MARC has published for comment an exposure draft which outlines the rating agency’s methodology for analysing obligations that are fully or partially guaranteed by third parties.
MARC's approach to rating issuances backed by full guarantees, partial credit guarantees (PCG) and other third-party credit support mechanisms that are similar in effect to an effective guarantee is predicated on 'credit substitution'. The credit risk mitigating effect of the full guarantee or PCG is recognised by allowing a guaranteed exposure to be treated as if it were an exposure to a higher-rated guarantor rather than the issuer or ultimate obligor, subject to the guarantee meeting MARC's criteria for credit substitution.
The proposed criteria builds on the existing cornerstones of our ratings analysis. Ratings assigned by MARC to obligations that are supported by full guarantees will continue to be rated on the basis of timely payment of interest or profit on and principal of the obligation. Credit ratings on obligations supported by PCGs will, instead, reflect the expected loss (EL) of the rated obligation. These ratings will factor in both the likelihood of default and the loss severity expected upon default.
MARC’s approach of rating fully guaranteed obligations on the basis of timely payment will remain unchanged given that investors in these securities expect a high degree of certainty about timely payment. Due to the remote probability of loss associated with protected exposures covered by guarantors with high investment grade ratings (“A” to “AAA”), the expected loss rating framework does not allow for sufficient differentiation between the relative credit quality of these exposures. Hence, MARC will continue to rate jointly supported obligations no higher than the "weakest link", i.e. at the lowest of the guarantors' ratings.
To facilitate implementation of the proposed criteria for PCG-supported issuances, MARC will introduce an EL-based credit-enhanced obligations long-term rating scale that will indicate expected credit loss. Like the existing PD scale, this also measures ordinal credit risk, but with respect to loss severity in the event of default.
MARC welcomes comments on any aspect of the draft methodology during the comment period and will consider all comments received in writing by January 15, 2016. Comments on the exposure draft should be sent to email@example.com. All responses will be regarded as on the public record unless confidentiality is requested by the commentator. MARC will finalise the rating methodology following a review of comments received during the consultation period.
The aforementioned exposure draft can be accessed on MARC’s website at Rating Approach for Issuances Supported by Third-Party Credit Guarantees.
Milly Leong, +603-2082 2288/ firstname.lastname@example.org.