Meaning, Attributes and Limitations
An Indicator of Relative Credit Risk
CI’s credit ratings are an independent opinion of the ability and willingness of an entity or obligor to meet its financial obligations as they fall due. We assign issuer credit ratings to indicate the general likelihood of default on senior financial obligations and issue credit ratings to capture the credit risk of specific financial instruments, such as bonds and sukuk.
Our credit ratings are intended provide a relative ranking of credit risk based on fundamental credit analysis, and are expressed in rating symbols from ‘AAA’ to ‘D’. The lower the rating, the greater the frequency of default – with ‘D’ denoting that the entity or financial instrument is in default.
As the number of positions on the rating scale is limited, entities or financial instruments with the same rating may not be of exactly the same credit quality, but they will share substantially similar credit risk characteristics.
Our credit ratings are based on a thorough analysis of the quantitative and qualitative factors that may affect creditworthiness and are assigned in accordance with our methodologies and established procedures.
A Matter of Opinion
Our credit ratings are statements of opinion and not statements of fact. We only assign ratings when we believe we have sufficiently adequate and accurate information available to form a credible opinion of future creditworthiness. Such information may be provided by issuers or obtained by us from other sources we consider reliable. We do not audit or verify the accuracy of information obtained from issuers as part of the rating process and may, in some cases, rely on unaudited financial data.
Outlooks Signal the Likely Change in Ratings
CI also assigns outlooks to long-term credit ratings to indicate the likely direction of a change in the ratings, usually over the next 12 months. A positive (negative) outlook signals a better than even chance that the rating will be raised (lowered) within a year. A stable outlook indicates that the rating is unlikely to change in the next 12 months. A positive or negative outlook does not mean that an upgrade or downgrade in the rating is inevitable. Similarly, a rating with a stable outlook may be changed without a prior revision in the outlook.
Determined by Committees and Monitored on an Ongoing Basis
CI’s credit ratings are assigned by, and all subsequent rating actions (including upgrades, downgrades 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.
Once assigned, credit ratings are monitored on an ongoing basis and formally reviewed at least once every six months for sovereign and sub-sovereign ratings and once every 12 months for bank, NBFI, and corporate ratings to ensure they continue to provide a credible opinion of the future creditworthiness of the rated entity or instrument.
A credit rating may, however, be raised, lowered, suspended or withdrawn at any time, in accordance with CI’s policies, procedures and criteria. This may happen if credit quality changes or, in the case of suspensions and withdrawals, if we no longer have sufficient information to maintain the rating.
Ordinal Not Cardinal
Credit ratings primarily provide an ordinal ranking of default risk – i.e. they focus on the relative likelihood of default rather than on the absolute (or cardinal) likelihood of default. This means they are not calibrated to specific default probabilities and therefore no explicit attempt is made to maintain constant default rates for each rating category. We do, however, monitor actual default rates and expect our methodologies to result in credit ratings that are associated with low default rates in high investment grade categories, increasing to significantly higher rates in lower speculative categories.
Credit Ratings Incorporate Stability Considerations
Rating stability is a key objective of our methodological approach. In general, the bulk of ratings should not change with great frequency and investment grade ratings should be more stable than speculative grade ratings. Rating stability is achieved in part by factoring into the credit rating the impact of typical fluctuations in economic activity and moderate stress on financial performance and repayment capacity. However, the extent to which ratings look through the business cycle and stress is not uniform across rating grades. As the distance from default decreases, the current stage of the business cycle matters more for the rating compared to higher levels and hence cyclical changes in financial performance indicators are more likely to trigger a rating action, especially in the ‘B’ and ‘C’ ranges where financial flexibility and financial buffers tend to be relatively weak (put differently, lowly rated entities are likely to be dependent upon favourable business, economic or financial conditions to meet their financial commitments).
Underpinned by Assumptions and Expectations
Credit ratings and rating outlooks are forward-looking measures. As such, they are typically conditioned on specific scenarios and underpinned by qualitative and quantitative assumptions and expectations concerning, for example, future performance, resilience in the face of adversity, and the likelihood of external extraordinary support in the event of need.
Quantitative assumptions refer to estimates and projections of key economic and financial indicators. Qualitative assumptions are those assumptions of a descriptive or categorical nature that are not directly tied to a quantifiable rating factor. They include assumptions about management and governance, strategy, and policy implementation. They may also include assumptions about important exogenous factors, such as macroeconomic and financial conditions, commodity price trends, and sovereign and country risk.
Credit Quality May Change in Unforeseen Ways
Ratings may be sensitive to the assumptions used. As the future is uncertain, key rating factors may evolve or change in a different way to that expected, potentially warranting an adjustment in the rating or rating outlook. Ratings may be raised or lowered by more than one notch in response to unanticipated changes in key rating factors and underlying quantitative and qualitative assumptions, with the size of the adjustment depending on the magnitude of such changes and CI’s expectations of the duration of the change and impact on creditworthiness. Ultimately, ratings offer no guarantee that an issuer or issue will not default at some point in the future.
Credit Ratings Are Not Indicators of Investment Suitability
CI’s credit ratings do not constitute investment or financial advice. Our credit ratings may be used as an analytical input into – but are not a substitute for – investors’ own risk management. Investors in particular should be aware that:
- Credit ratings focus on one aspect of investment risk – credit (or repayment) risk – and do not explicitly capture loss severity or recovery prospects.
- Credit ratings are not recommendations to purchase, sell, or hold stocks or shares in an institution or particular security.
- Credit ratings do not assess or indicate the likelihood of changes in the market price of rated instruments due to market-related factors such as changes in interest rates or liquidity.
- Credit ratings do not provide an opinion of the liquidity in the market of an issuer’s securities.
Not All Ratings Are Solicited or Assigned with Issuer Involvement
We may initiate credit ratings on issuers without the request of the issuer (i.e. on an unsolicited basis) provided there is adequate public information available to form a credible opinion of the issuer’s creditworthiness. In such cases the issuer may, nevertheless, still participate in the rating process by meeting with us or providing additional information. Whether or not the issuer participated is indicated in the disclosure section of our rating action announcements and reports.
We May Use Internal Ratings as Inputs into Credit Ratings
We may assign private ‘shadow’ sovereign ratings – internal assessments of sovereign risk that are not intended for publication and are used as an input into other rating assessments. Shadow sovereign ratings may constrain or cap the ratings of other rated issuers within a country. Shadow sovereign ratings may be based on a lower level of information or less detailed analysis compared to public sovereign ratings and, although monitored, may be reviewed less frequently than every six months. They do not represent a full rating opinion.
Credit Ratings Should be Relied Upon to a Limited Degree
As credit ratings and the underlying analysis are opinions of CI Ratings they should be relied upon to a limited degree and users of this information should conduct their own risk assessment and due diligence before making any investment or other business decisions.
Additional Considerations for National Ratings
National Ratings Are Country Specific, Not Internationally Comparable
The long- and short-term foreign and local currency ratings assigned by CI Ratings are international credit ratings that are broadly comparable across countries and sectors. In some markets, CI may also assign long- and short-term credit ratings on a national scale. Unlike international ratings, national ratings are not comparable across borders and refer instead to the creditworthiness of the rated entity or debt instrument relative to all other entities or instruments in the same country.
National ratings are mapped from international ratings. We do this in order to preserve the ordinal ranking of entities on the two scales as it would be counterintuitive for one entity to be rated more highly than another on the international rating scale but not on the national rating scale.
High National Ratings Are Not Incompatible with Low International Ratings
National ratings are not directly comparable to international credit ratings and the strongest credit on a national scale may be lowly ranked on an international rating scale. Consequently, CI Ratings makes no distinction between investment grade and non-investment (speculative) grade in its national rating scales. Investors should be aware that a highly rated credit on a national rating scale might still be a significant credit risk in an absolute sense.
National Ratings May Change for Reasons Unrelated to Creditworthiness
The relationship and mapping between international ratings and national ratings may change over time, with the national ratings assigned to entities repositioned to reflect updated mappings. In particular, an upgrade in the international rating of the strongest entity within a country generally results in a downward shift in the mapping from international to national ratings. As a result, all national ratings assigned within that country will normally be lowered as a direct result of the recalibration. Conversely, a downgrade in the international rating of the strongest entity will normally trigger an upward shift in the mapping and upward adjustments in all national ratings. In both cases, the international ratings of all entities (other than the strongest) may be unaffected.
In such cases the upward and downward revisions in national ratings should not be interpreted as necessarily indicating an improvement or deterioration in creditworthiness. They should instead be regarded as technical adjustments that are consistent with the underlying methodology and are necessary to ensure that the national scale is able to serve its primary purpose of affording sufficient opportunity for credit differentiation within a country. Accordingly, analysis of the migration of an entity’s national rating over time may be meaningless unless the effects of recalibrations are taken into account.