Government-Related Entities A New Criteria Criteria Overview
Overall Purpose This exposure draft concludes of a year-long review of our approach to entities owned by or otherwise under significant influence from government sponsors. It applies to all Government-Related Entities (GREs), irrespective of mission or legal status. The criteria will replace the Public Sector Entities Criteria and the section related to State Owned Entities under the Parent and Subsidiary Linkage criteria. There are approximately 180 international ratings of Public Sector Entities (public finance) and 165 international ratings of Sovereign Owned Entreprises (corporates) that will be covered by these criteria. Fitch expects that the proposed criteria revisions will result in a rating downgrade for about 10-15% and a rating upgrade for about 5% of Fitch s publicly rated GREs, similarly distributed between public finance and corporates and a small number of Infrastructure and Project Finance ratings. 1
New Criteria Framework Inputs + Support analysis = Output Government (parent) rating GRE Standalone Credit Profile Support Scoring System (limited) Overriding features Top-down path GRE Issuer Default Rating (IDR) Bottom-up path 2
Scoring System Incentive to Support Strength of Linkage Incentive to Support Status, Ownership and Control 0-10 Socio-Political Implications of Default 0-20 Support Track Record and Expectations 0-10 Financial Implications of Default 0-20 Score 0-60 3
Factor Scoring Factor Scoring Assessment of the factor Strength of linkages Incentive to support Very strong 10 20 Strong 5 10 Moderate 2.5 5 Weak 0 0 Source: Fitch 4
Strength of Linkage Factors Strength of Linkage Status, Ownership and Control Support Track Record and Expectations 0-10 0-10 Status, Ownership and Control: The GRE s legal status may result in the government bearing the ultimate liability of the GRE s debt in the case of default. Ownership and control may reinforce this responsibility to support. Support Track Record and Expectations: Evidence of the government providing financial support to the GRE, the regularity of this support and its importance in maintaining an adequate financial profile for the GRE are used to assess the future likelihood of government support. 5
Incentive to Support Factors Incentive to Support Socio-Political b Implications of Default Financial Implications of Default 0-20 0-20 Socio-Political Implications of a GRE s Default: The impact of a GRE s default on its activities and how those may have direct or indirect effects on the government s social and political environment are assessed. GREs may be obliged to continue to operate or provide the public service, even after default. Financial Implications of a GRE's Default: The impact of a default of the GRE is assessed to determine its likely implications for access to and the availability of future financing for the government and its other GREs. 6
From Scoring to Notching Score leads to Notching Up or Notching Down; varies by SCP SCP vs Parent <12.5 12.5 15-17.5 20-25 27.5-32.5 35-42.5 45+ Up to 3 notches SCP BU+1* BU+1* TD-1*** Equal Equal Equal 4 notches SCP BU+1 BU+1 TD-2 TD-1 TD-1 Equal More than 4 notches SCP BU+1 BU+2/3** TD-3 TD-2 TD-1 Equal SCP = Standalone Credit Profile; BU = Bottom Up; TD = Top Down * Capped at government minus one ** Capped at government minus 3 *** if the SCP of the GRE is one notch below the government, a one-notch uplift to the same rating as the government can also be considered Other limitations may apply 7
Case Study 1 Corporate with a stand alone rating at BBB Sovereign at A Status, Ownership and Control Strong 5 Support Track Record and Expectations Strong 5 Socio-Political Implications of Default Moderate 5 Financial Implications of Default Strong 10 TOTAL 25 Outcome is A- If stand-alone goes to BBB- with scores unchanged, then TD-2 (downgraded by one notch) SCP vs Parent <12.5 12.5 15-17.5 20-25 27.5-32.5 35-42.5 45+ Up to 3 notches SCP BU+1 BU+1 TD-1 Equal Equal Equal 4 notches SCP BU+1 BU+1 TD-2 TD-1 TD-1 Equal More than 4 notches SCP BU+1 BU+2/3 TD-3 TD-2 TD-1 Equal 8
Case Study 2 Public entity with a stand alone rating at A- Sovereign at AA- Status, Ownership and Control Strong 5 Support Track Record and Expectations Moderate 2.5 Socio-Political Implications of Default Moderate 5 Financial Implications of Default Moderate 5 TOTAL 17.5 Outcome is A If stand-alone goes to A with scores unchanged, then A+ SCP vs Parent <12.5 12.5 15-17.5 20-25 27.5-32.5 35-42.5 45+ Up to 3 notches SCP BU+1 BU+1 TD-1 Equal Equal Equal 4 notches SCP BU+1 BU+1 TD-2 TD-1 TD-1 Equal More than 4 notches SCP BU+1 BU+2/3 TD-3 TD-2 TD-1 Equal 9
Overriding Features Likely Equalised with GRE Parent 10
Exposure Draft Process Fitch will be accepting market feedback until 5 January 2018. Comments can be emailed to criteria.feedback@fitchratings.com. Fitch will apply the criteria described in this exposure draft to new issuers/transactions rating assignments during the exposure draft period. Existing ratings will continue to be reviewed either under existing criteria. Upon finalization of the exposure draft issuers currently covered by the Public Sector Entities Criteria or State Owned Entities under the Parent and Subsidiary Linkage criteria will be covered by the criteria for Government Related Entities and Fitch's 'Rating of Public-Sector Entities Outside the United States criteria will be retired. 11
Contacts Frederic Gits Head of Credit and Operations Group Corporate Ratings frederic.gits@fitchratings.com Nicolas Painvin Head of Criteria, Credit and Research, Global Public Finance and Infrastructure nicolas.painvin@fitchratings.com Christophe Parisot Managing Director, International Public Finance christophe.parisot@fitchratings.com 12
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