Scope Ratings has today published its updated General Corporate Rating Methodology, which clarifies and refines its analytical approach while keeping the core principles unchanged.

Scope invited market participants to comment on the methodology until 14 August 2023. Scope did not receive comments from market participants during the request-for-comments period. The methodology is now final.

The updated methodology can be downloaded here or on www.scoperatings.com.

Rating impact and reviews

The updated methodology will not have implications on existing issuer or debt ratings for non-financial corporates covered by Scope.

Methodology highlights

The update provides increased transparency and a detailed presentation of Scope’s analytical approach for assigning credit ratings to non-financial corporates. The proposed update does not entail any changes to the essence of Scope’s analytical framework. The methodology continues to be based on a modular rating approach for issuer ratings comprising an assessment of key rating factors that define a rated entity’s business and financial risk profiles, which is supplemented by supplementary rating drivers.

The rating approach on long-term debt ratings remains based on a generic notching approach for investment-grade rated issuers and a recovery analysis reflecting the value of claims at default against expected debt positions at default.

The rating approach on short-term debt ratings remains based on the underlying issuer rating and its Outlook as well as Scope’s assessment on the rated entity’s liquidity position.

The updated methodology will have no impact on outstanding ratings.

Summary of the proposed key changes

The proposed methodology includes the following adjustments to increase the transparency of the rating process:

• Harmonisation of Scope’s industry risk matrix, changing the applicable industry risk profile for industries with low cyclicality and high entry barriers from AA/AAA to A/AA, thereby balancing the industry risk matrix
   
• Additional background on the factors that typically drive the assessment of a rated entity’s market shares/position, diversification and operating profitability
   
• Guidance on the reflection of a country rating when a rated entity’s issuer rating and the relevant sovereign rating are close to each other
   
• Clarification about the currency context for issuer, debt category/instrument ratings
   
• Clarification about the treatment of reverse factoring in Scope-adjusted debt
   
• Guidance on the assessment/weighing of Scope’s credit metrics for the determination of the financial risk profile
   
• Further guidance about the reflection of financial covenants within the financial risk profile
   
• Further guidance about the reflection of potential ratings adjustments in a peer context
   
• Clarification about the weighing of the business and financial risk profile for different rating categories
   
• Details regarding the perceived impact of rating-relevant ESG factors that we consider in our analysis of debt category/instrument ratings
   
• Finetuning of the definitions of Scope-adjusted EBITDA, Scope-adjusted funds from operations, Scope adjusted interest and Scope-adjusted free operating cash flow and the provision of a definition of Scope-adjusted EBITDA margin
   
• Editorial changes