Evaluation Of The Applicability Of The Emerging Market Credit Scoring Model In Rating Corporate Bonds In Kenya

Abstract

This research project evaluates the applicability of the Emerging market scoring Model (EMS) in rating corporate bonds in Kenya. A growing economy like Kenya needs corporate bonds to fund infrastructure, housing and other long-term projects to see the economy grow. Corporate bonds can become more or less risky depending on trading performance of firms that issue them and this can be accessed through rating. Information on corporate bond rating is expected to increase confidence in investors and also assist issuers of bonds to correctly price their issues. The researcher therefore evaluated the extent to which the EMS Model could be used to score and rate corporate bonds based on a company’s calculated ratios. Bond rating in the country is new and is not a requirement of the CMA. As such companies are not under any obligation to publish ratings and so rating information may not even reach the investors. Some of the rated companies are also not willing to disclose such ratings especially where they may not be good enough. The central bank has however encouraged companies to get ratings. The study was done on total population of the companies that had issued a corporate bond between 2007 and 2011 and the bond had been listed in the NSE. The companies under the sample were nine. Five of them had been rated for a period between three and five years and the data was available. The main finding of this study, covering the five companies is that the Emerging Market Scoring model is not applicable in the Kenyan economy. The study results indicate that testing at 5% significant level at 2 tailed, there were significant differences between the given scores and the researchers calculated ones. The indication of this is that the EMS model should not be applied in Kenya since the difference between the given scores and the calculated were significant. The study results also indicate that there is high internal correlation between the given scores model and the difference between the given and calculated score models. Further studies should be done to assess the reliability of rating models and also to establish whether it is best to customize the existing scoring models, borrowed models or to develop a new bond rating model to match the Kenyan market.