Request For Comment: Issue Credit Ratings For Nonbank Financial Institutions And Nonbank Financial Service Companies

Transcription

1 ARCHIVE Criteria Financial Institutions Request for Comment: Request For Comment: Issue Credit Ratings For Nonbank Financial Institutions And Nonbank Financial Service Companies Primary Credit Analysts: Brendan Browne, CFA, New York (1) ; Robert B Hoban, New York (1) ; robert.hoban@standardandpoors.com Secondary Contacts: Ben T Bubeck, CFA, New York (1) ; ben.bubeck@standardandpoors.com Claudia Sanchez, Mexico City (52) ; claudia.sanchez@standardandpoors.com Dhruv Roy, London (44) ; dhruv.roy@standardandpoors.com Peter Sikora, Melbourne (61) ; peter.sikora@standardandpoors.com Tom G Connell, Toronto (1) ; thomas.connell@standardandpoors.com Daniel Koelsch, FRM, Toronto (1) ; daniel.koelsch@standardandpoors.com Criteria Officer: Nik Khakee, Criteria Officer, North American Financial Institutions, New York (1) ; nik.khakee@standardandpoors.com Emmanuel Dubois-Pelerin, Criteria Officer, Global Financial Services, Paris (33) ; emmanuel.dubois-pelerin@standardandpoors.com Michelle M Brennan, Criteria Officer, European Financial Services, London (44) ; michelle.brennan@standardandpoors.com Chief Credit Officer, Americas: Lucy A Collett, New York (1) ; lucy.collett@standardandpoors.com Table Of Contents SCOPE OF THE PROPOSAL SUMMARY OF THE PROPOSAL OCTOBER 24,

2 Table Of Contents (cont.) SPECIFIC QUESTIONS FOR WHICH WE ARE SEEKING A RESPONSE IMPACT ON OUTSTANDING RATINGS RESPONSE DEADLINE PROPOSED METHODOLOGY FSC Finance Companies And Asset Managers--Senior Obligations And NDSD Obligations That Have The Same Probability Of Default FSC Finance Companies And Asset Managers--Hybrid Capital FSC FMIs--Senior Obligations And NDSD Obligations That Have The Same Probability Of Default FMI Debt Obligations--Hybrid Capital Instruments NBFI Finance Companies, BDCs, And Securities Firms--Senior Secured Debt And Senior Unsecured Debt NBFI--First-Lien Secured Debt NBFI--Senior Unsecured Debt (And Junior Secured Debt) NBFI Finance Companies And Securities Firms (Prudentially Regulated, And Not)--NDSD And Hybrid Capital RELATED CRITERIA AND RESEARCH GLOSSARY OCTOBER 24,

3 ARCHIVE Criteria Financial Institutions Request for Comment: Request For Comment: Issue Credit Ratings For Nonbank Financial Institutions And Nonbank Financial Service Companies (Editor's Note: Standard & Poor's published the criteria article titled "Issue Credit Rating Methodology For Nonbank Financial Institutions And Nonbank Financial Services Companies" on Dec. 9, 2014, after the criteria review process initiated by this request for comment.) 1. These proposed criteria explain how we would rate obligations issued by nonbank financial institutions (NBFIs) and nonbank financial services companies (FSCs), including nonoperating holding companies (NOHCs) of such groups. This proposal should be read in conjunction with the five requests for comment (RFCs) listed "Related Criteria And Research." The proposed approaches differentiate by sector (see table 1) and primarily reflect the following factors: For hybrid capital instruments, the bank hybrid capital criteria ("Bank Hybrid Capital And Nondeferrable Subordinated Debt Methodology And Assumptions," published Sept. 18, 2014, on RatingsDirect) continue to apply to all NBFIs. The "hybrid handbook" ("Hybrid Capital Handbook: September 2008 Edition," published Sept. 15, 2008) and associated articles (see Related Research) continue to apply to all FSCs, apart from some limited cases for certain financial market infrastructure companies (FMIs), which are prudentially regulated (as described in the footnote of table 1 and paragraph 20). For senior obligations, we derive issue credit ratings ("issue ratings") from the issuer credit rating (ICR) of the issuer or guarantor, as determined under the proposed NBFI framework or proposed applicable FSC sector key credit factor. Specifically, to rate senior secured, senior unsecured, and conventional nondeferrable subordinated debt (NDSD) for FSC finance companies and asset managers, we propose to adopt "Rating Each Issue" (REI), published April 15, When recovery ratings are applicable, we propose to apply and notch issues according to "Criteria Guidelines For Recovery Ratings On Global Industrials Issuers' Speculative-Grade Debt," published Aug. 10, We rate debt issues by notching the issue rating up or down from the ICR, GCP, or stand-alone credit profile (SACP) of the issuer, in a process known as notching. For FSC FMIs we propose to adopt the REI criteria but will not generate recovery ratings and propose to instead apply notching as described below in paragraphs For NBFIs, we propose to continue not to assign recovery ratings and propose notching between classes of debt obligations as described below in paragraphs These criteria are related to "Principles Of Credit Ratings," published Feb. 16, Table 1 Proposed Applicable Criteria (With Adjustments Where Noted) For Issue Ratings For NBFIs And FSCs Sector FSC finance companies (FSFC) Senior secured and senior unsecured debt obligations Nondeferrable subordinated debt (NDSD)* Hybrid capital REI and apply recovery ratings REI and apply recovery ratings Hybrid handbook, unless the issuer is prudentially regulated, in which case bank hybrid capital criteria apply OCTOBER 24,

4 Table 1 Proposed Applicable Criteria (With Adjustments Where Noted) For Issue Ratings For NBFIs And FSCs (cont.) FSC asset managers (AM) FSC financial market infrastructure companies (FMI) NBFI finance companies, NBFI securities firms, NBFI business development companies REI and apply recovery ratings REI, but no recovery ratings REI and apply recovery ratings REI, but no recovery ratings. Instead, notch down one when the ICR is BBB- or higher and notch down two when the ICR is BB+ or lower (see paragraph 16-19) Hybrid handbook Hybrid handbook with limited exceptions See paragraphs Bank hybrid capital criteria Bank hybrid capital criteria *This refers to conventional nondeferrable subordinated debt that is not classified as hybrid capital under our criteria. Hybrid Capital Handbook applies to FMI hybrid issues unless the issuer is subject to Basel capital guidelines and has banking operations (albeit limited), in which case bank hybrid capital criteria apply. There are a very limited number of FMIs to which we apply bank hybrid capital criteria. In addition to being subject to Basel capital guidelines, they typically conduct quite limited banking operations tangential to their core FMI business. If the nonoperating holding company (NOHC) is not prudentially regulated by the national banking regulator, then the hybrid handbook applies for NOHC issuance. SCOPE OF THE PROPOSAL 3. Subject to the next paragraph, the proposed criteria would apply to all long-term debt obligations of globally rated NBFIs and FSCs (as defined in the five requests for comment in the Related Research And Criteria Requests for Comment section), after having applied the hybrid handbook or bank hybrid capital criteria as indicated in table 1 and paragraphs We would rate short-term obligations at the same level as the short-term ICR, and we would not notch the ratings to reflect recovery prospects or subordination. 4. The proposed criteria address entities that are not government-related entities (GREs). When an NBFI or FSC is classified as a GRE under our criteria, we apply GRE criteria to rate its hybrids. Please see our GRE criteria for details of how we rate hybrids issued by a GRE ("Rating Government-Related Entities: Methodology And Assumptions," published Dec. 9, 2010). SUMMARY OF THE PROPOSAL 5. To rate senior and NDSD obligations of an FSC, we propose: For FSC finance companies and FSC asset managers: To apply REI and apply our recovery ratings framework. In the U.S. and other countries where we assign recovery ratings, we propose to apply "Recovery: Criteria Guidelines For Recovery Ratings On Global Industrials Issuers' Speculative-Grade Debt" ("recovery ratings"). For FMIs: To apply REI, with no recovery ratings. We propose to rate senior secured and unsecured obligations as described in paragraphs and NDSD by rating it one notch lower than the ICR when the ICR is 'BBB-' or higher, and two notches lower when the ICR is 'BB+' or lower. 6. To rate hybrid capital instruments of all FSCs, we propose to apply the hybrid handbook, except for the following two cases when we would apply the bank hybrid capital criteria: if an FSFC is prudentially regulated and if an FMI is prudentially regulated, with certain exceptions described in the footnote of Table 1 and in paragraph To rate senior secured and senior unsecured debt of NBFIs, we propose: For entities that are either prudentially regulated or would likely be covered by a regulatory or official resolution OCTOBER 24,

5 process: To rate secured and unsecured senior debt issued the same as the ICR--the same as we do for banks. For all other NBFI group entities (which often includes nonoperating holding companies [NOHCs] that issue debt) we propose: (1) for senior secured debt, we propose to rate it at the same level as the ICR when the ICR is 'BBB-' or higher; (2) for senior unsecured debt, we propose to rate it at the same level as the ICR, when the ICR is 'BBB-' or higher; (3) when the ICR is 'BB+' or lower, we propose to rate the most senior obligation at the same level as the ICR and senior unsecured or junior secured obligations lower than the ICR by one or two notches when specified conditions are met, as outlined in paragraphs 24 to 28, otherwise we would rate the obligations at the same level as the ICR. 8. To rate NDSD and hybrid capital instruments of nonbank financial institutions (NBFI), we propose to apply bank hybrid capital criteria. 9. We propose to derive issue ratings from the ICR for senior debt obligations and from the SACP for NDSD when the probability of default for NDSD differs from the probability of default of the senior debt obligations and when the subordinated issue is classified as hybrid capital under our criteria. The ICR typically differs from the SACP when the ICR on the issuer is affected by external influence such as group relationships, government influence, or guarantees. We propose to derive issue ratings by notching from the SACP for all hybrid capital instruments, except when the issuer benefits from extraordinary group support and we would instead derive the issue rating from the SACP or ICR, depending on whether that group support would prevent a default on that instrument. 10. For both NBFI and FSC issue ratings, unless a 'D' rating applies, we wouldn't rate senior debt obligations below 'CC' and subordinated instruments below 'C'. For how we assign 'CCC+' issue ratings and below to subordinated instruments, see "Credit FAQ: Applying "Criteria For Assigning 'CCC+', 'CCC', 'CCC-', And 'CC' Ratings" To Subordinated And Hybrid Capital Instruments," published on July 16, SPECIFIC QUESTIONS FOR WHICH WE ARE SEEKING A RESPONSE 11. Standard & Poor's is seeking market feedback on its proposed methodology and responses to the following questions: What is your view on the application of the issue credit rating criteria, as described in this RFC? What is your view on notching down ratings on senior unsecured or junior secured obligations based on asset encumbrance and creditor position relative to priority (more senior) creditors? IMPACT ON OUTSTANDING RATINGS 12. If adopted as proposed, we expect the criteria would result in no ICR ratings changes but up to 25% of issue ratings may change by one notch, typically down. The changes are largely because in these proposed criteria we introduce a formal approach to notching based on recovery prospects or position within the capital structure. RESPONSE DEADLINE 13. We encourage interested market participants to submit their written comments on the proposed criteria by Nov. 24, 2014, to (you may need to log in or register first). We will OCTOBER 24,

6 review and take such comments into consideration before publishing our definitive criteria once the comment period is over. Generally, Standard & Poor's Ratings Services may, in cases when the commenter has not requested confidentiality, publish comments in their entirety, except when the full text, in our view, would be unsuitable for reasons of tone or substance. PROPOSED METHODOLOGY FSC Finance Companies And Asset Managers--Senior Obligations And NDSD Obligations That Have The Same Probability Of Default 14. We propose to apply REI and recovery ratings. FSC Finance Companies And Asset Managers--Hybrid Capital 15. We propose to continue to apply the hybrid handbook. FSC FMIs--Senior Obligations And NDSD Obligations That Have The Same Probability Of Default 16. We propose to apply REI but not apply recovery ratings. 17. Instead of applying recovery ratings, we propose to assign an issue rating one notch below the ICR for contractually subordinated nondeferrable obligations. For senior debt obligations (whether secured or not), when priority liabilities are greater than 20% of adjusted assets and the ICR is 'BBB-' or higher, we would notch down one. As defined in REI, we adjust assets to eliminate any goodwill in excess of 10% total assets (adjusted assets) (see glossary). 18. For FMIs with an ICR of 'BB+' or below, we propose not to perform a recovery analysis because, for two reasons, we cannot model absolute recovery with sufficient confidence. First, these institutions are typically highly prudentially regulated and there are limited examples of liquidations to support modeling recovery. Second, the history of FMI defaults is sparse, and most FMIs have been required to develop resolution and recovery plans. If an FMI defaults, we expect the regulator will quickly salvage the clearing and settlement functions to ensure the continued smooth operations of the national financial system, but we do not have sufficient data to gauge the impact of those actions and where they would leave creditors of the FMI entity. 19. Instead, for FMIs with an ICR of 'BB+' or below, we propose to rate NDSD two notches below the ICR, and rate senior debt (whether secured or not) one notch below if priority liabilities are 15%-30% of adjusted assets, or two notches below if priority liabilities are greater than 30% of adjusted assets. OCTOBER 24,

7 FMI Debt Obligations--Hybrid Capital Instruments 20. We propose to continue to apply the hybrid handbook except in the few cases when the issuer is subject to Basel capital guidelines and engages in even limited banking activity, in which case bank hybrid capital criteria apply. There are a limited number of FMIs to which we apply bank hybrid capital criteria. In addition to being subject to Basel capital guidelines, they typically conduct quite limited banking operations tangential to their core FMI business. If the NOHC is not prudentially regulated by the national banking regulator, then the hybrid handbook applies for NOHC issuance. NBFI Finance Companies, BDCs, And Securities Firms--Senior Secured Debt And Senior Unsecured Debt 21. To rate senior secured and senior unsecured debt of NBFIs that are either prudentially regulated or would likely be covered by a regulatory or official resolution process, we propose to rate: Senior secured and senior unsecured debt at the same level as the ICR, the same as we do for banks. 22. For all other NBFI group entities (which often includes NOHCs that issue debt), we propose: To rate first-lien senior secured debt at the same level as the ICR when the ICR is 'BBB-' or higher; To rate senior unsecured debt or junior secured debt at the same level as the ICR, when the ICR is 'BBB-' or higher; To rate first-lien senior secured debt the same as the ICR when the ICR is 'BB+ ' or lower; and To notch down senior unsecured or junior secured (i.e. second lien) obligations by one or two notches when certain conditions are met (see paragraphs 24-27), otherwise we would rate them the same as the ICR, when the ICR is 'BB+' or lower. NBFI--First-Lien Secured Debt 23. We propose to rate first-lien senior secured debt the same level as the ICR. NBFI--Senior Unsecured Debt (And Junior Secured Debt) 24. We propose to rate senior unsecured and junior secured debt at the same level as the ICR when the ICR is 'BBB-' or higher. When the ICR is 'BB+' or lower and the NBFI entity is not prudentially regulated or covered by a regulatory or official resolution process, we propose to notch down senior unsecured obligations and junior secured debt by one or two notches when the following conditions are met, otherwise we would rate them at the same level as the ICR. 25. When the ICR is 'BB+' or lower, we would rate issues one notch below the ICR when either of the following conditions apply: Priority debt is greater than 15% of adjusted assets and we expect unencumbered assets to be less than unsecured or junior secured debt, or Priority debt is greater than 30% of adjusted assets and we expect unencumbered assets to be greater than OCTOBER 24,

8 unsecured or junior secured debt. 26. When the ICR is 'BB+' or lower, we would rate the debt two notches below the ICR when both the following conditions apply: Priority debt is greater than 30% of adjusted assets and We expect unencumbered assets to be less than unsecured or junior secured debt. 27. We also may choose to rate senior unsecured debt or junior secured debt an additional notch below the ICR (but no more than two notches total) if the issuer has meaningful amounts of netted, contingent, or complex exposures on its balance sheet (such as securities repurchase and reverse repurchase agreements or open derivative positions). "Meaningful" means an amount sufficient to make determination of available unencumbered assets uncertain. 28. Our estimate of priority debt and adjusted assets is forward-looking and includes amortizations. For example, with regard to revolver draws, when a draw results in a level of priority debt to adjusted assets breaching the 15% or 30% thresholds, and we believe it would remain so, we notch down the issue rating and maintain that level for a minimum of four quarters, irrespective of short-term fluctuations in the priority debt level. NBFI Finance Companies And Securities Firms (Prudentially Regulated, And Not)--NDSD And Hybrid Capital 29. To rate NDSD and hybrid capital instruments of NBFIs, we propose to apply bank hybrid capital criteria. RELATED CRITERIA AND RESEARCH Superseded Criteria Criteria Financial Institutions Finance Companies: Recovery Ratings For U.S. Finance Companies, June 19, 2008 Related Criteria Criteria Financial Institutions Banks: Bank Hybrid Capital and Nondeferrable Subordinated Debt Methodology and Assumptions, Sept. 18, 2014 The Treatment Of Non-Common Equity Financing In Nonfinancial Corporate Entities, April 29, 2014 General Criteria: Group Rating Methodology, Nov. 19, 2013 Use Of 'C' And 'D' Issue Credit Ratings For Hybrid Capital And Payment-In-Kind Instruments, Oct. 24, 2013 Methodology: Hybrid Capital Issue Features: Update On Dividend Stoppers, Look-Backs, And Pushers, Feb. 10, 2010 Criteria Clarification On Hybrid Capital Step-Ups, Call Options, And Replacement Provisions, Oct. 22, 2012 Assumptions: Clarification Of The Equity Content Categories Used For Bank And Insurance Hybrid Instruments With Restricted Ability To Defer Payments, Feb. 9, 2010 Criteria Corporates Recovery: Criteria Guidelines For Recovery Ratings On Global Industrials Issuers' Speculative-Grade Debt, Aug. 10, 2009 Hybrid Capital Handbook: September 2008 Edition, Sept. 15, 2008 Rating Implications Of Exchange Offers And Similar Restructurings, Update, May 12, 2009 Criteria Financial Institutions Finance Companies: Recovery Ratings For U.S. Finance Companies, June 19, OCTOBER 24,

9 2008 Criteria Corporates General: 2008 Corporate Criteria: Rating Each Issue, April 15, 2008 Corporate Ratings Criteria--Rating Each Issue: Distinguishing Issuers and Issues; Junior Debt: Notching Down; Well-Secured Debt: Notching Up; Commercial Paper; Preferred Stock, Oct. 28, 2004 Related Criteria Requests for Comment Request For Comment: Key Credit Factors For U.S. Business Development Companies, Oct. 21, 2014 Request For Comment: Key Credit Factors For Financial Market Infrastructure Companies, Sept. 22, 2014 Request For Comment: Key Credit Factors For Financial Services Finance Companies, Sept. 11, 2014 Request For Comment: Key Credit Factors For Asset Managers, Sept. 11, 2014 Request For Comment: Nonbank Financial Institutions Rating Methodology, Aug. 13, 2014 Related Research Credit FAQ: Applying "Criteria For Assigning 'CCC+', 'CCC', 'CCC-', And 'CC' Ratings" To Subordinated And Hybrid Capital Instruments, July 16, 2014 GLOSSARY Hybrid capital instrument. A hybrid capital instrument is an obligation that displays features of both debt and equity, as defined in "Methodology: Use Of 'C' And 'D' Issue Credit Ratings For Hybrid Capital And Payment-In-Kind Instruments," published Oct. 24, Standard & Poor's considers an instrument to be a hybrid capital instrument only if it can absorb losses via either nonpayment of the coupon or a write-down of principal, or conversion into common equity or another hybrid capital instrument, without causing a legal default or liquidation of the issuer, or a default on senior unsecured obligations. A senior unsecured obligation is not a hybrid capital instrument, even if it could be bailed-in as part of the resolution of a distressed entity. Prudentially regulated. A prudentially regulated entity (or group) is subject to regulation that includes the adequacy of its capitalization. Conventional nondeferrable subordinated debt.nondeferrable subordinated debt obligation that has the same default risk as senior debt issued by the same issuer. Priority debt. Debt that is secured and more senior to the issue being considered (i.e. senior secured debt has a priority claim ahead of senior unsecured debt, as does first-lien debt versus second-lien debt). Adjusted assets. Assets adjusted to eliminate any goodwill in excess of 10% of total assets. These criteria represent the specific application of fundamental principles that define credit risk and ratings opinions. Their use is determined by issuer- or issue-specific attributes as well as Standard & Poor's Ratings Services' assessment of the credit and, if applicable, structural risks for a given issuer or issue rating. Methodology and assumptions may change from time to time as a result of market and economic conditions, issuer- or issue-specific factors, or new empirical evidence that would affect our credit judgment. OCTOBER 24,

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