Scope Ratings publishes its new Government-Related Entity Methodology after a call for comments. The methodology is applicable to assign issuer credit ratings to government-related entities (GRE) globally using a segmentation approach.
Scope’s Government-Related Entity Methodology is based on a qualitative, principles-based ‘segmentation-approach’ to account for the wide variety of entities and organisations, varying jurisdictions and resulting different relationships of GREs with their respective governments.
Scope’s approach is transparent and analytically rigorous, based on three scorecards highlighting the relative importance of key rating drivers and considering not only the nature and evolution of the relationship between the GRE and the government but also the operational and financial links between the two entities.
Scope’s approach starts with the analysis of the relationship between the GRE and the relevant government. Based on the GRE’s level of integration with the government, Scope then chooses either the ‘Top-Down’ or ‘Bottom-Up’ approach to determine the primary driver of the GRE’s rating.
The ‘Top-Down’ approach takes the government’s rating as the starting point and then negatively adjusts it based on Scope’s assessment of i) the ‘control and regular government support’ and ii) the ‘likelihood of exceptional support’ for the GRE. In turn, Scope’s ‘Bottom-Up’ approach starts with the assessment of the GRE’s stand-alone credit profile based on relevant sector specific rating methodologies, and then, positively adjusts this indicative rating upward. The extent of the upward notching is based on Scope’s assessment of i) the government’s ‘capacity to provide support’, and ii) the government’s ‘willingness to provide support’.
In a third step, Scope performs a supplementary analysis which can have credit-positive or negative implications for the final rating as well as no implications at all. Specifically, under the ‘Top-Down’ approach, Scope can assess the fundamentals of the GRE, including its business and financial risk profile in conjunction with the corporate or financial institutions methodologies. Finally, under either approach, Scope also assesses the potential risk for negative interventions by the government or additional constraints affecting the creditworthiness of the GRE.
The GRE methodology will apply to credit ratings of some issuers currently rated by Scope and may affect these ratings.