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An Overview of the Credit Rating Process
What Are Credit Ratings?
CI’s credit ratings are an independent opinion of the creditworthiness of an entity or obligor, either in general (an issuer rating) or with regard to a specific financial obligation (an issue rating). CI’s credit ratings indicate the likelihood of default, but they do not indicate a specific probability of default over any given time period. CI’s credit ratings are intended to provide a relative ranking of credit risk among rated entities and obligations based on fundamental credit analysis and expressed in rating symbols from ‘AAA’ to ‘D’. Reflecting the limited number of gradations, entities or obligations with the same rating may not be of exactly the same credit quality, but they will share substantially similar credit risk characteristics.
The credit rating process generally begins with either (a) an entity requesting that CI undertake a credit analysis or (b) CI deciding to initiate coverage of an entity in response to subscriber demand or to increase the number of rated entities within a particular sector in order to be able to determine relative credit strength. While CI provides issuer ratings on both a solicited and unsolicited basis, CI does not generally rate specific transactions unless requested to do so by the issuer.
CI only assigns credit ratings when there is adequate and accurate information available to enable a rating committee to form a credible opinion of future creditworthiness. Such information may be provided by the rated entity or obtained by CI from other sources it considers reliable. CI does not audit or perform any independent verification of financial information and may, in some cases, rely on un-audited financial data.
In the case of solicited ratings, the rated entity will generally sign an agreement with CI in which the entity agrees to provide CI with annual audited and interim statements, as well as any other relevant information requested by CI and to inform CI of any material changes in its financial position. The rating contract and fee discussions are dealt with by CI’s Marketing Department. Rating analysts are forbidden from initiating, or participating in, discussions regarding fees or payments with any rated entity or related third party.
Where the rating has been initiated by CI, the entity to be rated is generally invited to participate in the rating process. CI identifies unsolicited ratings in its Credit Rating Announcements and Credit Rating Reports and also indicates whether or not the rated entity participated in the rating process.
Rating Process Flow
Rated entities that agree to participate in the rating process (on a solicited or unsolicited basis) are sent a comprehensive questionnaire seeking financial and non-financial information over and above that provided in their financial statements and the notes to their accounts. Where the entity does not participate in the rating process, CI generally relies on publicly available information.
The primary (or lead) analyst assigned to a particular rated entity is responsible for conducting the credit analysis of the entity and presenting all relevant information to the rating committee. The primary analyst is also responsible for monitoring developments at the rated entity on an ongoing basis after a rating has been assigned.
The primary analyst must ensure that he or she has no actual or potential conflict of interest with the rated entity. Rating analysts who have an actual or potential conflict of interest with a rated entity must declare that interest and may not participate in any rating committee meeting or vote on any rating action related to that particular rated entity.
After collating and reviewing information on the rated entity, the primary analyst usually meets with the senior management of the participating entity in order to facilitate an understanding of the entity’s operations, activities and strategies, and to discuss the main factors that may affect the rating. During these visits, the primary analyst may also meet with other market participants, including auditors and regulators.
Any non-public information relating to the rated entity which is obtained on a confidential basis is kept confidential, but may be used (without being specifically disclosed) in forming rating opinions and determining rating actions.
CI has prepared comprehensive credit rating methodologies to promote consistency and impose discipline on the rating process. The appropriate methodology is typically identified by the primary analyst when he or she is assigned to the prospective rated entity and depends upon the type of entity being rated. In terms of the general approach, CI's credit analysis involves a thorough evaluation of the quantitative and qualitative factors that may affect the ability and willingness of a rated entity to meet its financial commitments, such as interest payments and repayment of principal, on a timely basis. The focus is usually on the intrinsic financial strength and financial resilience of the rated entity, but external support factors are also taken into consideration. Analysis of each general type of entity (bank, corporate etc) is disaggregated into a number of analytical categories in order to build a rated entity's credit risk profile and facilitate meaningful comparison between rated entities within the same industry or sector.
Following an analysis of the information obtained on the rated entity, the primary analyst prepares a Credit Rating Report in a manner consistent with the relevant CI methodology and format. The draft report is reviewed internally for analytical consistency and accurate usage of figures and subsequently amended where necessary.
Rating Committee Deliberation and Validation
CI’s credit ratings are assigned and all subsequent rating actions (including upgrades, downgrades, rating affirmations and changes in outlook) determined by rating committees and never by an individual analyst. Rating committees are composed of rating analysts who, individually or collectively, have appropriate knowledge and experience in developing a rating opinion for the type of credit being considered.
The rating committee chairman is responsible, among other things, for ensuring that the rating committee is properly constituted; that presenting analysts have supplied the appropriate documents; that the relevant rating methodology is applied; and that rating decisions are properly recorded.
The primary analyst’s submission to the rating committee usually consists of a rating proposal form, the draft Credit Rating Report, spreadsheets and ratios, and peer group ratios – all of which are circulated to committee members ahead of the meeting. During the rating committee meeting, the primary analyst makes a brief presentation on the credit strengths and weaknesses of the rated entity and the rationale behind his or her rating recommendation. Following the presentation, any rating committee member may make relevant comments or raise questions with the presenting analyst.
After the presentation and discussion, a vote is taken on the proposed rating. A simple majority is sufficient to carry a motion; in the case of a tie, the chairman of the rating committee may exercise an additional casting vote. Where it is felt that further information or clarification is required in order to reach a decision, the rating committee will adjourn until the primary analyst obtains the required information.
Once a rating has been agreed, the chairman of the rating committee initials the rating proposal form to indicate the committee’s approval and records the rating agreed and the vote.
To the extent possible following the determination of an entity’s credit rating by the rating committee, CI provides the rated entity with a draft of the Credit Rating Report for comment and to correct any factual errors and identify any confidential information that may have inadvertently been left in. Rated entities are generally given several days to review the Report irrespective of their participation status.
Provided the rated entity does not provide information which warrants significant changes to the analysis in the Credit Rating Report and does not appeal the ratings, the Report is subsequently finalised and approved for publication.
At the same time, the primary analyst prepares a Credit Rating Announcement, which is drawn from the Credit Rating Report and contains the principal considerations upon which the rating action is based. The rated entity is provided with an advance copy of the draft Credit Rating Announcement, and informed of CI’s intention to release it and make the entity’s credit ratings public after a period of twelve hours from the time the draft Announcement has been sent by email. After this time, the Credit Rating Announcement is posted on CI’s public website and the Credit Rating Report is released to subscribers.
A rated entity may appeal the rating committee’s rating decision before it is published, irrespective of the solicitation status of the rating. However, the right of appeal is limited both in time and to the submission of new information, with unanticipated and important changes in the issuer’s circumstances or the provision of previously undisclosed information typically required to trigger the re-presentation of the report and rating to the rating committee. If the primary analyst and committee chairman deem that material information has been missed or misinterpreted, the rating committee will be reconvened to discuss the ratings. The rating committee may sustain its original decision or change the rating action.
Monitoring and Updating Ratings
CI monitors credit ratings on an ongoing basis to ensure that they continue to provide a credible opinion of the rated entity’s creditworthiness. The primary analyst responsible for preparing the initial Credit Rating Report is usually responsible for maintaining regular surveillance over the rated entity by, for example, monitoring periodic financial statements, company announcements and media reports, as well as through direct contact with the entity.
Primary analysts are expected to review the financial statements of rated entities within their portfolio on a regular basis. The timing of such reviews will depend to a large extent on the frequency of financial reporting by rated entities, but in most cases will be quarterly or semi-annual and should never be more than annual.
Primary analysts may initiate a rating review whenever they become aware of factors that may affect the credit quality of the rated entity. Whenever possible, the primary analyst will discuss the pertinent issues with senior management of the rated entity and, where a rating action is deemed appropriate, may request that a rating committee be convened.
All published credit ratings are also subject to formal periodic review every 12 months, to the extent possible. As part of the formal review process, the primary analysts generally meets with senior management to discuss the entity’s performance in the previous year and management’s expectations for the entity and the operating environment in the short to medium-term. The primary analyst prepares an updated Credit Rating Report and presents his or her rating recommendation to the rating committee.
Once a rating action has been agreed by the rating committee, the rated entity is generally provided with a draft Credit Rating Report and, following consideration of the rated entity’s comments, an advance copy of the Credit Rating Announcement in the same way as during the assignment of the initial rating.
The rated entity may appeal any decision to change the rating.
Suspending and Withdrawing Ratings
CI may suspend a credit rating in cases where the information provided by the rated entity, either directly or through publicly available documents falls short of that required to adequately assess and monitor repayment capacity, but where there is a reasonable likelihood that the information required will be provided in the near future.
A credit rating may be withdrawn when a rated entity within a reasonable period of time has not or does not intend to disclose information that is material to a credible assessment of its creditworthiness.