Link to the proposed methodology

Methodology update

Scope proposes updates to the supranational methodology to further enhance the assessment of the financial profile and shareholder support:

• Climate risks

We propose to assess a supranational’s exposure to climate-related credit risks as part of the asset quality assessment, applying a portfolio-level climate risk scorecard. We assess the share of an issuer’s loan portfolio that is potentially affected by climate risks, taking into account geographical and sectoral distribution, remaining maturity, and climate-risk mitigants.

• Hybrid debt instruments

We propose guidelines to assess the equity content and instrument rating of hybrid debt instruments, with the equity content ranging from 100% (fully treated as equity) to 0% (fully treated as debt). We propose to limit the sum of the total equity content of qualifying hybrid debt and callable capital to 30% of total capital.

• Callable capital

We propose to include 5% of the callable capital of highly rated shareholders (AA- or above) within a supranational’s capital, and to increase this value to 25% if shareholders have authorised and appropriated the  callable funds. The proposed differentiation reflects that callable capital for which no additional parliamentary/legislative approval or extraordinary budget is needed has a higher likelihood of being received in a timely manner - should a call ever be needed.

• Shareholder support

We propose to refine our assessment of shareholder support for capitalised institutions, primarily to assesses ‘willingness to provide support’ qualitatively. We propose to combine our assessments of ability and willingness to provide support non-linearly, placing a slightly higher weight on willingness than on ability. This acknowledges that shareholders with a lower credit quality that are committed to an institution can provide significant support, for example, by agreeing to a capital increase. Conversely, shareholders with high credit quality which are less committed to an institution, as informed by the institution’s track record with regard to capital increases and contentious shareholder relations, among others, may be less inclined to provide support if needed.

• Scorecard refinements

We propose to refine our assessments of earnings, NPLs, and funding profiles. An institution’s medium- to long-term ability to retain earnings is informed by net income, adjusted for unrealised, interim fair value net gains (losses) from equity investments or fair value changes of derivative financial instruments. We propose to slightly widen the thresholds at which we assess NPLs, and to introduce a ‘Very Weak’ category for NPLs exceeding 10% of total gross loans. Finally, we propose to assess a supranational’s funding access, flexibility and profile qualitatively across seven categories.

We further propose to refine the assessment for actual capitalisation. We measure the difference between mandated capitalisation and actual capitalisation, instead of using an absolute threshold. This is to better capture the headroom of supranationals’ balance sheets and loss-absorbing capacity vis-à-vis limits allowed under an institution’s statutes or credibly enforced operational guidelines.

We propose to increase the maximum uplift from portfolio quality from ‘Very Strong’ to ‘Excellent’ to better reflect rating uplift from exceptionally strong portfolio quality relative to other rating factors.

Finally, for capitalised institutions, we propose to introduce an indicative rating for the intrinsic credit profile. This is to better reflect the supranational’s stand-alone credit profile independent from shareholder support. This analytical step will also allow us to rate hybrid debt instruments for which no shareholder support can be assumed.

Call for comments

Scope invites investors, issuers, policymakers and other interested parties to comment on the methodology by 10 June 2024, as part of the agency’s ongoing commitment to transparency and open dialogue with market participants.

Please send your comments to consultation@scoperatings.com.

Scope will review market participants’ comments on the proposed methodology and will publish the final version of this rating methodology with a feedback report thereafter.

The ‘Supranational Ratings Methodology – Call for Comments’ is available for download at www.scoperatings.com or on this link.