the view that “the integrity of the process adopted by LRA does not appear to support the credibility of the rating”.

The actual facts relating to this rating are as follows. EAP Broadcasting Company Ltd. obtained a rating from LRA for a Rs. 2.5 billion senior secured redeemable debenture on 30 September 2014. LRA also reaffirmed the company’s corporate credit rating on the same date. This was the same BBB rating assigned to EAP in 2013 by RAM. 

The Rating Quorum members who were on that date did not have any association whatsoever with the EAP Broadcasting Company Ltd. Subsequently, LRA reaffirmed the corporate credit rating and assigned a rating to a Rs. 3 billion listed rated redeemable debenture subject to a sinking fund mortgaged in favour of the Trustee on 18 March. 

The substance of the redeemable debenture remained the same, the addition being the sinking fund which provided additional strength to the issue. In essence, it was therefore a credit update of the previously assigned rating.

However, since two members of the original Rating Quorum, had been appointed to the Board of Directors of EAP Broadcasting Company Ltd., namely Dr. Dayanath Jayasuriya and Russell de Mel in October 2014, they did not directly or indirectly participate in the rating or credit update process of 18 March and the Rating Committee Quorum consisted of three independent members instead including two overseas Rating Committee members, who had no interest whatsoever in EAP Broadcasting Ltd. Preethi Jayawardena was appointed to the EAP Board in December 2014. He has not participated directly or indirectly in any rating process since joining the Board from inception.

The SEC has also implied in its directive that the very fact that there were common directors between LRA and EAP Broadcasting Company Ltd. results in a breach of the terms and conditions of the issue of the license to LRA. However, the Board of LRA wishes to emphatically state in this context, that it has strictly adhered to practices that had been approved and acquiesced to by the SEC on prior occasions.

Under the circumstances, the Board of LRA wishes to categorically state that there was absolutely no conflict of interest in the said rating process. 

In this context, the Board of LRA further wishes to state that LRA, which was formally known as RAM Ratings Lanka Ltd., has a proud and unblemished history of over a decade of service in Sri Lanka. Apart from being registered by the Securities and Exchange Commission of Sri Lanka, it is also recognised by the Central Bank of Sri Lanka and the Insurance Board of Sri Lanka as a rating agency. 

The company’s shareholders consist of the most prestigious financial institutions in Sri Lanka. The company also has a Memorandum of Understanding on Affiliation and Technical Assistance with CRISIL Ltd., which is a globally recognised rating agency and the leading rating agency in India which provides LRA with training, technical assistance and other services in order to maintain high standards of professionalism and service. The majority shareholder of CRISIL is Standard and Poor’s, which is the world’s foremost provider of credit ratings.

In the aforesaid circumstances, the Board of Directors categorically rejects any suggestion of impropriety on the part of the company or any of its officers and maintains that it has complied with every measure of prudence and propriety to protect the integrity of its rating process and that it will continue to do so in the future.