Posted Date: February 24, 2016

MARC has finalised its methodology for rating issuances supported by third-party credit guarantees following market consultation. MARC would like to thank market participants for their input. In finalising the criteria, MARC did not make any material changes to the content of the exposure draft which was published on December 31, 2015.

As part of the methodology, MARC has introduced a new expected loss (EL) rating for issuances supported by third-party partial credit guarantees (PCG). The EL ratings are intended to provide investors with insight into the loss severity dimension of credit risk. To implement MARC’s rating approach for PCG-supported issuances, MARC has established an EL-based rating scale, which reflects the agency’s opinion of loss severity in the event the obligation is not fulfilled.

Under the methodology, MARC will look to its own probability of default (PD) ratings to assess the default risk of the borrower and guarantor(s) levels. These ratings are mapped to PDs using MARC’s idealised PD table. Loss given default (LGD) rates are estimated for the borrower and guarantor(s) to derive the exposure-weighted average EL rate for the obligation. The credit risk mitigating effect of the PCG is recognised by allowing the guaranteed exposure to be treated as if it were an exposure to a higher-rated guarantor. The estimated PD and LGD of the guarantor are substituted for that of the issuer or ultimate obligor in deriving the exposure-weighted average EL rate for the obligation. The target debt ratings for the PCG-supported securities are achieved by targeting MARC’s horizon-specific idealised EL rates for a given rating level.

MARC notes the successful use of PCG structures in certain emerging markets to facilitate bond market access for corporate issuers and projects and is hopeful of the potential application of PCGs in the domestic bond and sukuk markets.

The rating methodology can be accessed on MARC’s website at Rating Approach for Issuances Supported by Third-Party Credit Guarantees.

Milly Leong, +603-2082 2288/ milly@marc.com.my.