4 March 2002

To : All Approved Trustees of Registered Schemes

Dear Sirs,

Requirements on Credit Rating

It has come to the attention of the Authority that there is a need to further clarify the credit rating requirements relating to debt securities as stipulated in section 37 of the Mandatory Provident Fund Schemes (General) Regulation ("Regulation") and section 7 of Schedule 1 to the Regulation.

Issue-specific Credit Rating is Required

Paragraphs 10 and 11 of the Guidelines on Debt Securities (Guideline III.1) specify the minimum long-term and short-term credit ratings of debt securities for the purposes of the two statutory provisions mentioned in the preceding paragraph. The relevant provisions have indicated very clearly the requirement of satisfactory "credit rating of the security/securities", instead of the general issuer credit ratings.

In practice, an issuer may, by means of certain financial structurings, issue credit-enhanced/subordinated debts. As a result, the credit worthiness of these debts may differ from the issuer's own financial capacity. For example, the repayment of an issuer's specific debt may hypothetically be linked to the revenue income of a specific project rather than to the issuer's general financial resources. The credit of that specific debt will thus depend solely on the revenue flow of the project rather than on the financial capacity of the issuer. Under such circumstances, it may be inappropriate to equate the credit rating of the specific debt with the credit rating of the relevant issuer. The legislative requirement of an issue-specific credit rating is to acknowledge the fact that the credit worthiness of an issuer's specific debt may differ from the indication of the issuer's general financial capacity.

Generally speaking, the definitions of ratings of the approved credit rating agencies distinguish the issue-specific credit ratings from the issuer credit ratings. However, some of the approved credit rating agencies, like Moody's for example, may have flexibility in rating short-term obligations of an issuer. Moody's short-term credit ratings, unlike its long-term issue-specific credit ratings, apply to an individual issuer's capacity to repay all short-term obligations rather than to specific short-term borrowing programs. Once assigned, the short-term credit rating would apply to all of the issuer's senior, unsecured obligations with an original maturity of less than one year, regardless of the currency or market in which the obligations are issued.

Individual Credit Rating is Required for Debt Securities Issued from MTN Programs

In respect of medium-term note (MTN) programs, the Authority does not accept the indicated program credit rating in lieu of the credit rating assigned to individual debt securities issued under the programs. Approved credit rating agencies generally assign ratings to individual debt securities issued from the MTN programs, in addition to indicating ratings to MTN programs themselves. The indicated MTN program rating applies to all pari passu notes issued under the program. When notes are issued from the MTN program with altered credit profiles from that of the program, the resultant credit ratings of these notes may have credit ratings different from the MTN program. For control purpose, approved credit rating agencies would assign ratings to these notes individually, but only after reviewing the relevant documentation. Therefore, when a note is issued from an MTN program without a specific individual rating, technically speaking, the note cannot be treated as having the same credit rating as the indicated MTN program rating.

Should you have any query to the above, please do not hesitate to contact your case officer at the Authority.

Yours faithfully,

(Ms Hendena YU)
Chief Operating Officer (Compliance)

Last Revision Date: 17/10/2014