Credit ratings and access to loans for development
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  • 1. Access to Development Funding For Local Governments Lorenzo Pareja Associate Director International Public Finance Ratings Services Standard & Poor’s September 17, 2008
  • 2. S&P Global Coverage
    • A division of The McGraw-Hill Company
    • Over 140 years of experience
    • Global office network in 24 Countries
    • 6300+ employees
    • We rate more than 40,000 issuers in over 100 countries
    • We rate 90% of the world’s publicly issued debt
  • 3. Ratings for the African LRGs and GREs
    • Growing interest for LRGs & GREs ratings in Africa: The experience of S&P
    • The value of a rating
    • Criteria for rating LRGs & GREs
  • 4. 1. Growing interest for LRGs & GREs ratings in Africa: The experience of S&P
  • 5. Sovereign ratings growth concentrated in non-IG Africa
    • Sub-Saharan Africa
    • Benin (B/Pos.)
    • Botswana (A+/Stable)
    • Burkina faso (B/Stable)
    • Cameroon (B/Stable)
    • Gabon (BB-/Stable)
    • Kenya (B/Negative)
    • Madagascar (B/Stable)
    • Mali (B/Stable)
    • Mozambique (B+/Stable)
    • Nigeria (BB/Stable)
    • Senegal (B+/Negative)
    • South Africa (A+/Stable)
    • North Africa
    • Egypt (BB+/Stable)
    • Morocco (BB+/Positive)
    • Tunisia (A/Stable)
  • 6. Next Step in Africa : Local and Regional Governments
    • LRGs global demand for ratings
  • 7. Example of current trend in Emerging markets
  • 8. 2. The value of a rating
  • 9. Rating definition. S&P Issuer Credit Rating ‘ An opinion of the obligor’s overall capacity to meet its financial obligations. This opinion focuses on the obligor’s capacity and willingness to meet its financial commitments when they come due’. Standard & Poor’s: Criteria 200 7
      • Constitute a recommendation to buy, sell or hold a particular security
      • Comment on the suitability of an investment for a particular investor
      • Measure liquidity, volatility, or market value
      • S&P does not perform an audit in connection with any rating
      • A rating is not an opinion if an entity is ”good” or ”bad” – it is a measure of the risk an investor is taking on by investing in that entity’s financial obligations.
    A rating does NOT Note: a rating is requested, agreed and paid for by the borrower/ client/ investors
  • 10. Default Risk by Rating. S&P Source: S&P Annual Global Corporate Default Study (cumulative average default rates by ratings, 1981 to 2007) 2007 Annual Global Corporate Default Study BBB A AA AAA B BB CCC/C Non Investment Grade Investment grade
    • Cumulative average default rates by ratings, 1981 to 2007)
  • 11. Standard & Poor’s Global Rating Scales
      • Sub-investment grade ratings regarded as having significant speculative characteristics. Around 1/3rd of corporate ratings in Europe, 2/3rds in the US.
  • 12. Standard & Poor’s National Rating Scales
    • South Africa, Nigeria, Brazil, Mexico, Russia, Canada….
    • National Scales:
      • Issuer credit rating: ‘ An opinion of the obligor’s overall capacity to meet its financial obligations … relative to other national obligors’
      • Use of National Scales:
        • More granular ratings
        • Emphasis on comparability with other national obligors
        • Excludes risks common to all national obligors (e.g. transfer risk)
  • 13. Benefits of Ratings in the Marketplace
    • Other benefits
      • Diversification of financing sources
      • Discipline & Accountability
      • Transparency. International benchmarking of risks
      • PPPs
  • 14. Other ratings-related products
    • Credit Assessment (CA)
    • - Credit assessments are preliminary indicators of creditworthiness expressed in either a broad rating category or in descriptive terms. They provide an evaluation of the general strengths and weaknesses of an issuer, obligor.
    • Credit assessments represent a point-in-time evaluation and are generally confidential.
    • Standard & Poor's does not maintain ongoing surveillance on credit assessments.
    • Private Credit Analysis (PCA)
    • Confidential credit opinions on entities that do not have a public credit rating
    • Rating Evaluation Service (RES)
    • - An assessment of the credit impact of a proposed strategic initiative/ hypothetical scenarios before it is implemented.
    • - Provides a timely credit evaluation and an indicative rating outcome for each scenario
    • - Carried out by the same analysts who are responsible for all other rating decisions with the same issuer
  • 15. Rating Criteria for LRGs and GREs (Local and Regional Governments, Government-Related Entities)
  • 16. LRG and GREs
    • LRG and GRE analytical peculiarities
      • Accounting and information issues
      • Rating stability
      • Emerging Countries specificities
    • LRG and GRE: The rating process
    Previous to Management meeting Management Meeting Committee date Release to capital markets Surveillance Data requirements
  • 17. Key Rating Factors: Local and Regional Governments
    • 1. Inter-governmental system supportiveness and predictability
    • 2. Demography, Economic structure and growth prospects
    • 3. Political stability and management sophistication
    • 4. Financial flexibility
    • 5. Budgetary performance, projections
    • 6. Debt burden
    • 7. Liquidity and debt management
    • 8. Off balance sheet liabilities
    For detailed information, see article ”Rating International Local And Regional Governments: A Primer”, on RatingsDirect
  • 18. Key Rating Factors: Government-related entities
    • 1. Stand alone ratings incorporate Ongoing Government support
    • 2. Extraordinary support could enhance a rating on a GRE
    • 3. Public-policy based GREs
    • 4. Commercial GREs
    • 5. Government guarantees
    • 6. Rating a GRE above its own government
    • 7. Foreign currency considerations
    • For detailed information, see article ”Rating Government-related entities: A Primer”, on RatingsDirect
  • 19. Contact Details
    • Analytical contacts
      • Ben Faulks - Associate Director, Sovereign Ratings
        • [email_address]
      • Myriam Fernandez de Heredia -Senior Director, International Public Finance
        • [email_address]
      • Moritz Kraemer - Managing Director, Sovereign Ratings
        • [email_address]
      • Lorenzo Pareja - Associate Director, International Public Finance
        • lorenzo_pareja@standardandpoors.com + 34 91 389 69 62 (Madrid, Spain)
    • Business Development contacts
      • Sofya Tolstykh - Associate Director, Sovereign/Public Finance Ratings Group EMEA
        • sofya_tolstykh@standardandpoors.com +44 2071763685 (London, UK)
      • Konrad Reuss – Managing Director, Africa
        • [email_address]
  • 20. Analytic services and products provided by Standard & Poor’s are the result of separate activities designed to preserve the independence and objectivity of each analytic process. Standard & Poor’s has established policies and procedures to maintain the confidentiality of non-public information received during each analytic process. www.standardandpoors.com
  • 21. Standard and Poor’s Main Policies*
    • Issuer Confidential Information
    • Avoiding Selective Disclosure
    • Management Meetings
    • Role of the Rating Committee Chairperson
    • Appeal
    • Pre-Publication Notice to Issuers
    • Rating Release
    • Surveillance
    * Main Policies and Terms and Conditions attached to the Credit Ratings Briefing Book
  • 22. Initial rating assignment typical time frame Rating Request 60 Days 0 Days 30 Days Credit Committee Preliminary Discussions Management Meeting Planning Supply of Requested/Available Information/Documentation Discussion of conclusions with rated entity Possible Appeal Timing may be accelerated/extended to accommodate financing schedules. 1 st week 4 th week 3 rd week 2 nd week 8 th week 7 th week 6 th week 9 th week Release to capital markets Management Meetings
  • 23. LONG-TERM PUBLIC FINANCE CREDIT RATINGS DEFINITIONS AAA An organization rated 'AAA' has the highest rating assigned by Standard & Poor's. The obligor's capacity to meet its financial commitment is extremely strong. AA An organization rated 'AA' differs from the highest-rated obligations only to a small degree. The obligor's capacity to meet its financial commitment on the obligation is very strong. A An organization rated 'A' is somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions than obligations in higher-rated categories. However, the obligor's capacity to meet its financial commitment on the obligation is still strong. BBB An organization rated 'BBB' exhibits adequate protection parameters. However, adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity of the obligor to meet its financial commitment on the obligation. BB An organization rated 'BB' is less vulnerable to nonpayment than other speculative issues. However, it faces major ongoing uncertainties or exposure to adverse business, financial, or economic conditions which could lead to the obligor's inadequate capacity to meet its financial commitment on the obligation.
  • 24. LONG-TERM PUBLIC FINANCE CREDIT RATINGS DEFINITIONS B - An organization rated 'B' is more vulnerable to nonpayment than obligations rated 'BB', but the obligor currently has the capacity to meet its financial commitment on the obligation. Adverse business, financial, or economic conditions will likely impair the obligor's capacity or willingness to meet its financial commitment on the obligation. Adverse business, financial, or economic conditions will likely impair the obligor`s capacity or willingness to meet its financial commitments. CCC - An organization rated 'CCC' is currently vulnerable to nonpayment, and is dependent upon favorable business, financial, and economic conditions for the obligor to meet its financial commitment on the obligation. In the event of adverse business, financial, or economic conditions, the obligor is not likely to have the capacity to meet its financial commitment on the obligation. In the event of adverse business, financial or economic conditions, the obligor is not likely to have the capacity to meet its financial commitments. CC - An organization rated 'CC' is currently highly vulnerable to nonpayment. C - The `C` rating may be used to cover a situation where a bankruptcy petition has been filed or similar action has been taken but payments on financial commitments are being continued. D - The `D` rating, unlike other ratings, is not prospective; rather it is used only where a default has actually occurred –and not where a default is only expected. Plus (+) or minus (-) The ratings from 'AA' to 'CCC' may be modified by the addition of a plus (+) or minus (-) sign to show relative standing within the major rating categories.
  • 25. External imbalances
  • 26. Gross external financing
  • 27. Public debt