credit rating workshop, fitch ratings 02
TRANSCRIPT
SADC – DFRCDFI Stakeholder Workshop
26 March 2009
Agenda
Credit Ratings in general
Fitch’s Rating Scales
Fitch’s Profile
What areCredit Ratings?
Credit Ratings
> “Fitch's credit ratings provide an opinion on the relative ability of an entity to meet financial commitments, such as interest, preferred dividends, repayment of principal, insurance claims or counterparty obligations. Credit ratings are used by investors as indications of the likelihood of receiving their money back in accordance with the terms on which they invested.”
> Assigned to ISSUERS and to OBLIGATIONS
Who Gets Ratings?
> Financial Institutions
> Corporates
> Sovereigns
> Local authorities
> Debt, loans, preferred stock, other obligations of the above
> Debt issued by SPVs
What Do Ratings Mean?
> ‘Independent, Timely, Prospective’
> Ratings measure credit risk – more specifically
– Issuer Default Ratings
> Probability of Default only
– Issue ratings for corporates, banks, insurers and sovereigns
> Probability of default, adjusted up or down to reflect relative loss severity (PD+LGD)
– Issue ratings for structured finance
> Probability of default, although underlying assets are analysed using loss severity assumptions
What Do Ratings Mean?
> Ratings are ordinal
– ‘AA’ less likely to default than ‘BB’
– Speculative-grade (BB+ and lower) more likely to default than investment-grade (BBB- and higher)
> Ratings are ‘through the cycle’ opinions
> Ratings measure the obligation under the documentation
– Can affect ‘timeliness’ considerations
– Can affect absolute amount of principal or interest obligation
What Does a Rating Do for my Company?
> Enables better access to debt capital markets funding
– Assists in obtaining a better take-up and pricing on bond issuance
> Broadens investor base, aids tighter pricing
– Helps in negotiating better pricing with correspondent banks
– Helps in maintaining competitive tension between correspondent banks
– Reduces level of collateral posted with credit card association
– Assists in negotiating better financing terms with the World Bank, IFC, etc
> Enables benchmarking to peers
– Both on a local and an international base
> Demonstrates transparency and discipline
– Especially for issuers that are regularly in the public domain
What Do Ratings Not Include?
> Fitch does not verify or audit data from an issuer
> Fitch does not ‘require’, ‘approve’, or ‘endorse’ issuer behaviour
> Ratings are not recommendations to buy/sell or hold a security
> Ratings do not constitute investment guidance, recommendations or advice
> Ratings are not commentaries on pricing of bonds
> Ratings are not an expression of a percentage probability of default
> Credit ratings are not an assessment of anything other than credit risk
What Do Ratings Not Include?
> Corporate Ratings do not incorporate Temporal Subordination
– (i.e. a 10-day obligation has less risk than a 10-year obligation)
> Fraud
– ‘Fraud’ means active misrepresentation of material facts or material embezzlement
– Fraud is not simply ‘mismanagement’ or incompetence – our view on management quality should be incorporated in the rating
> Erroneous logic: “They told us they would double profits in 6 months; if they don’t, well, that’s fraud isn’t it?”
Who Uses Ratings?
> Investors
> Banks
> Regulators
> Commercial Counterparties
Fitch’s Rating Scales
Fitch’s Investment Grade Ratings Scale
F1+
F1
F2
F3
Short Term Rating Long Term Rating
AAA
AA+
AA
AA-
A+
A
A-
BBB+
BBB
BBB-
Fitch’s Sub Investment Grade Ratings Scale
B
C
D
Short Term Rating Long Term Rating
BB+
BB
BB-
B
B-
CCC-
CC
B+
CCC+
CCC
C
D
Rating Addendums
> Add "+" or "-”
– suffixes that denote relative status within major rating categories (BBB-, BB+)
> Rating Watch
> Rating Outlook
Rating Watch
> Notifies a reasonable probability that a rating change will take place (most likely relating to an expected event)
– "Positive“ () indicates a potential upgrade
– "Negative“ () a potential downgrade
– "Evolving“ () if ratings may be raised, lowered or maintained
> Typically resolved over a relatively short period
Rating Outlook
> Indicates the most likely direction of a rating over a one- to two-year period.
– May be positive, stable, or negative
– (Occasionally, Fitch may be unable to identify the fundamental trend and in these cases, the Rating Outlook may be described as "evolving")
> Most Outlooks are stable
Time Line – sensitive to information flow!
Company sends A/Cs and other information
Dates for meeting
Replies in advance of management meeting
Comments from company
Rating Agreement Signed
Lead and backup analyst designated
Review of publicly available information
Questions sent to issuer
Management meeting
Further analysis
Rating committee presentation and draft report
Rating committee review and decision
Preparation of final rating report and press release
Ratings released to public domain. Full rating report available to subscribers
Ongoing dialogue and application of ratings to new issue and progs
Pro
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Mandate to Publication –The Ratings Process Explained
Fitch’s Profile
Fitch Ratings
Know Your Risk> One of only 3 global rating agencies with expertise and critical mass across the
credit spectrum
> Dual headquartered in London and New York
> 7,500+ active subscribers globally
> 1,800 employees in 35 countries, 49 offices worldwide
> A mass of expertise at your service
Worldwide Offices and Staff
Mexico City
Santiago
Brisbane
Sao Paulo
Buenos Aires
Paris Frankfurt London
Chicago
Caracas
Austin
Johannesburg
Sydney
Singapore
Hong Kong
Tokyo
Beijing
Tampa
New York
Lima
Seoul
Mumbai
Tunis
Barcelona
Milan Toronto
Moscow
La Paz
Bogota
Rio De Janeiro
San Jose
Quito
San Salvador
Kuala Lumpur
Bangkok
Taipei
Colombo
Istanbul
San Francisco
McLean
Warsaw
Montevideo
Garza Garcia
New DelhiKolkata
Chennai
Powell
Dubai
Why Fitch?
> Fitch is an effective and proven alternative, offering issuers and their advisors the benefits of– Critical mass coverage
– Broad investor acceptance
– Clear and transparent methodologies and processes
– Highly skilled and experienced analysts
– A ’best in class’ research offering to a world wide client base of credit risk managers and investors – a great shop window for issuer visibility
– A complete range of rating products
– A cost effective fee structure
– A strong ‘service’ ethos dedicated to timely delivery of all aspect of its product and service offering
Your contact at Fitch
Roland Cooper
Telephone +27 11 380- 0900Director