An Introduction To Standard & Poor’s Ratings Services Roberto Rivero Head of Market Development Europe, Middle East & Africa 25th November 2014 Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s. Copyright © 2014 by Standard & Poor’s Financial Services LLC. All rights reserved.
Agenda • Who we are • What are credit ratings? • What’s the process? • Common misconceptions and opinions
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Who we are
Who we are A leading provider of independent credit ratings and analysis, offering a combination of global perspective and local insight.
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Standard & Poor’s Global Reach • In business for 150+ years • Provides global reach and local knowledge with an office network spanning 23 countries • 1,400+ research analysts • More than 1.1 million ratings outstanding • $6.6+ trillion in new debt rated in 2013 • Provides perspective on a company’s creditworthiness, including its environmental, social and governance (ESG) performance
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Standard & Poor’s EMEA • EMEA operations established in 1984 • 400+ analysts and analytical supervisors (excluding Criteria and Quality)
• Offices include: London, Frankfurt, Paris, Madrid, Milan, Stockholm, Moscow, Warsaw, Istanbul, Dubai, Johannesburg, Tel Aviv
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Standard & Poor’s Ratings Leadership S&P: More Than 1.1 Million Ratings Outstanding Globally Credit Ratings Outstanding Globally1
Global Analytical Capability by NRSROs3 Credit Analysts
Credit Analyst Supervisors
Total
Standard & Poor’s Ratings Services
1,436
245
1,681
Moody’s Investors Service, Inc.
1,123
149
1,272
783
309
1,092
A.M. Best Company, Inc.
84
42
126
DBRS Ltd.
93
33
126
NRSROs
36.88%
45.67%
Moody’s 923,363
S&P 1,143,300
Fitch, Inc.
13.99%
3.46%
Japan Credit Rating Agency, Ltd.
27
32
59
Fitch 350,370
Others2 86,571
Morningstar
26
10
36
Kroll Bond Ratings
22
6
28
2
3
5
Egan-Jones Rating Company
1. Nationally Recognized Statistical Rating Organization (NRSRO) filing 2013 (Exhibit 8). Note: Morningstar and Kroll — 2012 filing, 2013 N/A. 2. Others include A.M. Best Company, Inc; DBRS Ltd.; Japan Credit Rating Agency, Ltd.; Morningstar; Kroll Bond Ratings; Egan-Jones Rating Company. 3. NRSRO filing 2013 (Item 7). Note: Morningstar and Kroll — 2012 filing, 2013 N/A.
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Analytic Coverage Across The Global Credit Spectrum Sectors Corporates
Financial Institutions
Insurance
• Industrials • Utilities • Project Finance
• Banks • Broker/Dealers • Finance Companies • Others
• • • • •
Bond Health Life Property/Casualty Reinsurance/ Specialty
Government • International Public Finance • Public Finance (U.S.) • Sovereigns
Structured Finance • • • • • •
ABCP ABS CDO CMBS RMBS Servicer Evaluations
Industry/Asset Class Drill-Down Industrials • Aerospace & Defense • Automobiles & Components • Building Materials • Capital Goods • Chemicals • Commercial & Professional Services • Consumer Products • Containers & Packaging
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Utilities • • • • • • • • • • • •
Energy Health Care Homebuilding Hotels & Gaming Information Technology Media & Entertainment Metals & Mining Paper & Forest Products Property & Real Estate Retailing Telecom Services Transportation
• • • •
Electric Gas Multi Water
Project Finance • Industrial • Leisure & Gaming • Natural Resources/ Mining • Oil & Gas • Power • Public Finance Initiative/Real Estate • Telecom • Transport
U.S. Public Finance • • • • • •
Appropriation Charter School Health Care Higher Education Housing Public Finance Structured • Tax Secured • Transportation • Utility
Collateral Types • ABS: Including Credit Card, Auto Loan, Auto Lease, Student Loans • RMBS: Including Prime, Non-conforming, Buy-to-let • Structured Credit: Including Leveraged Loan CLO, Corporate Cash Flow • CMBS: Including Multifamily, Retail, Office • ABCP: Including Multiseller Conduits, Single-seller
What are credit ratings?
Ratings Categories
Investment Grade
Speculative Grade
AAA
Extremely strong capacity to meet financial commitments. Highest rating
AA
Very strong capacity to meet financial commitments
A
Strong capacity to meet financial commitments, but somewhat susceptible to adverse economic conditions and changes in circumstances
BBB
Adequate capacity to meet financial commitments, but more subject to adverse economic conditions
BBB-
Considered lowest investment grade by market participants
BB+
Considered highest speculative grade by market participants
BB
Less vulnerable in the near term, but faces major ongoing uncertainties to adverse business, financial and economic conditions
B
More vulnerable to adverse business, financial and economic conditions, but currently has the capacity to meet financial commitments
CCC
Currently vulnerable and dependent on favorable business, financial and economic conditions to meet financial commitments
CC
Currently highly vulnerable
C
A bankruptcy petition has been filed or similar action taken, but payments of financial commitments are continued
D
Payments default on financial commitments
Ratings from ‘AA’ to ‘CCC’ may be modified by the addition of a plus (+) or minus (-) sign to show relative standing within the major rating categories.
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What A Credit Rating Is And What It Is Not
What It Is
And What It Is Not
Forward-looking opinions about relative credit risk, i.e., the creditworthiness of an entity or its securities that:
• Absolute measures of default probability
• Strive to be globally comparable across sectors • Incorporate views on relative likelihood of default that: • Refer to the timely payment of interest and principal , • Are applied to entities and securities
• Investment advice, a recommendation to purchase, sell or hold securities, or a comment as to market price or suitability for an investor • A measure of liquidity or market value • A way of defining “good” or “bad” companies, or a direct assessment of corporate governance • An audit of the company or its auditors • A guarantee of credit quality or of future credit risk
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Ratings serve as an effective measure of relative risk Global Corporate Average Cumulative Default Rates By Rating (1981-2013)
Sources: Standard & Poor’s Global Fixed Income Research and Standard & Poor’s CreditPro ®.
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Ratings: Filling the Gap Between Issuers and Investors Borrowers/Issuers Seek To: • •
•
Optimize cost of funding Provide access to broader investors Diversify funding sources
Investors Seek: •
Independent opinion of credit quality
•
A basis of comparison across asset classes, geographies and peer groups
•
Information and benchmarks to make informed decisions
Features of Credit Ratings • Independent • Comparable • Forward-looking 11
What’s the process?
The Rating Process
Contract
Pre-evaluation
Management Meeting
Notification
Rating Committee
Analysis
Publication
Surveillance of Rated Issuers and Issues
S&P may allow for an appeal only if the issuer can provide new and significant information to support a potentially difficult rating conclusion.
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S&P Ratings Policy Framework
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Key Elements Of Our Corporate Rating Criteria Country Risk Industry Risk Competitive Position
Business Risk
Profitability/Peer Analysis
Profile
Accounting
Rating Governance, Risk Tolerance, Financial Policy Cash Flow Adequacy Capital Structure/Asset Protection Liquidity/Short-Term Factors 17
Financial Risk
Profile
Corporate Ratings Criteria Summary
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Key Elements Of Our Sovereign Rating Criteria
Political Stability Income and Economic Structure Economic Prospects Growth Fiscal Flexibility General Government Debt Burden Off-Budget and Contingent Liabilities Monetary Stability External Liquidity
Narrow Net External Debt Burden
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Rating
Stress scenarios commensurate with each rating category Set of hypothetical stress scenarios that we believe are commensurate with each rating category Each scenario reflects a level of stress that credits of the corresponding rating category should, in our view, be able to withstand (though they might be downgraded significantly as economic stresses increase) Clarified that 'AAA' rated entities/securities typically should be able to withstand an extreme level of stress (a historical example of such a scenario is the Great Depression in the U.S.), and still meet its financial obligations. Stress scenarios are defined in terms of broad economic variables, such as GDP, unemployment rate, and stock market indices. For example: Macroeconomic Stress Scenario Parameters Stress scenario
B
BB
BBB
GDP decline (%)
0.5
1
3
6
8
10
25
Unemployment (%) Equity market decline (%)
AA
AAA
6
15
26.5
10
15
20
24.9
50
60
70
85
Objectives: 1.
To promote greater comparability and transparency of our credit ratings across sectors, geographies and over time.
2.
To clarify why ratings may move if the expected level of stress changes
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A
AAA scenario – the great depression in the U.S. •
Real GDP fell by 26.5% from 1929 to 1933
•
Unemployment peaked at 24.9% in 1933 and was above 20% from 1932 to 1935
•
Industrial production declined by 47%
•
The stock market fell by 85% from September 1929 to July 1932
•
Deflation of 25%
•
Nominal GDP did not recover its 1929 level until 1940
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“Ratings don’t work. Just look at WorldCom and ENRON”
• WorldCom
• ENRON
“Ratings don’t work” Over the two years 2008-2009 (the ‘credit crunch’), what proportion of corporates rated by S&P Ratings defaulted? A) 10% B) 20% C) 0.73%
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“Ratings don’t work” In Europe, between mid-2007 and late 2009, what proportion of structured securities rated by S&P Ratings defaulted? A) 12.5% B) 25% C) 0.39%
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Historical Inverse Correlation Between Rating Level and Defaults
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How Have Ratings Performed? •
Look to correlation with defaults, not with bond prices
•
The one-year global Gini ratio rose was 90% in 2013 and 89.4% in 2014.
•
Global corporate average five year cumulative default rates for 1981-2013: • • • •
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AAA rated issuers: 0.0% AA rated issuers: 0.3% A rated issuers: 1.0% BBB rated issuers: 5.1%
• BB rated issuers: 20.5% • B rated issuers: 61.7% • CCC/C rated issuers: 11.4%
“S&P Ratings rated instruments they did not understand”
“S&P Ratings rated instruments they did not understand”
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“Ratings have lost all credibility”
Bank support schemes Bank of England • Special Liquidity Scheme (SLS) • Announced 13th April 2008 • Two AAA ratings from S&P Ratings / Moody’s / Fitch
European Central Bank • Long-term re-financing operation/main re-financing operation • In place before Bank of England’s SLS • One rating (two for Asset Backed Securities) from S&P Ratings/Moody’s/Fitch/DBRS
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Nearly two-thirds of EMEA investors have documented investment policies tied to ratings. S&P continues to lead the market as the primary agency tied to these policies. Agencies ratings tied to No, 29%
DK/Unc, 14%
YesNRSRO Ratings, 22%
YesSpecific Rating Agencies , 35%
100% 80% 60% 40% 20% 0% S&P
Moody's Fitch 2011
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DBRS
2013
Other
“Conflicts of interest distort ratings”
“…an inherent conflict of interests in the business model”
“everyone gets a AAA rating”
Ratings Distribution For Global Corporates
60% 50% 40% 30% 20% 10% 0% AAA
AA
A 2013
Data correct as of September 19, 2013
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BBB
Lower
Western Europe Trend Analysis Historic Downgrades & Upgrades Upgrades
Key Credit Factors
Downgrades
16%
1. Muted tailwind from gradual, uneven economic recovery for banks’ earnings 2. Debt overhang, geopolitical risks, bubble-like characteristics in global capital markets, and unwinding of monetary policies raise the specter of market turbulence lurching back to life
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14% 12% 10% 8%
14
15 12 10
6%
9
7
7 5
4% 2%
3. New regulatory and legislative initiatives push up compliance costs, reduce revenue opportunities, and require business model changes for some
17
2
2
2
5 3
1
1
4. The EU recovery and resolution directive is set to introduce mandatory bail-in from January 2016 latest, with potential implications for future government support for banks’ senior creditors 5. Continued bank reform process could have ambiguous rating implications and extends the period of uncertainty for market participants
1
0% Q2 12 Q3 12 Q4 12 Q1 13 Q2 13 Q3 13 Q4 13 Q1 14 Q2 14 Q3 14 Rating Distribution
OL/CW Distribution 6 Months Ago
Current Outlook
25
16% 14%
19
12%
18
10%
6% 4%
13
12
8% 7
7
11
10
9
8 6
5
6 4
4 2
2%
36 All data as at: 01/10/14 Data by ultimate parent only
CCC+
B-
B
B+
BB-
BB
BB+
BBB-
BBB
BBB+
A-
A
A+
AA-
AA
AA+
AAA
0%
North America Trend Analysis Key Credit Factors
Historic Downgrades & Upgrades Upgrades 6%
Downgrades
1. The credit cycle is turning and bank management teams will need to maneuver through a changing monetary policy, repositioning their balance sheets accordingly.
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2. In a low interest rate environment, banks may have incurred increased risk-taking in the search of yield, especially as underwriting standards have continued to ease.
5%
3%
3. Banks will continue to battle non-fundamental credit issues, such as litigation risk, regulatory fines, and regulatory compliance costs.
8
4% 5
6
5 4
4
5
4
5
4
2% 2 1%
66
5
1
1
1
4. Banks will continue to adapt to changing regulations, including minimum long term debt at the holding company, a supplemental leverage ratio, and the Volcker rule. 5. Evolving regulation related to resolution under Orderly Liquidation Authority could alter the amount of uplift we incorporate into the ratings of the banks that we deem as having high systemic importance due to expected extraordinary government support or we may widen securities notching.
0% Q2 12 Q3 12 Q4 12 Q1 13 Q2 13 Q3 13 Q4 13 Q1 14 Q2 14 Q3 14
OL/CW Distribution 6 Months Ago
Rating Distribution Current Outlook
16%
33
14%
30
12%
25
10%
21 21 21
8%
15 14
6%
17 11
7
4%
7
8
6
2%
1
37 All data as at: 01/10/14 Data by ultimate parent only
CCC+
B-
B
B+
BB-
BB
BB+
BBB-
BBB
BBB+
A-
A
A+
AA-
AA
AA+
AAA
0%
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“…The U.S. will never default”
Our Ratings Categories
Investment Grade
Speculative Grade
AAA
Extremely strong capacity to meet financial commitments. Highest rating
AA
Very strong capacity to meet financial commitments
A
Strong capacity to meet financial commitments, but somewhat susceptible to adverse economic conditions and changes in circumstances
BBB
Adequate capacity to meet financial commitments, but more subject to adverse economic conditions
BBB-
Considered lowest investment grade by market participants
BB+
Considered highest speculative grade by market participants
BB
Less vulnerable in the near term, but faces major ongoing uncertainties to adverse business, financial and economic conditions
B
More vulnerable to adverse business, financial and economic conditions, but currently has the capacity to meet financial commitments
CCC
Currently vulnerable and dependent on favorable business, financial and economic conditions to meet financial commitments
CC
Currently highly vulnerable
C
A bankruptcy petition has been filed or similar action taken, but payments of financial commitments are continued
D
Payments default on financial commitments
Ratings from ‘AA’ to ‘CCC’ may be modified by the addition of a plus (+) or minus (-) sign to show relative standing within the major rating categories.
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“…interfering in questions of politics”
Key Elements Of Our Corporate Rating Criteria Country Risk Industry Risk Competitive Position
Business Risk
Profitability/Peer Analysis
Profile
Accounting
Rating Governance, Risk Tolerance, Financial Policy Cash Flow Adequacy Capital Structure/Asset Protection Liquidity/Short-Term Factors 42
Financial Risk
Profile
Key Elements Of Our Sovereign Rating Criteria
Political Stability Income and Economic Structure Economic Prospects Growth Fiscal Flexibility General Government Debt Burden Off-Budget and Contingent Liabilities Monetary Stability External Liquidity
Narrow Net External Debt Burden
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Rating
“Rating agencies caused the crisis”
The growth of credit Credit as % of GDP
Source: Eurostat
Government 2008
Corp 2008
Retail 2008
Government 1999
Corp 1999
Retail 1999
Romania
Slovakia
0%
Poland
0%
Finland
50%
Hungary
50%
Sweden
100%
France
100%
Germany
150%
Belgium
150%
Austria
200%
Greece
200%
Italy
250%
Netherlands
250%
Spain
300%
United Kingdom
300%
Portugal
350%
Ireland
350%
“Market prices are better at indicating default risk than ratings”
“Ratings never tell us anything we didn’t already know”
Sovereign Rating Changes in Europe
Sovereign spreads
We believe a decade of undershooting…
“Ratings are a black box”
Corporate Ratings Criteria Summary
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S&P Ratings’ Credit Rating Guides To help increase understanding, S&P has published guides to credit ratings essentials, performance and criteria
Additional resources are available at:
www.UnderstandingRatings.com and www.AboutCreditRatings.com
Why are Ratings Relevant to Investors? • Can be useful as one of many indicators of risk • Can help in discussion and agreement of credit risk parameters of portfolio • Can help with the assessment of relative credit risk of your individual investments
• Can help with the assessment of the credit risk of counterparties and sponsors • Free access to Credit Ratings and Research
Thank You
Roberto Rivero Head of Market Development, EMEA T: +44 207 176 3882
[email protected]
Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s. Copyright © 2014 by Standard & Poor’s Financial Services LLC. All rights reserved.
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