Global Structurally Enhanced Corporate Bonds Rating Criteria – Revised Methodology Published

30 Nov 2017 In GCR Communications

Global Structurally Enhanced Corporate Bonds Rating Criteria – Revised Methodology Published

Johannesburg, 30 November 2017—Global Credit Ratings (“GCR”) has published its updated Global Structurally Enhanced Corporate Bonds Rating Criteria.

GCR has updated its Global Structurally Enhanced Corporate Bonds Rating Criteria (the “Criteria”). The Criteria applies to senior secured securities issued by corporates that benefit from certain structural enhancements. These enhancements can, for example, take the form of cash reserves, guarantees or transaction specific security packages. The rating of structurally enhanced corporate bonds is derived by applying a notching approach, starting from the long term, corporate credit rating of the intended issuer of such bonds. In determining the appropriate number of rating notches to be applied, GCR compares the estimated overall recovery rate after a potential default of the bonds with the assumed average corporate senior unsecured debt obligation recovery rate. If overall estimated recoveries are higher than the assumed average recovery rate, a notching uplift may be applicable in line with the recoveries notching table detailed in the Criteria. Where relevant, the credit quality of the transaction parties facilitating structural enhancements (e.g. a guarantee) relating to the transaction is taken into account. In some instances, dependent upon the rating of the underlying corporate, the rating of the secured obligation may be capped.

The rating of the senior secured structurally enhanced corporate bonds incorporates recoveries potentially arising from the structural enhancements (e.g. the proceeds of a guarantee claim payment). In effect, the rating accorded to these securities is an expected loss rating (which is a function of probability of default and loss severity), and relates to an assessment of the ability to meet ultimate (as opposed to timely) payment of interest and principal. Such a rating can therefore not be fully compared with a traditional corporate credit rating (the latter, which is also an expression of expected loss, but refers to probability of default and an average historical loss given default (LGD) for generalised senior unsecured debt). Where a tap issue occurs, GCR expects to receive sufficient notice prior to issuance in order to carry out its analysis to accord and/or affirm the ratings of the bonds. Where such notice is not provided, GCR may withdraw the ratings at its discretion.

The Criteria lays down the fundamentals for structurally enhanced senior secured corporate bond issues that are not covered by other specific GCR rating criteria reports. Each transaction will be accompanied by a transaction specific report that will disclose any additional observations, or deviations from the Criteria.

The Criteria is an update to the version published in September 2016. There are no significant amendments to the Criteria. The update of this Criteria will not have an impact on any existing transactions that have been rated under it. Going forward, all new transactions will be rated using this updated Criteria.

The updated Criteria is available at www.globalratings.net.

 

ANALYTICAL CONTACTS

Primary Analyst

Yohan Assous

Sector Head: Structured Finance Ratings

+27 11 784 1771

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Committee Chairman

Marc Chadwick

Sector Head: Insurance Ratings

+27 11 784 1771

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RATING LIMITATIONS AND DISCLAIMERS

ALL GCR’S CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: http://GLOBALRATINGS.NET/UNDERSTANDING-RATINGS. IN ADDITION, GCR’S RATING SCALES AND DEFINITIONS ARE ALSO AVAILABLE FOR DOWNLOAD AT THE FOLLOWING LINK:  http://GLOBALRATINGS.NET/RATINGS-INFO/RATING-SCALES-DEFINITIONS. GCR’S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, PUBLICATION TERMS AND CONDITIONS AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE AT http://GLOBALRATINGS.NET.

GLOSSARY OF TERMS/ACRONYMS USED IN THIS DOCUMENT AS PER GCR’S STRUCTURED FINANCE GLOSSARY

Bond A long term debt instrument issued by either: a company, institution or the government to raise funds.
Claim A formal request or demand.
Corporate Credit Rating A credit rating accorded to a corporate entity.
Credit A contractual agreement in which a borrower receives something of value now, and agrees to repay the lender at some date in the future, generally with interest. The term also refers to the borrowing capacity of an individual or company
Credit Rating An opinion regarding the creditworthiness of an entity, a security or financial instrument, or an issuer of securities or financial instruments, using an established and defined ranking system of rating categories.
Debt An obligation to repay a sum of money.
Default A default occurs when: 1.) The Borrower is unable to repay its debt obligations in full; 2.) A credit-loss event such as charge-off, specific provision or distressed restructuring involving the forgiveness or postponement of obligations; 3.) The borrower is past due more than 90 days on any debt obligations as defined in the transaction documents; 4.) The obligor has filed for bankruptcy or similar protection from creditors.
Guarantee An undertaking for performance of another’s obligations in event of default.
International Scale Rating LC International local currency (International LC) ratings measure the likelihood of repayment in the currency of the jurisdiction in which the issuer is domiciled. Therefore, the rating does not take into account the possibility that it will not be able to convert local currency into foreign currency or make transfers between sovereign jurisdictions.
Issuer The party indebted or the person making repayments for its borrowings.
Long-Term Rating A long term rating reflects an issuer’s ability to meet its financial obligations over the following three to five year period, including interest payments and debt redemptions. This encompasses an evaluation of the organisation’s current financial position, as well as how the position may change in the future with regard to meeting longer term financial obligations.
Loss A tangible or intangible, financial or non-financial loss of economic value.
Notching A movement in ratings.
Obligation The title given to the legal relationship that exists between parties to an agreement when they acquire personal rights against each other for entitlement to perform.
Principal The total amount borrowed or lent, e.g. the face value of a bond, excluding interest.
Proceeds Funds from issuance of debt securities or sale of assets.
Recovery The action or process of regaining possession or control of something lost. To recoup losses.
Reserves A portion of funds allocated for an eventuality.
Securities Various instruments used in the capital market to raise funds.
Security An asset deposited or pledged as a guarantee of the fulfilment of an undertaking or the repayment of a loan, to be forfeited in case of default.
Security Package Security offered to Noteholders for debt securities issued that should increase the recoveries in an event of default.
Senior A security that has a higher repayment priority than junior securities.
Senior Unsecured Debt Securities that have priority ahead of all other unsecured or subordinated debt for the payment in the event of default.
Short-Term Rating A short term rating is an opinion of an issuer’s ability to meet all financial obligations over the upcoming 12 month period, including interest payments and debt redemptions.
Structural Enhancement This may be provided as credit enhancement or as various other methods to enhance the security of a transaction such as performance triggers, short revolving periods et cetera.
Transaction A transaction that enables an Issuer to issue debt securities in the capital markets. A debt issuance programme that allows an Issuer the continued and flexible issuance of several types of securities in accordance with the programme terms and conditions.

For a detailed glossary of terms, please click here.

 

 

ALL GCR CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS, TERMS OF USE OF SUCH RATINGS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS, TERMS OF USE AND DISCLAIMERS BY FOLLOWING THIS LINK:HTTP://GLOBALRATINGS.NET/UNDERSTANDINGRATINGS. IN ADDITION, RATING SCALES AND DEFINITIONS ARE AVAILABLE ON GCR’S PUBLIC WEB SITE AT WWW.GLOBALRATINGS.NET/RATINGSINFORMATION. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. GCR'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, COMPLIANCE, AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE UNDERSTANDING RATINGS SECTION OF THIS SITE.

CREDIT RATINGS ISSUED AND RESEARCH PUBLICATIONS PUBLISHED BY GCR, ARE GCR’S OPINIONS, AS AT THE DATE OF ISSUE OR PUBLICATION THEREOF, OF THE RELATIVE FUTURE CREDIT RISK OF ENTITIES, CREDIT COMMITMENTS, OR DEBT OR DEBT-LIKE SECURITIES. GCR DEFINES CREDIT RISK AS THE RISK THAT AN ENTITY MAY NOT MEET ITS CONTRACTUAL AND/OR FINANCIAL OBLIGATIONS AS THEY BECOME DUE. CREDIT RATINGS DO NOT ADDRESS ANY OTHER RISK, INCLUDING BUT NOT LIMITED TO: FRAUD, MARKET LIQUIDITY RISK, MARKET VALUE RISK, OR PRICE VOLATILITY. CREDIT RATINGS AND GCR’S OPINIONS INCLUDED IN GCR’S PUBLICATIONS ARE NOT STATEMENTS OF CURRENT OR HISTORICAL FACT. CREDIT RATINGS AND GCR’S PUBLICATIONS DO NOT CONSTITUTE OR PROVIDE INVESTMENT OR FINANCIAL ADVICE, AND CREDIT RATINGS AND GCR’S PUBLICATIONS ARE NOT AND DO NOT PROVIDE RECOMMENDATIONS TO PURCHASE, SELL OR HOLD PARTICULAR SECURITIES. NEITHER GCR’S CREDIT RATINGS, NOR ITS PUBLICATIONS, COMMENT ON THE SUITABILITY OF AN INVESTMENT FOR ANY PARTICULAR INVESTOR. GCR ISSUES ITS CREDIT RATINGS AND PUBLISHES GCR’S PUBLICATIONS WITH THE EXPECTATION AND UNDERSTANDING THAT EACH INVESTOR WILL MAKE ITS OWN STUDY AND EVALUATION OF EACH SECURITY THAT IS UNDER CONSIDERATION FOR PURCHASE, HOLDING OR SALE.

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