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ARC publishes updated Corporate Entities Rating Methodology
31-03-2020

London, 31 March 2020 - ARC Ratings. S.A. (ARC) has published its updated Corporate Entities Rating Methodology. This is an update to the methodology previously published on 29 March 2019. There are no material changes and as such no rating impact. This methodology can be accessed at www.arcratings.com.


ARC’s non-financial corporations (corporate) ratings are a measure of the ability of an issuer to honour its financial obligations, relative to other issuers. Corporate credit quality and default risk is assessed over both the short- term and the long-term, with separate short-term and long-term ratings being accorded where necessary. A crucial part of ARC’s analysis is a peer comparison.


Typically, a strong linkage exists between short-term and long-term ratings. However, the rating process is dynamic, this linkage may be broken under certain circumstances, at the discretion of the rating panel.


Day-to-day corporate performance can be reflected by a series of quantitative projections of corporate risk ratios that are calculated through ARC’s analysis on a regular basis, such as EBITDA related indicators. A careful survey of these quantifiable factors often allows a nuanced distinction between the creditworthiness of one corporate vis à vis another.


In its broadest terms ARC’s corporate methodology tests the sustainability of the underlying business model of the corporate as well as its historical and prospective performance against various shifts in paradigms.


ARC’s approach is to integrate quantitative analysis with a strategically based qualitative analysis. The objective is to assign ratings that are applicable throughout the various stages of the business cycle, as well as examining the ability of an issuer to meet its obligations under reasonable and stressed scenarios. This analysis takes into account the different fundamentals evidenced across the various industries that fall under the corporate sector.


While the debt maturity profile of an entity may differ from year-to-year, ARC assesses the creditworthiness of the entity over the maturity of the commitment being rated. If principal and interest payments would appear to be especially onerous during any one-year period, the related default risk of the corporate in that year may define the overall rating in the context of all other meaningful considerations. Likewise, if an assessment of major risk events projects the occurrence of a risk related event within the horizon being analysed, the firm’s critical ability to manage the impact of such an event on its business will also become a key element to be considered within the rating analysis. Cyclical peaks and turnarounds are typical examples of such risks.


In order to issue an opinion on a non-financial corporation’s ability and willingness to pay, ARC typically analyses the last five years of audited financial statements.
 

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