Weak signalling of bond ratings in Israel

Purpose: This paper presents the statistical distribution of credit ratings and their migration in Israel, and shows that for 16 years the distribution of ranks has been skewed to the left. The purpose of this paper is to analyze why firms with average quality debt have not changed their tactics and consent to publishing their grade which would then differentiate an average quality debt from a riskier one. Design/methodology/approach: The paper estimates the mean values of ranks and the diagonal of the migration matrix on the basis of data on 1,639 bond rankings listed on the Tel-Aviv Stock Exchange and publications by the largest Israeli rating agency, Maalot. Findings: From 1992 to 2004, one-third of the Israeli firms that had initially requested ranking from a rating agency decided to prevent publication. The findings show the average bond rankings published by Israeli rating agencies tend to be relatively high, while bond rating migration is relatively slow. There was no change in the shape of the statistical distribution of ratings between 2004 and 2007. The strategy of borrowers has remained stable and shows no change over 16 years of credit ratings in Israel. Practical implications: Debtors with an average quality debt view the publications of the credit agency as a weak signal and do not expect the investment community to give them better credit for an average grade. To obtain more detailed ratings, regulators along with the credit rating agencies should consider enforcement of the publication of the rank of firms that requested evaluation. Originality/value: The paper offers insights into why credit ratings in Israel have remained stable over the last decade and explains why Israeli firms with average quality debt do not change their strategy and do not request credit rating agencies to issue their grade publically which could then distinguish them from firms with worse quality debt.