The proposed update to the methodology can be downloaded here.

The proposed update provides refinements and further clarifications to Scope’s analytical approach for assigning credit ratings to government related entities (GREs). The GRE Methodology continues to be based on a qualitative ‘segmentation-approach’ to account for the wide variety of entities and organisations, varying jurisdictions and resulting different relationships of GREs with their respective public sponsors.

Methodology highlights

Scope’s approach starts with the analysis of the strength of the relationship between the GRE and its public sponsor. Based on the GRE’s level of integration with the sponsor, Scope then chooses either the ‘Top-Down’ or ‘Bottom-Up’ approach and determines the primary driver of the GRE’s rating.

The ‘Top-Down’ approach takes the public sponsor’s rating as the starting point and then applies indicative notching based on Scope’s assessment of i) the ‘control and regular support’ and ii) the ‘likelihood of exceptional support’ for the GRE.

Scope’s ‘Bottom-Up’ approach starts with the assessment of the GRE’s stand-alone credit quality, and then, applies credit uplift factors. The extent of the upward notching is based on Scope’s assessment of i) the public sponsor’s ‘capacity to provide a credit uplift’, and ii) the public sponsor’s ‘willingness to provide support’.

Under both approaches, in case of an explicit guarantee covering the GRE’s debt obligations, Scope will align the GRE’s rating with that of the public sponsor.

In a third step, Scope performs a supplementary analysis which can have credit-positive or negative implications for the final rating or no implications at all. This can include an assessment of the fundamentals of the GRE (under the ‘Top-Down’ approach) and the risk of potential negative interventions by the government (under both approaches).

Summary of the proposed key changes

With this update of the methodology, Scope proposes to:

• Provide clarifications with regards to issuer ratings, debt instrument ratings, the assessment of different debt categories as well as local and foreign currency ratings;
   
• Broaden the application of the approach via the definition of a public sponsor for entities where effective control over the GRE lies with a different level of government than the one owning it;
   
• Refine the qualitative assessment guidance tables for the analytical components to determine the strength of the relationship between the GRE and its public sponsor under Qualitative Scorecard 1 (QS1), encompassing the GRE’s: i) Legal status; ii) Purpose & activities; iii) Shareholder structure; and iv) Financial interdependencies;
   
• Refine the qualitative assessment guidance tables for the analytical component of ‘Evidence of financial support’ under Qualitative Scorecard 2 (QS2), to encompass different variations of financial support;
   
• Modify the output of Qualitative Scorecard 3 (QS 3) under the ‘Bottom-up’ approach, with a refinement of the uplift notching, and application of additional notching which is foreseen in rare cases; and
   
• Introduce a threshold for the application of the equalisation factor when the public sponsor guarantees more than 75% of a GRE’s debt, provided there are no concerns regarding the timeliness of payments or a significant reduction in the level of the guarantee.

Call for comments

Scope invites investors, issuers, policymakers and other interested parties to comment on the methodology as part of the agency’s ongoing commitment to transparency and open dialogue with market participants. Please send your comments by 29 July 2024 to consultation@scoperatings.com. Scope will review and publish the content of written responses in accordance with regulatory requirements unless the respondent has specifically requested confidentiality.