COUNTRY CREDIT RATING SOVEREIGN RATING RATING METHODOLOGY MARCH 2015

Transcription

1 SOVEREIGN RATING RATING METHODOLOGY MARCH 2015 Mehr erkennen. Mehr erreichen.

2 TABLE OF CONTENTS INTRODUCTION TO FER METHODOLOGIES 3 OVERVIEW OF SOVEREIGN DEBT 4 RATING SCHEME 5 DETAILS OF THE RATING PROCESS 6 FERI COUNTRY RATING SCALE 9 SURVEILLANCE 10 CONTACT INFORMATION 11 DISCLAIMER 11 2

3 Introduction to FER Methodologies FERI EuroRating Services AG (FER), one of Germany s largest economic research and forecasting institutes, is one of the leading European rating agencies specialized in investment market and product ratings. Our mission is to increase market transparency and offer forward-looking investment ratings that provide decision-making guidance to retail and institutional investors. FER publishes rating methodologies to provide issuers and investors insight into the rationale driving FER s rating opinions. In general terms, FER ratings are opinions that reflect the creditworthiness of an issuer, a security or an financial obligation. FER ratings assess an issuer s ability to make timely payments on outstanding obligations (whether principal, interest, preferred share dividends or distributions) with respect to the terms of a financial obligation. FER rating methodologies include analysis of historical and expected business and financial risk factors, as well as industry-specific issues, regional nuances and both subjective factors and intangible considerations. Our approach includes both quantitative and qualitative factors. The factors and analysis outlined in FER methodologies are not exhaustive and the relative importance of any specific factor or analysis can vary by issuer. For example, major strengths might compensate for weaknesses and, conversely, weaknesses can override major strengths of the issuer in other areas. FER uses several methodologies when rating issuers are involved in multiple business lines, weighted according to the appropriate importance of such business lines. FER operates with a stable rating philosophy. FER factors the impact of cyclical economic environments into its ratings when applicable, minimizing rating changes due only to economic cycles. Rating revisions do occur when more structural changes, either positive or negative, impact (or are likely to impact) the rating object in the near future. FER also establishes criteria which are an important part of the rating process. Criteria typically cover areas that apply to more than one industry. Both methodologies and criteria are publicly available on the FER website. 3

4 Overview of Sovereign Debt The FERI Country Credit Rating is a structured macroeconomic research product focusing on two objectives: Evaluating the macroeconomic performance of a country and its impact on capital markets; Assessing the default risk of a country's sovereign debt. The first objective is reached using a model-based analysis of cyclical and structural macro economic developments. The second objective is using proprietary rating and scoring models. The Country Credit Rating uses a wide range of prospective economic and financial indicators to enable an integrated assessment of market potentials and investment risks. The ratings are unsolicited. The FERI Country Credit Rating gives valuable decision-making support in the following fields: Capital markets research; Risk control; Corporate and financial planning. In order to maintain complete and total independence, FER does not solicit or otherwise accept input in any form from companies, governments, institutions or any other service outside of commonly available government and generally available private statistical information. Default of sovereign debt is defined as a situation when a principal or interest payment fails to be executed on the due date or within a specified grace period. A default includes distressed exchange, when such an exchange serves to help the sovereign avoid missing interest or principal payments. 4

5 Rating Scheme The FERI Country Credit Rating is based on a comprehensive analysis of the current macroeconomic situation of a country and a 10-year forecast of macroeconomic developments. The coverage of this forecast ranges from international markets, such as oil and energy prices, exchange rates and world trade issues, to domestic markets for goods, labor and capital. The latter covers monetary and fiscal policy, production and domestic demand, costs and prices as well as foreign trade and capital markets. This broad macroeconomic view is used to assess the country's investment opportunities. The Country Credit Rating concentrates on the creditworthiness of a countries sovereign debt. The following chart shows the FERI Country Credit Rating process including the relevant analysis steps carried out: Graph 1: FERI Country Credit Rating Process 5

6 Details of the Rating Process This section outlines in detail the analysis performed during the FERI Country Credit Rating process.. This description of risk indicators is non-exhaustive and risk indicators might not be fully applicable to all Sovereign debt. Usage of indicators is determined by characteristics of the country being rated. The FERI Country Credit Rating assesses the creditworthiness (solvency) of the sovereign debt of a country. It is based on forecasts of the future development of the ability and willingness of the country to service and pay off its sovereign debt obligations. This analysis uses four risk indicators: adequacy of indebtedness, domestic economic risks, external economic risks and political risks. All four are created by using a range of subindicators. While external economic risks are mainly driven by current and capital account balances and/or imbalances, domestic economic risks cover underlying internal credit risks. Economic and political risks are important factors that may jeopardize the continuity of economic development, solidity of public finances and price stability. The FERI Country Credit Rating is forecast-based. The Country Credit Rating is as a result a forward looking assessment. The "Country Credit Rating" covers 59 countries (22 developed and 37 emerging market economies). It provides comprehensive country specific reports as well as cross country analysis. The reports are continuously reviewed and updated when appropriate. A watchlist serves as an early-warning system. Data sources comprise notifications and publications of international organizations (e.g. UNO, IMF, UNIDO, Eurostat), national organizations (e.g. offices for national statistics, national central banks) and other public authorities (e.g. government departments). The FERI Country Credit Rating uses the FERI Rating Algorithm to assess the appropriate rating indicators and condense available data, forecasts and information into 21 rating grades, ranging from AAA (Best) to CC (Worst) plus the category Default. The general assessment sequence for the algorithm is as follows: 6

7 Graph 2: FERI Country Credit Rating Algorithm 7

8 Rating Scheme Public Debt Public Finance (70%) Public Balance Debt Position (40%) Interest Payments Capital Market Structure (30%) Domestic Economic Risk (30%) Economic Stability (80%) Price Stability (20%) Economic Growth Economic Volatility Inflation Rate Country Credit Rating Net External Position (35%) Central Bank Rate External Economic Risk (20%) Current Account Financing (35%) Current Account Balance Real T.W. Exchange Rate Capital Account Financing (30%) (Curr. Acc. Bal. FDI) Rule of Law (40%) Political Risk (10%) Econ.-Pol. Freedom (30%) Political Condition (30%) Graph 1: Rating Scheme for FERI Country Credit Risk 8

9 FERI Country Rating Scale The following table shows the FERI Country Rating Scale, which is also used to express FER s credit opinion for Sovereigns: # Category # Notch Description 1 AAA 1 AAA lowest default risk 2 AA+ very low default risk 2 AA 3 AA very low default risk 4 AA- very low default risk 5 A+ low default risk 3 A 6 A low default risk 7 A- low lo default ss risk 8 BBB+ moderate default risk 4 BBB 9 BBB moderate default risk 10 BBB- moderate default risk 11 BB+ elevated default risk 5 BB 12 BB elevated default risk 13 BB- elevated default risk 14 B+ high default risk 6 B 15 B high default risk 16 B- high default risk 17 CCC+ very high default risk 7 CCC 18 CCC very high default risk 19 CCC- very high default risk 8 CC 20 CC highest low default risk 9 21 D Default Table 1: FERI Country Rating Scale for Country Credit Risk The default of Sovereign debt generally is defined as meeting at least one of the following criteria: failure to make payment of principal and/or interest under contractual terms of the rated obligation (excluding missed payments made within a contractually allowed grace period); or the distressed exchange of an obligation, where creditors are offered securities with diminished structural or economic terms, compared with the existing obligation to avoid a probable payment default. Where a payment default has been initiated by an issuer, is all but inevitable, or where an issuer formally announces a distressed debt exchange in the immediate future, or where analysis indicates that an instrument is irrevocably impaired such that it is not expected to pay interest and/or principal in full in accordance with terms of an obligation s documentation during the life of the transaction, but where no actual payment default in accordance with the terms of the documentation is imminent, FER rates the obligation typically within the CC category. 9

10 Surveillance FER carries out a regular and systematic surveillance process, which aims at ensuring the timeliness and accuracy of the Country Credit Rating. 10

11 Contact Information Gerald Christoph Dorsch Head of Credit Rating Phone: FERI EURORATING SERVICES AG Haus am Park Rathausplatz Bad Homburg Deutschland Phone: Fax: Disclaimer Any information, analysis, forecasts or concepts contained in this document serve only your nonbinding information. The document is not a tax, legal or other advice and does not constitute an offer for the management of assets or recommendation / advice on asset dispositions. The document has been prepared on the basis of subjective assessments by us. Some Information contained in this document might be based on and / or derived from information which has been provided by independent third parties. We always act on the assumption that such information is accurate and complete and comes from trusted sources. A guarantee for the correctness and completeness of the information contained in this document will not be borne by us. This document does not replace individual advice. Anyone interested should make any decision only after carefully considering the risks associated with a particular contract and seek legal and tax advice and if necessary other advice. We do not take over any responsibility towards either the recipient of this document or third persons in respect of actions that are taken on the basis of this document. The opinions mentioned in this document are current opinions as of the date listed in this document. This document is to be treated strictly confidential and may be used only by the person for whom it was created and solely for their internal purposes. Reproductions of any kind are permitted only upon our prior written consent and upon the exact acknowledgement of the source. 11