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:
1) 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).
2) 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.
3) 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.
June 3, 2015
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