Can We Uncover The Subtext Behind Credit Ratings Research? Part III

Efficient ways to perform text analysis of S&P Global Ratings’ credit ratings research* using machine-readable technology

This is the third and final blog in the series. Click to read the first or second blog.

In our first two blogs, we explored the ability to spot trends in credit ratings research compared to earnings transcripts, and three ways to uncover additional insights from credit ratings research. In this blog, we look at how to use textual data analysis of these reports to uncover regional differences in key themes that may lead to potential credit ratings changes.

Differentiating the Key Areas of Credit Risk Across Geographies

Text analysis of credit ratings research can be used to detect early-warning signals of potential changes to credit ratings. The reports can also be analyzed to uncover differences in key themes driving potential credit ratings changes across geographies.

Word clouds are graphical representations that give greater prominence to words that appear more frequently in a source text. The larger the word in the visual, the more the word was used in the document(s). In Figure 1 below, we analyzed all the S&P Global Ratings research reports published during the three months leading up to November 2020. We then created word clouds of keywords mentioned for North American entities and for Asia Pacific entities. In this simple analysis, we looked at all sections of the reports, including those describing financial risk and business risk, which could explain some of the keywords from financial statements.

Figure 1: Sample of geographic differences in key themes contained in credit ratings research

Source: RatingsXpress: Research, S&P Global Market Intelligence, as of November 2020. For illustrative purposes only.

It is interesting to note that there are a few common themes across geographies:

• Pandemic/COVID-19
• Negative
• Loan
• Capital

In North America, the keywords highlight an emphasis on financial risk:

• Bank
• Finance
• Liquidity
• Structured Finance
• (Interest) Rate
• Default

In Asia, however, the keywords are more closely related to business risk (e.g., macro, top-line growth, and China):

• Government
• China
• Investments
• Growth
• Sector
• Operations

When we drill down into the business risk components of Asia Pacific-based corporates, we find that there is a negative skew in the Corporate Industry and Country Risk Assessments (CICRAs), indicating that there could be systemic vulnerability of a good number of Asia Pacific corporates to a macroeconomic or industry downturn and/or political (country) risk in some developing markets.

On the other hand, the financial risk profiles (i.e., financial leverage and the ability for companies’ cash flows to service these debt obligations on a forward-looking basis) appear to be the Achilles heel for North American corporates.

Chart 1: Distribution of CICRA scores of Asian corporates