Bangkok--30 Jun--Standard & Poor's
Standard & Poor's Ratings Services today published its updated methodology for rating government-related entities (GREs). This follows our "Request For Comment: Enhanced Methodology For Rating Government-Related Entities And Assessing The Potential For Extraordinary Government Intervention", published on Jan. 23, 2009.
The criteria announced today apply to approximately 500 GREs rated by Standard & Poor's. Full details of the criteria, which are effective immediately, are available in the article titled General Criteria: Enhanced Methodology And Assumptions For Rating Government-Related Entities, published June 29, 2009.
We intend to complete our review of all credits affected within the next three to six months. Overall, we estimate that between 10% and 20% of rated GREs are likely to be affected by the revised criteria.
"We are publishing this article to help market participants better understand how we include government support in the issuer credit rating," said Standard & Poor's credit analyst Alexandra Dimitrijevic. "We expect the effect to be positive or negative depending on the individual situation of each GRE and to be generally within one or two notches from the current rating."
Standard & Poor's has, over the years, incorporated in its ratings its opinion of the likelihood of a government taking timely extraordinary measures that could affect the credit risk of certain entities during periods of stress. We have observed, however, that the relationships between GREs and their respective governments have become ever more complex. Accordingly, we have enhanced our methodology for rating GREs and assessing the potential for extraordinary intervention by introducing certain clarifications designed to achieve a more granular analysis of the range of GREs across sectors and regions and capture their increased complexity. We think these modifications should provide more transparency in our rating approach.
The most significant changes are:
Focusing our assessment of the likelihood for extraordinary government intervention on (i) the importance of the GRE's role and (ii) the strength and durability of its link with the government; therefore placing less emphasis on the "binary" categorization of GREs as either "public policy" or "commercial" entities.
Further emphasizing the importance of the GRE's stand-alone credit profile (SACP).
Providing more transparency on how the combination of the SACP, the government rating, and Standard & Poor's analysis of the importance of the GRE role and the link to the government combine to determine the GRE rating. The article published today supersedes published June 14, 2006.
GREs are enterprises potentially affected by extraordinary government intervention during periods of stress. GREs are often partially or totally controlled by a government (or governments) and they contribute to implementing policies or delivering key services to the population. However, we have observed that some entities with little or no government ownership might also benefit from extraordinary government support due to their systemic importance or their critical role as providers of crucial goods and services.
The new criteria don't apply to all financial institutions, only those with a public policy role and/or where government ownership is strategic and long-term in nature. While many characteristics of commercial financial institutions fit in with this broader approach to GREs, some types of government support in the banking sector call for a modified approach. Further criteria development is required before applying this broader GRE methodology to all financial institutions; Standard & Poor's expects to successively update its criteria on this subject.
Standard & Poor's will hold a teleconference on Tuesday, June 30, 2009, at 10:30 a.m. EDT, 4.30 p.m. CET, 3.30 p.m. BST.