On Jan. 17, 2024, S&P Global Ratings published a request for comment (RFC) that presents the principles it applies when assessing the creditworthiness of assets or entities it doesn't rate, when this information is required to inform its rating analysis (see "Request For Comment: Methodology For Determining Ratings-Based Inputs"). These principles, which are materiality-based, are already reflected in our sector-specific criteria. The RFC's proposal includes updates to the way we incorporate ratings from other credit rating agencies (CRAs). We're publishing this article to provide answers to questions we anticipate some market participants may have regarding the RFC to help them better understand the updated framework proposal.
QUESTIONS AND ANSWERS
What do you need to know?
- The RFC explains how we consider materiality in our use of ratings-based inputs to consistently support the quality of our ratings.
- We may use ratings from all other regulated CRAs with ratings that are included in a publicly available regulatory mapping table.
- When using other CRA ratings as inputs, we will do so without notching (adjusting) them.
- When a CRA rating is available that we're not able to incorporate as a rating input, we will determine the rating input based on the information available to us.
Do the proposals in the RFC affect the analytical approach to third-party CRA rating inputs described in the criteria article "Insurer Risk-Based Capital Adequacy--Methodology And Assumptions" Nov. 15, 2023?
No. That analytical approach is consistent with the RFC's proposed approach.
Why is S&P Global Ratings proposing these changes?
The RFC is a new article that aims to provide additional transparency on our approach to considering ratings-based inputs. It details, in one place, the materiality-based framework we intend to apply consistently across the full spectrum of our criteria. The framework enables an expansive use of other CRA ratings as inputs into our analysis, without notching, while ensuring that the ratings we assign reflect our opinion and are consistent with our rating definitions.
Why is materiality important?
Materiality matters because we seek to assign ratings, through the application of our methodologies, that are consistent with our ratings definitions and that reflect our credit opinion. While other CRAs can be a meaningful source of information on the creditworthiness of assets we don't rate, they also have their own credit opinions based on their rating definitions, which may differ from ours. Therefore, we need to be mindful of the materiality of the exposures for which we use other CRAs' ratings to ensure that our rating outcomes remain reflective of our credit opinion.
Are there circumstances where S&P Global Ratings won't use other CRA ratings as inputs in its analysis, and if so, why?
Yes, there are circumstances where we will not use other CRAs' ratings. This is because we need to ensure that, in all cases, the ratings we ultimately assign reflect our own opinion and are consistent with our rating definitions. As further described in the RFC:
- Substantial drivers: For substantial rating drivers, such as repackaged securities, we will only use our ratings-based inputs. Otherwise the rating we assign would not reflect our opinion.
- Primary drivers: For primary rating drivers where the rating input is material, we will incorporate CRA ratings that we expect to be sufficiently close to ours to ensure that the ratings we ultimately assign are consistent with our own rating definitions. When we're not able to confirm this sufficient level of comparability, we will not incorporate the other CRA ratings. Instead, we would conduct our own analysis, looking to other sources of information to determine the appropriate rating input.
- Secondary drivers: For secondary rating drivers, we incorporate ratings from all CRAs as inputs into our analysis as long as they are regulated and we have access to a public prudential mapping scale.
What would lead S&P Global Ratings to perform a comparability review of a given CRA's ratings?
We will conduct comparability reviews only in the context of primary rating drivers. We will perform these reviews to the extent that the CRA has ratings on assets in the pools we analyze to assign a credit rating to an issue or issuer. We won't perform comparability reviews of other CRA ratings for secondary rating drivers.
How would such a comparability review be conducted?
When we review the comparability between our credit ratings and another CRA's ratings, we conduct an analysis of the ratings the CRA assigns, generally on a broad sector level. We consider both historical ratings performance (historical default and transition analysis) and a review of issuers or issues that carry ratings from us and the other CRA (overlapping ratings analysis) based on information made available to us.
For primary rating drivers, what's currently the outcome of your comparability reviews?
Given available data regarding assets rated by other CRAs that we're seeing in the pools we've reviewed so far, we view ratings from Moody's and Fitch as sufficiently comparable to our own for us to incorporate in the application of sector-specific criteria.
Will this methodology change affect any outstanding ratings?
If implemented as proposed, these criteria will lead to changes to 23 criteria articles and/or their related guidance. We expect no ratings impact from the application of these changes, except for:
- Fixed-income funds with fund credit quality ratings: We expect we could raise up to 15% of these ratings by one notch;
- Leveraged funds rated under our market value securities criteria: We anticipate raising 6% of these ratings by up to two notches; and
- Structured settlement securitizations: We could raise up to 7% of these ratings by up to two notches.
Related Request For Comment
Related Criteria
Related Research
This report does not constitute a rating action.
| Analytical Contacts, Structured Finance: | Belinda Ghetti, New York + 1 (212) 438 1595; belinda.ghetti@spglobal.com |
| Winston W Chang, New York + 1 (212) 438 8123; winston.chang@spglobal.com | |
| Analytical Contact, Bond Insurance: | David S Veno, Princeton + 1 (212) 438 2108; david.veno@spglobal.com |
| Analytical Contact, International Public Finance: | Alexander Ekbom, Stockholm + 46 84 40 5911; alexander.ekbom@spglobal.com |
| Analytical Contact, U.S. Public Finance: | Lisa R Schroeer, Charlottesville + (434) 529-2862; lisa.schroeer@spglobal.com |
| Analytical Contact, Managed Funds: | Andrew Paranthoiene, London + 44 20 7176 8416; andrew.paranthoiene@spglobal.com |
| Methodology Contacts: | Claire K Robert, Paris + 33 14 420 6681; claire.robert@spglobal.com |
| Erkan Erturk, PhD, New York + 1 (212) 438 2450; erkan.erturk@spglobal.com | |
| Nik Khakee, New York + 1 (212) 438 2473; nik.khakee@spglobal.com | |
| Andrew M Bowyer, CFA, London + 44 20 7176 3761; andrew.bowyer@spglobal.com | |
| Lapo Guadagnuolo, London + 44 20 7176 3507; lapo.guadagnuolo@spglobal.com |
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