Definition and Use of Credit Ratings
What is a credit rating?
A credit rating is an opinion that provides a measure of credit quality. It is an unbiased, independent, third-party evaluation of an issue or issuer. It is a grading system which focuses on a company’s capability and willingness to pay its obligations upon maturity.
Can a credit rating guarantee that an investor will not suffer losses?
A credit rating is not a guarantee against future losses, nor it is a recommendation to buy or sell a specific security. It is a tool that can be used by investors, regulators, and the general public to augment their own assessment of a particular investment.
What are the types of credit rating available?
There are issue credit ratings, issuer, and financial strength credit ratings.
An issue credit rating assesses a company’s capability to pay a specific debt instrument according to the terms (e.g. amount, maturity) of the issue. An issue credit rating is typically obtained for bonds and bank loans.
An issuer credit rating, also sometimes called corporate credit ratings or company ratings or counterparty credit ratings, is a measure of a company’s over-all creditworthiness. An issuer credit rating can be obtained for commercial paper issuances, to rate companies in general, or for any other transaction does not require an issue credit rating.
A financial strength credit rating is a measure of an insurance company’s financial security.
What are credit ratings used for?
A credit rating is typically used to obtain funding from the public. Raising funds from the capital markets provides a company with improved financial flexibility and can allow it to negotiate for better terms and interest rates.
A credit rating can also be used for marketing and benchmarking purposes as through the rating process, a company’s strengths, weaknesses, opportunities, and threats will be highlighted.
On the part of regulators and investors, credit ratings can assist in their own evaluation and monitoring of specific companies and instruments. Credit rating agencies typically have access to confidential information which will not be readily available to other market participants.
Credit Rating Fees
Who pays for the credit rating fee?
The company applying for a credit rating pays for the fee. The fee is paid upfront, similar to the practice of rating agencies worldwide.
Since the company applying for a credit rating pays for the fee, will this result in a conflict of interest?
Credit rating agencies (both domestic and international) have similar practices of generating rating fees from the companies that they rate. Payment of the fee, however, should not influence or impact the final credit rating that is eventually assigned to the company.
A credit rating agency must be perceived as objective, independent, and transparent, regardless of which entity pays for the credit rating fee.
PhilRatings and Its Credit Ratings
Who is PhilRatings?
PhilRatings is the pioneer and leading domestic credit rating agency in the Philippines. It started providing credit rating services in 1985. It is accredited by the Securities and Exchange Commission (SEC) and recognized by the Bangko Sentral ng Pilipinas (BSP) as a domestic credit rating agency for bank supervisory purposes. It is 70%-owned by Go Kim Pah Foundation and 30%-owned by CIBI Foundation, Inc. It was initially part of a company known as Credit Information Bureau, Inc. (CIBI) which was established by the SEC, Central Bank of the Philippines, and the Financial Executives Institute of the Philippines (FINEX) in 1982 to serve as a third-party source of business and credit information.
PhilRatings is a founding member of the Association of Credit Rating Agencies in Asia (ACRAA) which has credit rating agencies in Asia as members.
What do PhilRatings’ credit ratings express?
PhilRatings’ credit ratings express probability of default. As one goes down the PhilRatings’ credit rating scale from highest to lowest rating, the probability of default increases and capability to pay maturing obligations decreases.
A default occurs when there is non-payment on interest, any amortization, or principal when due.
Why should a company get a credit rating from PhilRatings?
PhilRatings has a 38-year track record in domestic credit rating. It is knowledgeable about local market conditions, has established ties with market participants and information sources, and conducts its credit rating in a professional, courteous and thorough manner. It has likewise demonstrated its ability to safeguard the confidentiality of information provided for credit rating and to adequately manage conflict-of-interest situations. All confidential information received from a client is not shared with any other party and is just used for internal credit rating purposes. Any Rating Committee member who may also have a “perceived” or “actual” conflict-of-interest, whether for or against a particular account, does not participate in the credit rating process or credit rating deliberations for the said account.
How much does PhilRatings charge for a credit rating?
PhilRatings’ fees depend on the amount of time and effort needed to complete a credit rating. For issue credit ratings, the fee is tied to the amount to be issued. For issuer credit ratings, it is tied to the asset size. PhilRatings’ fee structure is reviewed on a regular basis and may be adjusted at any time.
How does a company go about getting a credit rating from PhilRatings?
The company or its underwriter can get in touch with PhilRatings at (02)8812-3210 or at 8812-3215. They may also send inquiries to Ms. Lourdes Tabarina (Vice President and Head — Credit Rating — Financial Institutions) at tabarina@philratings.com.ph and/or Mr. Bogie Indiongco (Vice President and Head — Credit Rating — Corporates and Structured Finance) at bogie_indiongco@philratings.com.ph.
Upon receipt of the inquiry and after initial queries and discussions, PhilRatings will provide the prospective client with a credit rating proposal and a list of initial information requirements for credit rating. PhilRatings will also meet with the prospect to explain the credit rating process. Once a decision has been reached in terms of obtaining a credit rating, a Rating Agreement will need to be signed by PhilRatings and the client to formalize the rating engagement.
How does PhilRatings publicize its credit ratings?
PhilRatings publicizes its credit ratings via reports submitted to the SEC, as well as the preparation of press releases and rating write-ups. These are provided to the general public free of charge. Information is likewise available at the company’s official website and via its social media platforms on Facebook, Twitter, and LinkedIn.
Does the company do unsolicited ratings?
PhilRatings does not do unsolicited ratings. As a credit rating agency, PhilRatings believes that it is essential to get the full cooperation of the company and to be able to obtain complete information so that a fair and appropriate rating for the issue or issuer can be assigned.
Does the company do private credit ratings?
PhilRatings can do private credit ratings. Prior to acceptance by any company of their final credit rating, all credit ratings are kept private. Even the fact that the company is undergoing the credit rating process is likewise kept confidential. At the end of the credit rating process, the final credit rating can still be kept confidential provided that the company being rated does not issue debt securities to the public.
Once issued, can credit ratings be withdrawn?
Ratings can be withdrawn due to the following reasons:
1. Rated debt security has been paid in full upon maturity.
2. Company has decided not to renew its credit rating agreement after the yearly agreement lapses.
3. Company being rated does not provide enough information which PhilRatings can use as basis for regularly updating and monitoring the credit rating.
As much as possible, PhilRatings refrains from withdrawing credit ratings due to lack of information for surveillance purposes.
How many credit ratings has PhilRatings issued?
As of the end of May 2021 and since 1985, PhilRatings has published 590 issue and issuer credit ratings for 144 companies, with the total amount of rated debt at P1.7 trillion.
What types of issues and issuers has PhilRatings evaluated to date?
PhilRatings has evaluated corporates in various sectors, banks and financial institutions, government institutions, insurance companies, as well as structured finance transactions. It has also rated local government units and insurance companies on a private, confidential basis for exclusive use by specific parties and entities.
How many defaults have there been to date?
As of the end of May 2021, PhilRatings has recorded five defaults out of 590 issues and issuers (representing 0.85% of total number), with all defaults occurring after the Asian financial crisis in 1997. Of the total estimated issue amount, accounts which went into default corresponded to debt issues amounting to P6.7 billion or 0.40% of total issue amount since 1985.
Since 2003, however, PhilRatings has not recorded any case of default. The company’s annual default rate remained at 0% for the last 20 years.
Credit Rating Process and Criteria
How long does the credit rating process take?
The credit rating process can take anywhere from four to eight weeks from submission of complete information for credit rating and the signing of a rating agreement with PhilRatings. The actual timeframe depends on the type and complexity of the issue and/or issuer, as well as the nature of the transaction.
What does the credit rating process consider?
A credit rating agency considers various qualitative and quantitative factors to arrive at the final credit rating. These can be generally classified into two general categories of risk: Business Risk and Financial Risk. Business Risk covers items such as Industry Characteristics and Prospects, Market and Competitive Position, Operating Efficiency, and Management Quality and Shareholder Strength. Financial Risk considers the aspects of Profitability, Cash Flow and Liquidity, Capital Adequacy, and Financial Flexibility.
The general framework for credit analysis applies across industries and sectors although specific rating criteria would be considered on a per sector (e.g. corporates, banks, and financial institutions) basis.
How often is a credit rating reviewed?
The account is reviewed on a continuous basis. Analysts keep themselves informed of developments relating to their respective accounts and industries.
Can a credit rating change?
A credit rating can be changed at any time depending on prevailing circumstance and/or prospects. Any potential upgrade or downgrade, however, will require a meeting or discussion with the company concerned to ensure the accuracy of facts and rating considerations in arriving at the revised credit rating.
How important are management meetings? Who are expected to participate?
Management meetings are an important component of the credit rating process. These provide opportunities for the Rating Committee to obtain information on an account and to assess the quality of management.
On the part of the company being rated, the Chief Executive Officer and Chief Finance Officer typically participate in the management meetings for credit rating. Other key officers overseeing the different functional areas (e.g. marketing, operations) may also participate as the company sees fit.
If the company being rated does not agree with the credit rating assigned, what remedies exist?
Credit rating agencies have an appeal process whereby the company being rated may appeal the credit rating provided that there is new information to be considered.