Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s.Copyright (c) 2008 Standard & Poor’s, a division of The McGraw-Hill Companies, Inc. All rights reserved.
Access to Development Funding For Local Governments
Lorenzo ParejaAssociate Director International Public FinanceRatings ServicesStandard & Poor’s
September 17, 2008
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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
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Ratings for the African LRGs and GREs
1. Growing interest for LRGs & GREs ratings in Africa: The
experience of S&P
2. The value of a rating
3. Criteria for rating LRGs & GREs
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1. Growing interest for LRGs & GREs ratings in Africa:
The experience of S&P
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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)
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Next Step in Africa : Local and Regional Governments
• LRGs global demand for ratings
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Example of current trend in Emerging markets
Mexico: Ratings on LRGs and Water companies
1 2
858183
76
60
48
29
0
10
20
30
40
50
60
70
80
90
19
98
19
99
20
00
20
01
20
02
20
03
20
04
20
05
20
06
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2. The value of a rating
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Rating definition. S&P
Issuer Credit RatingIssuer 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 2007
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 therisk 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
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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
0
10
20
30
40
50
60
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15
(Time horizon, years)
(%)
BBBBBB
AA
AAAA
AAAAAA
B
BB
CCC/C
Non Investment Grade
Investment grade
• Cumulative average default rates by ratings, 1981 to 2007)
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Standard & Poor’s Global Rating Scales
Capacity to meet its financial commitment
AAA Extremely strong
AA Very strong
A Strong
BBB
Adequate but more susceptible to the adverse effects of economic conditions
AAA
AA+
AA A-1+
AA-
A+
A A-1A-
BBB+ A-2
BBB
BBB- A-3
BB+
BB B
BB-
B+
B
B-
CCC+ C
CCC
CCC-
CC
SD
D D
Long-term Rating Scale
Short-term Rating Scale
Sub-investment grade ratings regarded as having significant speculative characteristics. Around 1/3rd of corporate ratings in Europe, 2/3rds in the US.
BBLess vulnerable to nonpayment than other speculative ratings. However, debt reimbursement capacity could be somewhat impacted in case of adverse economic conditions
B
More Vulnerable to nonpayment than BB but the obligor still has the capacity to meet its financial commitments. Adverse economic conditions will likely impair debt reimbursement capacity
CCCVulnerable to non-payment and is dependent on favorable business, financial and economic conditions.
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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)
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Benefits of Ratings in the Marketplace
Borrowers/Issuers
• Enables capital structure to be optimised
• Broadens lender base
• Determines cost of funds in
public market
Investors
• Independent assessment of credit quality of entity and specific issue
• Enhances secondary market liquidity
Intermediaries
• Key consideration for structuring and pricing transaction to sell
• Allows approach to wider group of Investors
Borrowers/Issuers
• Enables capital structure to be optimised
• Broadens lender base
• Determines cost of funds in
public market
Investors
• Independent assessment of credit quality of entity and specific issue
• Enhances secondary market liquidity
Intermediaries
• Key consideration for structuring and pricing transaction to sell
• Allows approach to wider group of Investors
Other benefits
• Diversification of financing sources
• Discipline & Accountability
• Transparency. International benchmarking of risks
• PPPs
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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
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Rating Criteria for LRGs and GREs(Local and Regional Governments, Government-Related Entities)
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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
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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
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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
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Contact Details
• Analytical contacts– Ben Faulks - Associate Director, Sovereign Ratings
– Myriam Fernandez de Heredia -Senior Director, International Public Finance
– Moritz Kraemer - Managing Director, Sovereign Ratings
– Lorenzo Pareja - Associate Director, International Public Finance
[email protected] + 34 91 389 69 62 (Madrid, Spain)
• Business Development contacts– Sofya Tolstykh - Associate Director, Sovereign/Public Finance Ratings Group EMEA
[email protected] +44 2071763685 (London, UK)
– Konrad Reuss – Managing Director, Africa
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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
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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
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Initial rating assignment typical time frame
Rating Request
60 Days0 Days 30 Days
Credit Committee
PreliminaryDiscussions
Management MeetingPlanning
Supply of Requested/Available Information/Documentation
Discussion of conclusions
with rated entity
Possible Appeal
Management Meetings
Timing may be accelerated/extended to accommodate financing schedules.
1st week 4thweek 3rd week 2nd week 8th week 7th week 6th week 9th week
Release to capital markets
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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.
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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.
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External imbalances
-10
-5
0
5
10
15
20
2003
2004
2005
2006
2007
2008
2009
2010
Cu
rre
nt
Ac
co
un
t B
ala
nc
e (
% o
f G
DP
)
CEE Africa Middle East
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Gross external financing
70
80
90
100
110
120
130
2003
2004
2005
2006
2007
2008
2009
2010
% o
f C
A r
ec
eip
ts a
nd
FX
re
se
rve
s
CEE Africa Middle East
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Public debt
0
10
20
30
40
50
60
70
2003
2004
2005
2006
2007
2008
2009
2010
Gro
ss
Ge
n.
Go
v.
De
bt
(% o
f G
DP
)
CEE Africa Middle East