Article Examines Why NDBs And ECAs Are Rarely Rated Above The Sovereign
Standard & Poor’s Ratings Services today published an article explaining why 15 national development banks (NDBs) and 14 export credit agencies (ECAs) are (with a few exceptions) rated at the sovereign level. The conclusions reached in the article, entitled “Why National Development Banks And Export Credit Agencies Are Rarely Rated Above The Sovereign,” are supported by evidence from the credit default swap market, which suggests that the default risk of these government-related entities (GREs) tends to be slightly higher than that of the sovereign.
According to Standard & Poor’s credit analyst Marie Cavanaugh, an NDB or ECA may be rated above the sovereign if its stress-tested, stand-alone rating exceeds the sovereign’s rating, and if the government is not expected to take actions in a stress scenario that impair its credit standing. Thus, the GRE should not rely upon government contracts, a favorable regulatory regime, liquidity held in government securities, or any other government connection.” “NDBs and ECAs most often do not have stand-alone credit quality exceeding that of the sovereign, so in order to assign a rating exceeding the sovereign’s Standard & Poor’s must feel comfortable that the sovereign will provide support even as it fails to meet its own obligations,” Ms. Cavanaugh said. “While there may be a few examples of governments providing such support, there are more examples of sovereign stress extending to NDBs and ECAs,” she added. As an example, Belize this month concluded a rescheduling program that comprises Development Finance Corporation (DFC) debt, which the government assumed in recent years as DFC’s financials deteriorated. Even where a NDB or an ECA has stand-alone credit quality exceeding that of the sovereign, the NDB or ECA rating is usually constrained by the tendency for sovereigns to ask them to provide additional services or to pay higher taxes or dividends in a deteriorating economic environment. “Standard & Poor’s criteria for rating jointly supported obligations allows a higher rating than assigned to either the sovereign or the stand-alone NDB or ECA, but only where the expected default correlation between the sovereign and the GRE is below 25%,” noted Ms. Cavanaugh. “While this may be true in some cases, the circumstances under which sovereigns create or acquire NDBs and ECAs suggest a fairly high default correlation,” she concluded. The report is available to subscribers of RatingsDirect, the real-time Web-based source for Standard & Poor’s credit ratings, research, and risk analysis, at www.ratingsdirect.com . If you are not a RatingsDirect subscriber, you may purchase a copy of the report by calling (1) 212-438-9823 or sending an e-mail to research_request@standardandpoors.com . Ratings information can also be found on Standard & Poor’s public Web site at www.standardandpoors.com ; under Credit Ratings in the left navigation bar, select Find a Rating, then Credit Ratings Search. Members of the media may request a copy of this report by contacting the media representative provided. Media Contact: David Wargin, New York (1) 212-438-1579
Analyst Contacts: Marie Cavanaugh, New York (1) 212-438-7343
David T Beers, London (44) 20-7176-7101