by ms. watana tiranuchit ms. nopalak rakthum tris rating ... · ms. nopalak rakthum tris rating...
TRANSCRIPT
ByMs. Watana Tiranuchit
Corporate Credit Rating
1
Ms. Watana TiranuchitMs. Nopalak RakthumTRIS Rating Co., Ltd.
3 September 2015
Content (1)
Importance of Credit Rating
Definitions and Symbols
Credit Rating Process
Credit Rating Methodology
2
TRIS Rating Statistics
Credit Rating Fee
FAQ
Credit Rating Methodology
Importance of Credit Rating
3
Importance of Credit Rating
Why do companies need ratings?• To issue debt in capital market (wider fund
raising alternatives in terms of size, maturity, covenant packages)
• Required by the SEC
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• Required by the SEC– Bond sold to retail investors– Bond with complicate structure
• Required by the investors
• To negotiate more favorable terms with banks• To evaluate its credit risk
Bond market vs. Bank loan Bank Loan
Indirect Lending
Bank Companydeposit Lend
Depositor
Bond Market Direct Lending
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Investors Company
Bonds
Lend
Rating Agency
Comparison of MLR and Bond Yield
6
*Average 3-year bond yield
20,000,000
25,000,000
30,000,000
35,000,000
Thai Financial Markets
Ba
ht
Mil
lio
nEquity = 44%
Lending = 49%
Debt market = 7%
7
-
5,000,000
10,000,000
15,000,000
Equity Market Lending from Financial Institutions Debt Market
Ba
ht
Mil
lio
n
Thai Bond Market
5,0006,0007,0008,0009,000
10,000
Bah
t B
illio
n
Corporate Bonds = 20% of Total Bonds
8
Source: Thai BMA
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Jul-15
Corporate 548 660 943 1,069 1,109 1,344 1,265 1,499 1,453 1,593 1,827 1,953 Government 2,192 2,700 3,127 3,793 3,919 4,714 5,509 5,751 6,826 6,992 6,967 7,260
01,0002,0003,0004,0005,000B
aht
Bill
ion
*As of July 2015
New Corporate Bond Issuance
300,000
400,000
500,000
600,000B
aht M
illio
n
Fixed Income Instruments9
0
100,000
200,000
300,000
Bah
t Mill
ion
40%
50%
60%
70%
80%
90%
100%
New Corporate Bond Issuance by sector
10
0%
10%
20%
30%
40%
2007 2008 2009 2010 2011 2012 2013 2014 Jul-15
Bank Leasing Energy Residential Telecom Others
Definitions and Symbols
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Meanings of the Credit Rating
“The opinion of the rating agency about relative ability and the willingness of the company to repay ability and the willingness of the company to repay its obligations, including principal and interest, in full and on time”
• Rating reflects the relative ranking of “Default Risk” of the company
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Types of Ratings• Corporate rating (Company rating / Issuer rating)
– Reflects the ability and willingness of the company to repay its total obligations
• Issue ratings– Issue ratings may be different from the company rating due – Issue ratings may be different from the company rating due
to differences in structure and/or the seniority of each issue• Senior Secured bonds• Senior Unsecured bonds
• Subordinated bonds• Hybrid bonds• Guaranteed bonds• Securitized bonds
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Example of Issue Rating
Senior secured debentures
A+
Debt Type
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Senior unsecured debentures
Subordinated debentures
Guaranteed debentures
AAA
A
A-
Issuer Rating
A
Guarantor
AAA
“Credit Rating” V.S. Level of RiskRating Category Risk Grade
AAA Lowest
Investment Grade
AA+
AA
AA-
A+
A
A-
BBB+
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BBB+
BBB Medium
BBB-
BB+
Speculative Grade
BB
BB-
B+
B
B-
C Highest
D Default
Credit Rating Agency
There are two types of CRAs
1. International Credit Rating Agency : Provide the rating services to both sovereigns and companies
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rating services to both sovereigns and companies globally
2. Domestic Credit Rating Agency : Provide the rating services to companies within a specific country or region
List of Major International CRAs
Name Headquarter
Standard & Poor’s (S&P) USA
Moody’s Investors Service (Moody’s) USA
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Moody’s Investors Service (Moody’s) USA
Fitch Ratings (Fitch) USA, UK
Rating and Investment Information, Inc. (R&I) Japan
Japan Credit Rating Agency, Ltd. (JCR) Japan
Examples of Local CRAs
Name Headquarter
TRIS Rating Co., Ltd. Thailand
Rating Agency Malaysia Berhad Malaysia
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Rating Agency Malaysia Berhad Malaysia
CRISIL Limited India
PEFINDO Credit Rating Indonesia Indonesia
Philippine Rating Services Corporation Philippines
S&P Clients in Thailand vs. TRIS Rating
NameS&P
TRIS RatingForeign Local
THAILAND BBB+/Stable A-/Stable
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BAY BBB+/Stable BBB+/Stable AAA/Stable
PTTEP BBB+/Stable BBB+/Stable AAA/Stable
RATCH BBB+/Stable BBB+/Stable AAA/Stable
TMB BBB-/Stable BBB-/Stable A+/Stable
As of 28 Aug 2015
Rating SymbolTRIS Rating S&P Moody’s
AAA AAA AaaAA+ AA+ Aa1AA AA Aa2AA- AA- Aa3A+ A+ A1A A A2A- A- A3
BBB+ BBB+ Baa1
BBB BBB Baa2BBB - BBB - Baa3
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BBB - BBB - Baa3
BB+ BB+ Ba1BB BB Ba2
BB- BB- Ba3
B+ B+ B1B B B2
B- B- B3C+ CCC+ Caa1C CCC Caa2C- CCC- Caa3
CC Ca
RD SD and D C
Credit Rating ProcessCredit Rating Process
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Credit Rating ProcessCredit Rating Process
Initial Rating Process
� INFORMATION GATHERING
� INTERVIEW MAJOR DEPT. & SITE VISIT
� MANAGEMENT/
DISAGREE
RATING COMMITTEE
MEETING
•APPEAL WITHIN 7 DAYS•PROVIDE NEW DATA WITHIN 15 DAYS WITH-
DRAWN
INFORM RATING TO
ISSUER
ANALYSIS
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� MANAGEMENT/AUDIT COM. MEETING
MEETING
RATING ANNOUNCEMENT
KEEPCONFIDENTIAL
6 WEEKS 2 WEEKS
* For more details, please see www.trisrating.com/ Rating Information/Rating Process
ISSUERACCEPT
MONITOR & ANNUAL REVIEW
MONITOR & ANNUAL REVIEW
Annual Review Process• INFORMATION
UPDATE
• MANAGEMENT MEETING
RATING COMMITTEE
MEETING
2-3 WEEKS 2 WEEKS
INFORM REVIEW RESULT
TO ISSUER
ANALYSIS
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CANCELLATION ANNOUNCEMENT
RATING ANNOUNCEMENT
KEEPCONFIDENTIAL
* For more details, please see www.trisrating.com/ Rating Information/Rating Process
MONITOR & ANNUAL REVIEW
MONITOR & ANNUAL REVIEW
WITH-DRAWN
List of Preliminary information required
PAST / CURRENT / PROJECTION� Background information of the company� Shareholder structure� Organization of management� Investment in related companies� Business policy / Marketing policy / Pricing policy� Operating data and market research� List of major customers / supplier / competitors� Financial data i.e. breakdown of revenue and cost structure� Debt profile / major loan agreements� Financial projection, including CAPEX & investment plan� Etc. i.e. other contractual agreements, audit committee report
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Rating Monitoring & Report• Initial Rating & Annual Review
Report:– Assign / affirm / change : Rating and/or Outlook
• New Issue RatingReport:– Assign rating for new issue; – Affirm : Rating and/or Outlook (can be changed if necessary)– Affirm : Rating and/or Outlook (can be changed if necessary)
• Quarterly Monitoring– Projection comparison
• Special Monitoring (event risks)Report:
– Credit Update Affirm / change : Rating and/or Outlook
– Credit Alert Remove Outlook & replace with Alert : positive / negative / developing
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Credit Rating MethodologyCredit Rating Methodology
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Credit Rating MethodologyCredit Rating Methodology
• Industry Analysis
• Business Analysis
Key Rating Factors
• Business Analysis
• Financial Analysis
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Rating ProcessIndustry Analysis Business Analysis
Business Risk Financial Risk
Financial Analysis
28
Rating Assignment by Rating Committee
Monitoring Process
Industry Analysis
1. Nature of the company’s industry2. Industry prospects2. Industry prospects3. Level of competition
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Industry Analysis (1)
1. Nature of the company’s industry• Cyclicality of the industry, vulnerability to
change in the economychange in the economy
• Evolving or well-established industry
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Industry Analysis (2)
2. Industry prospects• Demand growth potential • Secular change of product/technology• Secular change of product/technology
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Industry Analysis (3)
3. Level of competition• Competitive environment: number of players,
demand-supply balance• Barriers to entry: business nature or regulation
• License requirement• Capital intensive• Sophisticated technology
• Threats of substituted products• The degree of product differentiation (branded)
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Business Analysis
1. Strategy & management
2. Ownership & group support2. Ownership & group support
3. Diversification4. Competitive position
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Business Analysis (1)
1. Strategy & Management• Long term strategy, strategic planning, decision
makingmaking• Track record and competency of management team• Management team structure, continuity and
succession• Control, auditing, risk management and information
system
34
Business Analysis (2)
2. Ownership & Group support • On-going supports either financially or
operationallyoperationally• Business synergy and group performance• Strengths derived from parent and/or subsidiary
support
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Business Analysis (3)
3. Diversification• Diversity of business - product lines,
customer base, market segments, customer base, market segments, geographic
• Ability to manage diverse operations
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Business Analysis (4)
4. Competitive PositionMarket position
– Market share, size, scale– Brand reputation/awareness– Assets quality– Product quality – Marketing networks / logistics / distribution channels – Customer base– Technological advantage, innovation, R&D
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Business Analysis (5)
4. Competitive Position (cont.)Operational Efficiency/Cost competitiveness– Economies of scale:- capacity and utilization– Economies of scale:- capacity and utilization– Operating skills:- production yield, waste reduction– Procurement of raw materials and inventory management– The efficiency of worker– Quality control– Cost structure
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Financial Analysis
Qualitative Analysis • Accounting quality• Financial policy• Financial policy
Quantitative analysis• Capital structure• Profitability• Efficiency• Cash flow protection and liquidity
39
Financial Analysis (1)Qualitative Analysis
• Accounting quality– Disclosure of information– Auditor’s report/opinion– Auditor’s report/opinion– Changes in accounting policies
• Financial policy– Funding policy – Target capital structure– Dividend policy– Reserves for bad debts or policies for writing off
obsolete Inventory– Hedging policy
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Financial Analysis (2)
Quantitative analysis1. Capital structure
• Leverage level, D/E ratio• Leverage level, D/E ratio• ST loans vs. LT loans• Major adjustments for off-balance sheet obligations
– Operating leases – Financial guarantees/ supports provided to related parties– Litigations– Potential penalties
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Financial Analysis (3)
2. Profitability• Gross profit margin• Operating profit margin• Net Profit Margin• ROA , ROE, ROPC (return on permanent
capital)
42
Financial Analysis (4)
3. Efficiency• Inventory turnover / Inventory days• A/R days• A/R days• A/P days• Operating cash cycle
Very important for trading firms/ retailers to determine level of cash flow needed for normal operation
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= AR days +Inventory Days – AP days= AR days +Inventory Days – AP days
Financial Analysis (5)4. Cash flow protection and liquidity4.1 Cash Flow Protection
• FFO/total debts• Interest coverage ratio• DSCR = debt service coverage ratio• Refinancing risk
4.2 Liquidity/financial flexibility• Cash on hand• Unused credit lines: committed vs. uncommitted • Accessibility to capital and money markets• Other liquid assets• Support from shareholders
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Industry
BusinessCompany
Business
Financial
Company
Rating
45
Outlook ���� แนวโน้มอันดับเครดติ
“ Rating outlook will always be assigned to all long-term ratings”
“ Rating outlook ���� potential for change over medium term (1-2 years)”
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stable (คงที�) = not likely to changepositive (บวก) = likely to be raisednegative (ลบ) = likely to be lowerdeveloping (ยังไม่ชัดเจน) = may be raised, lowered or unchanged
Credit Rating Fee
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Credit Rating Fee
Credit Rating Fees• Annual Fee
– Company rating– Issue rating– Issue rating
• Site Visit expenses
• Legal Fee (if any)
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TRIS Rating Statistics
49
TRIS Rating Statistics
TRIS Rating’s Rated Issuers• 370 issuers since 1993, with total issue size of approximately Bt2.9 trillion• 159 outstanding rated issuers as of 19 August 2015 (published 132/ private & in the rating process 27)• Rated issuers include both Thai and multinational corporations• Ratings assigned to diverse sectors
Sector No. of Rated Issuers
Financial Institutions 41
Property Developers 27
50* As of 19 Aug 2015* As of 19 Aug 2015
Property Developers 27
Energy 18
Agro & Food 15
Engineering & Construction 9
Transportation 7
Telecom 8
Commerce 5
Healthcare Services 3
Others 26
TOTAL 159
Rating Distribution
15
20
25Category A = 39.31%
BBB = 35.86%
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0
5
10
15
AAA AA+ AA AA- A+ A A- BBB+ BBB BBB- BB+ BB to D
As of 7 Aug 2015
Engineering & Construction
40
60
80
% N
o. o
f clie
nts
52
AAA AA+ AA AA- A+ A A- BBB+ BBB BBB - BB+ to D
% 0 0 0 0 0 0 22 11 11 56 0
0
20
40
% N
o. o
f clie
nts
As of Aug 2015
Energy
40
60
80
% N
o. o
f clie
nts
53
AAA AA+ AA AA- A+ A A- BBB+ BBB BBB- BB+ to D
% 17 0 0 0 22 6 11 11 22 0 0
0
20
40
% N
o. o
f clie
nts
As of Aug 2015
Agri & Food Industry
40
60
80
% N
o. o
f clie
nts
54
AAA AA+ AA AA- A+ A A- BBB+ BBB BBB- BB+ to D% 0 0 21 21 14 14 0 0 14 0
0
20
40
% N
o. o
f clie
nts
As of Aug 2015
Residential Developers
40
60
80
% N
o. o
f clie
nts
55
AAA AA+ AA AA- A+ A A- BBB+ BBB BBB- BB+ to D
0 0 0 0 5 10 5 19 10 24 14
0
20
40
% N
o. o
f clie
nts
As of Aug 2015
Frequently Asked Questions about Credit Ratings
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about Credit Ratings
Frequently Asked Questions• Which industry has the high/low credit risk?• How does the industry cycle affect the rating of a
company?• When will the rating change? Time horizon of rating.• When will the rating change? Time horizon of rating.• What is the default rate of each individual rating
category? Can “AAA” default?
57
Which Industry has the High/Low Credit Risk?
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High/Low Credit Risk?
“Industry risk influences but not the only risk that determine a company credit rating”
Industry risks + Business risks + Financial risks Credit risks Ratings
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High Risk Industries1. Highly cyclical
� residential property, shipping, steel
2. Intensive competition: many players, commodity products products � petrochemical, construction materials, airline, contractor,
semiconductor
3. Expose to (uncontrollable) external factors� agricultural products, airlines, hotel
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High Risk Industries4. Rapid change of technology
� internet, semiconductor
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Low Risk Industries1. Steady demand growth
� Utility i.e. electricity, water
2. Ability to maintain margins� Branded consumer products� Branded consumer products
3. Monopoly� Air traffic control
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How the Industry Cycle Affects the Rating of a Company?
63
When Will a Rating Change?
“A credit rating for a company at any time incorporates industry cycle and expectation about risks of the expectation about risks of the company over the medium term.”
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• Industry cycles �demand fluctuation, and swings of supply capacity
• Exception, when the cycle and/or the • Exception, when the cycle and/or the company’s performance is substantially different from initial expectation
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Rating Through the Cycle
Highest
Rating
6666
Lowest
Present Future (3-5 years)Past
Change of Rating
A-
A
A-
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FuturePresent
BBB+
Past
“ Rating of a company will be changed when a company risks differ from previous expectation significantly and permanently.”significantly and permanently.”
“ Rating of a lower rated companies will be more likely to change than a higher rated.”
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What is the Default Rate of Each Individual Rating Category?
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Can AAA Default?
Cumulative Defaulters By Time Horizon Among Global Corporates, From Original* Rating (1981-2014)
AAA AA A BBB BB B CCC/C TotalNumber of issuers defaulting within
one year 3 12 70 68 153
Three years 1 6 28 132 508 137 812
Five years 4 13 68 273 837 165 1,360
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Five years 4 13 68 273 837 165 1,360
Seven years 2 7 27 99 365 1,016 174 1,690
Total 8 30 91 191 555 1,242 184 2,301
Source: S&P’s : Default, Transition, and Recovery:
2014 Annual Global Corporate Default Study And Rating Transitions
30-Apr-2015
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Q & A
THANK YOU
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Contact Person:
Business Development Department:Ms. Kornkamol Thavisin [email protected]
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TRIS Rating Co., Ltd.24th Floor, Silom Complex Building
Tel: 0-2231-3011#218Fax: 0-2231-3012www.trisrating.com
Most Frequently Asked Questions About Credit RatingAbout Credit Ratingby
Nopalak Rakthum
1
Emerging of New Financial Instruments
• Over the past 20 years, new financial instruments and rating concepts emerged and developed
– National scale
– Parent guaranteed; Partial guaranteed
Asset-backed securities– Asset-backed securities
– Government related entities
– Hybrid capital instruments
– Sovereign rating and T&C
– Group rating
2
Most Frequently Asked QuestionsAbout Credit Rating
1. What are the differences of the ratings assigned by TRIS Rating vs other CRAs?
2. When the rating could not be assigned?
3. How to rate the related companies (group rating) ?3. How to rate the related companies (group rating) ?
4. How can the rating of issuer be enhanced or notched down or capped?
5. How can the rating of specific issue be enhanced or notched down or capped?
3
Most Frequently Asked QuestionsAbout Credit Rating (continued)
6. What are rating factors of hybrid capital instruments?
7. How much equity content will be given to a specific characters of hybrid capital instruments ?
8. What is the maximum equity content allowed for an issuer?issuer?
9. What are rating factors of sovereign rating ?
10. Can the sovereign rating assigned by TRIS Rating compare with other ratings assigned by TRIS Rating, i.e. corporate ratings?
11. What are factors that TRIS Rating used to assign ratings of companies operated overseas?
4
Concept of credit ratings
• Rating is raking, based on level of credit worthiness
• The measurement of ability and willingness to comply with financial obligations of ultimate obligorultimate obligor
• Specific repayment schedule and measurable amount
“ Technically, dividend payment is not financial obligation” � imputed promised
5
What are the differences of the ratings assigned by TRIS Rating vs other CRAs?CRAs?
6
Three Concepts of Credit Rating Scale
Rating is comparison…
• International (global) comparison �
international scale
• Regional comparison � regional scale• Regional comparison � regional scale
• National (domestic) comparison �
national scale
7
International Scale Ratings
• Global comparison
• Local currency and foreign currency
• Benefits to international investors for global investment decision making.global investment decision making.
• No limits on regional or national boundary.
• Highest rating in a country may not be AAA.
8
National and Regional Scale Ratings
• Comparable within a country (or region) only
• Could not compare with international ratings
• Generally assign only local currency rating
Highest rating of domestic issuers could be • Highest rating of domestic issuers could be AAA,
– mostly assign to the government.
9
National Scale Rating Is Not A Mapping
• TRIS does not map rating of international scale into national scale.
• For parent-guaranteed debentures, TRIS Rating will analyze credit risks using our best effort based on available information.
• The rating of parent company should be rated by TRIS Rating otherwise the rating of parent company rated by NRSROs should not lower than BBB.not lower than BBB.
• TRIS Rating will not use only rating assign by international CRAs to map into national scale. Though the availability of ratings will provide essential information.
• Even though Thai government rated by S&P = A-, TRIS Rating will not reach the national scale rating by the mark up of 6 from international scale. TRIS Rating will evaluate the ratings assigned by other CRAs and assess more detail of the business risks and financial performance.
• Our experience shows that the lower the international scale rating the narrower the rating gap between national vs international scale
10
However, the ratings within TRIS Rating Scale should be comparable, no matter they are should be comparable, no matter they are industrial companies, financial institutions, government-related entities, or sovereigns.
11
When the rating could not be assigned ?assigned ?
12
Rating assigned to credit-based financial obligations
• Interest bearing debts
• Credit based financial obligations
• Specific amount and repayment schedule• Specific amount and repayment schedule
13
CRA will not assign ratings to..
• Equity stock
• Debt instrument which repayment tied with stock index, or commodity prices, etc.
• When information about the issuer is • When information about the issuer is insufficient: very short track record; under restructuring process; no audited financial report, etc.
14
How can the rating of “issuer” and “issue” be enhanced or notched down or capped?down or capped?
15
Rating Enhancement
• “Issuer rating” will be enhanced if default risk of the issuer is lower by:– Extraordinary support from government (GRE)
– Extraordinary support from parent company or groupgroup
• “Issue rating” will be enhanced if default risk and loss severity of specific debenture are lower by:– Parent guaranteed, subsidiary guaranteed
– Secured by assets or flows of income or reserve account
16
Rating Enhancement
• TRIS Rating generally applies bottomed up approach for issuer rating in a group.
• Rating will be enhanced (notched up) from standalone rating. standalone rating.
17
Rating Factors for Government-Related Entities (GRE)
• Standalone rating � similar factors to other FI or Non-FI corporate
• Degree of government supports � extraordinary supports
• Extraordinary supports: • Extraordinary supports: – Linkages between government and the GRE (the level of
government intervention and proportion of government shares, the existing of guaranteed debts, reputation risks, share names etc.)
– Strategic important of the GRE � ability to use other private company to achieve similar mission, roles of the GRE to deliver government policies and actions
18
Rating Factors for Government-Related Entities (GRE)(continued)
• Issuer rating = Standalone rating+ extraordinary support from government
• Issuer rating of GRE ranges between “standalone rating” and “AAA”rating” and “AAA”
• Ratings of GRE could be very high even its financial performance is miserable if TRIS Rating believes that:– Government views this GRE’s function is very important to
government
– The GRE was considered as state-owned enterprise and its charter indicates that government will responsible to repay debts
19
Rating Notched Down or Capped
• In general, issuer rating of a subsidiary in a group is not higher than (capped by) the group rating.
• Rating of a specific issue could be notched down • Rating of a specific issue could be notched down if :
– It is a junior debt (when portion of senior debts >20% of total assets)
– Issued by structural subordinated entity (eg. pure holding company in a group)
20
How to rate related companies(Group Rating) ?(Group Rating) ?
21
Group Rating Process
Source: TRIS Rating “Group Rating Methodology” 22
Group Rating
• Implicitly assign group rating
• Group of companies comprised those are under controlled of a single group of shareholders or management teams
• A company may be considered as part of a group if • A company may be considered as part of a group if TRIS Rating believes that the company’s business direction and policies are determined by the group.
• Generally a subsidiary is consolidated in a group financial performance and the rating will be capped by the group rating
23
• Issuer rating of core company will be equal to the group (consolidated) rating.
• Issuer rating of subsidiary could be enhanced or capped by the group rating, unless– we are convinced that any financial difficulty borne by the
Issuer Rating of Company in A Group
– we are convinced that any financial difficulty borne by the group will have a limited impact on the issuer’s credit quality
– special purpose vehicle company,
– a project finance company,
– other forms of business that insulate the issuer from its parent company and other group members
– Or when the proportion of minority shareholders is large enough to counter decisions of the major shareholders
24
When Affiliates Are Included in The Group
• A company may be considered as part of a group even when parent company holds less than 50% of its shares.
• Two or more companies may have relationship that enables one company to control, support, or interfere the other firm: the other firm: – common shareholders for both firms, – similar brand names, – majority proportion of board seats, and the role of the
designated directors, – overlapping or complementing lines of businesses, and – historical record of interventions or support
25
Issuer Rating of Subsidiary in The Group
Could be either:
1. Capped by the group rating, or
2. Equal to the group rating, or
3. Enhanced by multiple notches but must be lower 3. Enhanced by multiple notches but must be lower
than group rating by 1 notch, or
4. Enhanced by 1-3 notches from standalone rating
but must be lower than the group rating, or
5. No notch up
26
What are rating factors of hybrid capital instruments?capital instruments?
27
CRA’s Point of Views
• The characteristics of hybrid capital instruments of deferrable, subordination make these instruments more flexible than other debt instruments.
• These characteristics also benefit the issuer during the financial stress scenario.
• On the other hand, these increase repayment risks to • On the other hand, these increase repayment risks to the investors.
• Combined this two characteristics, hybrid capital instruments will be notched down by 2 notches.
• Nonetheless, given the limited benefits of hybrid instruments comparing with other common stocks, CRAs generally limit the proportion of maximum hybrid capital instrument in the company’s capital structure.
28
Maximum Equity Content
• Non-FI: Not more than 25% of capital (equity + hybrid equity credit)
29
TRIS Rating’s Guideline for Equity Content of Non-FI
• High � 100% equity
• Intermediate � 50% equity: 50% debt
• Low � 100% debt with subjective • Low � 100% debt with subjective
adjustment
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Basic Factors for “Intermediate” Equity Content
To have intermediate equity content, hybrid capital instrument must have
1. Long-life � at least 20 years remaining until effective
maturity date
2. Effective maturity date:
1. Original maturity date of the instrument, or
2. When call option + more than 25 bps step up withoutreplacement capital covenant (RCC), or
3. When call option + more than 100 bps step up
3. Call option should not earlier than 5 years after issue date
31
Basic Factors for “High” Equity Content
• Converts to common equity in short time (not longer than 3 years)
• Coupon varies with stock dividend or financial performanceperformance
• Very easy to be mandatorily deferrable (eg. upon breach of financial or rating trigger that are set close to existing level)
32
Why 25 bps and 100 bps ?
• TRIS Rating believes that the step up of hybrid instrument by over 25 bps will create a cost pressure for issuer to exercise the call option.
• So if the call option comes with the step up of 26-100 bps, the RCC is needed, and it should be 26-100 bps, the RCC is needed, and it should be legally binding RCC, otherwise it would be effective maturity.
• When the step up is higher than 100 bps, the cost pressure to issuer will be overwhelm and it will be effective maturity.
33
“Bank” Hybrid Capital Instrument Rating
• Rating criteria follows BOT guidelines for bank hybrid capital Tier 2 characteristics:
– Perpetual
– Subordination
– Loss absorption mechanism– Loss absorption mechanism
– Deferral
• Factors Definition Notch-down from standalone rating
1. Subordination Debt repayment is lower priority than debenture holders but higher than common stock shareholders.
1
2. Loss absorption mechanism
Supplementary loss-absorption at the point of non-viability in terms of write-down or stock conversion
1
3. Deferrable Mandatory or optional deferrable of coupon payments under financial stress.
1
34
Hybrid Ratings By TRIS Rating
Rating as of 28 August 2015
1. Thanachart Bank Plc. Issuer Rating = AA-
Hybrid Tier 2 Capital = A
2. TISCO Bank Plc. Issuer Rating = A2. TISCO Bank Plc. Issuer Rating = A
Hybrid Tier 2 Capital = BBB+
3. LH Bank Plc. Issuer Rating =A-
Hybrid Tier 2 Capital = BBB
Source: TRIS Rating
35
Sovereign Rating
36
Sovereign rating
• Ability and willingness of sovereign government to repay debt to non-sovereign bond holders.
• Not include debts of multilateral institutions such as IMF, World Bank, ADB.
• Rating factors include quantitative and qualitative • Rating factors include quantitative and qualitative factors.
• Nonetheless, among all, the qualitative which include the credit culture of the government , administrative efficiency of officials, political stability are very important rating factors.
37
Crucial Rating Factors of Laos PDR
1. Relatively low commercial external debts comparing with peers. Most external debts are public debts from ADB and G-to-G.
2. Small scale economy and emerging stage of capital market.
3. Political stability but limited data base and updated 3. Political stability but limited data base and updated information.
4. High willingness to comply with international standard with supports and guidance from international organizations.
5. National income linked with commodity prices but increasing portion of income from hydropower sector sold to Thailand.
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Lao Sovereign Rating = BBB+
• Thailand national scale
• Comparable to other ratings in TRIS Rating portfolios
• Ability and willingness to repay debts of • Ability and willingness to repay debts of Lao government in terms of Thai-Baht.
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Ratings Private Companies OverseasOverseas
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Rating Factors Private Companies Overseas
• Similar to other issuer rating.
• Additional consideration:
– Sovereign risks of country of domicile
– Transferability and convertibility risks – Transferability and convertibility risks
– To mitigate transferability and convertibility risks �
reserve account overseas in USD or other hard currencies.
• The rating will be assigned in Thai Baht, TRIS Rating scale (Thai scale).
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Could issuer or issue rating of non-sovereign companies higher than sovereign rating?
• Generally, issuer rating of a non-sovereign company could not higher than sovereign rating of the country of its domicile.
• Sovereign government always have ability to determine tax rates, impose regulatory requirement that will enable tax rates, impose regulatory requirement that will enable to increase its ability to repay public debts in local currency.
• Some private companies may have higher issuer rating than government if – its overall local currency rating is higher than the government – the majority of its revenues generated from overseas – revenues mostly are in term of foreign currency.
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Could issuer or issue rating of non-sovereign companies higher than Sovereign Rating?
• Continued…
• The issue rating of debentures issued by a private company could be higher than sovereign rating if:
The standalone rating of the company is higher than – The standalone rating of the company is higher than sovereign rating
– The debentures are backed by revenues generated in other countries which will be put into reserve account overseas
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THANK YOU
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