Posted Date : 03 June 2015
MARC has published its final methodology on the rating of government-related entities (GREs) today following a request for comments period. This methodology aims to increase the consistency, transparency and clarity of MARC’s analytical process for GREs, particularly how ratings have been notched up for government support. MARC has interpreted the increased public demand for transparency and accountability in certain GREs as a signal that ratings should be more explicit about expectation of government support for GREs.
Under the new methodology, assigned GRE ratings will continue to embed the rating agency’s view on the likelihood of implicit or explicit support being provided to the GRE, consistent with its prior rating approach. Similarly, government guarantees continue to be differentiated from non-binding moral obligations. A five-factor support assessment framework which functions as a key analytical input for GRE ratings is the salient difference between the new methodology and MARC’s prior rating approach as illustrated by MARC’s rating actions on a number of GREs and project debt in its July 2010 Commonly Asked Questions (CAQ) titled “The Role of Government Support in Corporate and Project Finance”. The support assessments introduce greater transparency in the rating agency’s rating process and facilitate more rigorous, consistent and reproducible analysis.
The final revised methodology takes into account market feedback, both written and non-written, received by MARC from capital market stakeholders after publishing its exposure draft on the same subject on April 6, 2015. The rating agency gratefully acknowledges the feedback and comments provided by the respondents.
Respondents to the exposure draft offered suggestions in a number of areas where, after consideration, MARC made few changes to the rating methodology to provide further clarity in certain sections. These are as follows:
- We have defined “close affiliation” to the government as majority government ownership or effective control (to address situations where controlling interest may be achieved with less than 50% ownership of the GRE).
- As explained in the overview section, the methodology applies to specific debt issued by GREs as well as payment obligations of GREs under offtake contracts. The former takes into account the nature of the obligation and its priority in the GRE’s liquidation, as well as any form of credit enhancement on the obligation. It is important to stress that the loss-given default aspect of a rated debt takes on relevance in an issue rating; when assessing the GRE’s ability to meet its payment obligations under offtake contracts, MARC is primarily concerned with the general creditworthiness of a GRE or the likelihood that the GRE may default with regard to all its financial obligations.
- We have also clarified that each of the five support assessment factors will be scored on a scale of 1 (most favourable) to 5 (least favourable) and the average of the scores will be taken with equal weight given to each factor in arriving at the composite score which represents MARC’s support assessment.
MARC currently does not anticipate that the methodology will result in materially different ratings when applied to new or existing GREs in MARC’s rating universe. However, there is an increased potential for rating changes on GREs that were rated using a ‘bottom-up’ approach with the introduction of a maximum notch distance from the GRE’s standalone credit rating. A GRE rating that was assigned using a ‘bottom-up’ approach may change as a result of rating transitions of the GRE and the government and/or a change in MARC’s view of implicit government support.
The rating methodology can be accessed on MARC’s website at Rating of Government-Related Entities.
Contact: Milly Leong, +603-2082 2288/milly@marc.com.my
