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Argentina Credit Rating Alternative
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Written by Richard E. Morris   
Thursday, 22 December 2011
As US regulators look to replace references to credit ratings in their rulemaking, Argentine pension funds have already been making investments using alternative means of analysis, including reports from local universities.

But while Argentina's regulators insist the selection process is thorough, financial attorneys have their doubts that the system operates exactly as intended.

"With the combination of no rating plus the political criteria for investment, the government ends up making investments the private sector would not have made," said Bruchou Fern?ndez Madero & Lombardi partner Hugo Bruzone.

When the pension funds were nationalised in 2008, the rules governing investment were changed to encourage investment in outlying areas of Argentina.

Though investments in most listed companies require the rating of at least one credit agency, the country's fund authority, Administraci?n Nacional de la Seguridad Social (Anses), was given flexibility when considering certain investments.

"The most important types of investments in which we are involved nowadays are those related to infrastructure and project finance in Argentina," said Anses general counsel Mar?-a Van Morlegan. "In those investments we don't require a credit rating."

Instead, Van Morlegan said the pension funds must contract a national university to conduct an analysis of the investment, including how it will effect the macroeconomic situation of Argentina and how it would impact the local labour market.

Additionally, she said an investment committee relies on an internal assessment process that factors the university report into its recommendations to the Anses chief officer. The decision is then passed to a board consisting of three secretaries of state.

"We have a risk management department, a strategy department, and investment department, and a number of technicians, engineers and accountants assessing the university reports and providing recommendations to the committee," Van Morlegan said.

While Bruzone expressed confidence in Morlegan's work at Anses, he said the university reports provide a subjective calculation where a quantitative assessment is needed.

"They changed the criteria from a rating agency to a university that they think will give a report that is not so strict and will talk about the importance of investment in that part of the country," he said, "not whether the company can repay the credit or not."

A precedent for sour investments
The Argentine pension system was privatised in 1994 after years of government financing raids by successive administrations. The funds were divided among several private administrators known as AFJPs.

In December of 2007 the government established a small public pension fund known as FGS to provide a federally-backed alternative to the AFJPs. Less than a year later the administration moved all the investments of the private funds into the FGS.

"I'm aware of certain investments that fund did that went into default at the very first moment," Bruzone said. He noted that when the private funds were nationalised their assets were simply moved to the FGS.

As of October 2010 Anses had 2.23% of its portfolio invested in projects exempt from rating requirements, and Van Morlegan predicted the amount was currently between 3% and 4%. The rules require infrastructure investments to ultimately comprise 20% of the total portfolio.

Bruzone said most of the remaining investments were negotiated prior to the nationalisation.
Last Updated ( Thursday, 22 December 2011 )
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