Credit Ratings: Methodology and Use

1
Credit Ratings Methodology and Use

• Vladimir Ismailov
• Operations Director,
• Standard Poors Russia CIS

2
Issuer Issue rating
Issuer
Issue
3
Definitions

• What a credit rating is
• an independent opinion of the issuer on its
  ability and willingness to repay debt in a full
  and timely manner
• What a credit rating is NOT
• an audit
• a recommendation to buy/sell or appropriateness
  of investment

4
SP CreditWatch Outlook

• CreditWatch
• focuses on identifiable events and short-term
  trends that cause ratings to be placed under
  special surveillance,
• highlights the potential direction of a short- or
  long-term rating
• Positive,
• Developing
• Negative

• Outlook
• assesses the potential direction of a long-term
  credit rating over the intermediate term
  (typically six months to two-three years)
• Positive,
• Developing
• Negative

5
SP credit rating process
Typical timescale 6-8 weeks from receipt of
initial information
- on rare occasions
6
Credit rating fundamentals

• Business Risk
• Country risk,
• Industry characteristics,
• Competitive position,
• Management,
• Business strategy.

• Financial Risk
• Financial policy,
• Profitability,
• Capital structure,
• Cash flow protection,
• Liquidity financial flexibility.

7
Correlation of Long- and Short-term Ratings
8
Cumulative Average Default Rate by Rating
Modifier, 1981-2004 ()(Time horizon 15 years)
Source S Global Fixed Income Research Standard
Poors CreditPro 7.0
9
Credit rating information requirements

• Organization structure,
• Senior management background,
• Several years of detailed historical financial
  info,
• Projections, including assumptions,
• List of bank lines available and recent usage,
  and list of restrictive covenants,
• Disclosure documents issued over the last 3
  years,
• Detailed descriptive data relating to the
  operations of all material divisions,
• Summary of corporate strategy together with
  perceptions of risks and opportunities.