MARC has published for public comment an exposure draft which outlines the rating agency’s methodology for rating government-related entities (GRE).
MARC’s proposed rating methodology articulates the steps taken to derive the GRE’s credit rating. The starting point of the rating agency’s GRE credit analysis is an evaluation of the government’s propensity to support the GRE. The support assessment is an analysis of the context factors that will drive or constrain government intervention. The five factors considered are: (i) the GRE’s economic and strategic importance to the country and government; (ii) the GRE’s legal ties with the government; (iii) the government’s track record of providing support or tendency towards intervening; (iv) the GRE’s operating and financial linkages with the government; and (v) the potential consequences of the GRE’s default. Accordingly, full ownership by the government does not automatically equate to the highest or most favourable support assessment.
The “propensity to support” assessment on the GRE is expressed on a scale which reflects MARC’s view that the government’s perceived commitment to the GRE can be placed along a continuum ranging from “very high propensity to support” (GS 1) to “none to low propensity to support” (GS 5). This assessment determines whether MARC will employ a “top-down” or “bottom-up” approach to arrive at the GRE’s rating. The “top-down” approach anchors the rating of the GRE to the rating of the government while the “bottom-up” rating approach notches up the GRE’s standalone rating for government support, if warranted. The second component of the assessment is an evaluation of the government’s capacity to provide extraordinary support which draws on the credit profile of the government or supporting government entity.
MARC has, over the years, incorporated in its ratings of GREs the potential for extraordinary support or intervention from the government. The publication of this exposure draft is part of MARC’s initiatives to increase transparency around the rating agency’s ratings process and to support consistency in the manner by which government support is assessed. The methodology assumes that similarly situated GREs will be treated in a similar fashion as in the past and ensures that a more conservative view of support will be taken where MARC observes a significant degree of arbitrariness surrounding the government’s decisions to extend extraordinary support to GREs.
MARC welcomes comments on any aspect of the draft methodology during the comment period and will consider all comments received in writing by May 1, 2015. Comments on the exposure draft should be sent to firstname.lastname@example.org. 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.