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Sovereign Criteria for Assessing Country Ceilings - Draft Methodology Published for Consultation
15-04-2015

London, April 15, 2015 – ARC Ratings has published today its Sovereign Criteria for Assessing Country Ceilings - Draft Methodology. The credit rating agency welcomes feedback from market participants in respect to the methodology to be applied in according local and foreign country ceilings to countries it rates.  The draft methodology can be accessed at www.arcratings.com.

 

ARC Ratings’ local currency country ceiling caps the highest rating that can be achieved in a country for a local currency bond instrument. It is ARC’s proxy for a country risk rating in local currency. The local currency ceiling potentially enables private sector entities to be rated higher than the sovereign in local currency.

 

The local currency country ceiling is the purest measure of country risk, stripping out the role of external financial flows in to and out of a country. It captures all of the attributes reflected in sovereign ratings – institutional robustness, government finances, and the overall health of the economy – and speaks broadly and holistically to overall macro conditions in a country.

 

ARC also accords foreign currency country ceilings (FCC) for every country it rates. This ceiling serves as a cap for any foreign currency debt issuance in a country. The FCC serves as ARC’s proxy for a country risk rating in foreign currency.

 

The foreign currency country ceiling of a country can be higher than the sovereign foreign currency rating depending on ARC’s assessment of two key risks: transfer risk and convertibility (T&C) risk, also known as payments moratorium risk. The foreign currency country ceiling is a ceiling and not a rating. Ratings are accorded for individual issuers based on the ceiling as well as any given issuer’s own individual credit strengths and weakness, as determined in a separate rating committee.

 

The foreign currency country ceiling is oftentimes set higher than the foreign currency sovereign rating of a country to accommodate any and all issuers with more robust payments prospects in foreign currency than the sovereign. This situation could exist because the issuer’s intrinsic financial situation is healthier than the sovereign in foreign currency, but also must reflect ARC’s assessment that the government would not want to or be able to ‑ at least to some extent - interfere with scheduled payments by that issuer. A company could have a higher rating than the government in foreign currency because of the expectation that the sovereign would give that issuer preferential access to foreign exchange even in the event of a general moratorium on payments.

 

Country ceilings have a strong connection to the sovereign bond ratings of a country. Sovereign defaults or debt restructurings almost always coincide with severe economic malaise in a country, and are also accompanied by investor aversion and capital outflows, leading to a significantly impaired financing environment all around for almost all, if not all, issuers in a country.  All of these conditions increase the risk of economy-wide payments disruptions. Moreover, regarding the local currency country ceiling, the sovereign has unique taxing authority and the ability to print money, suggesting that in most cases the sovereign rating may well be the highest local currency rating accorded in the country despite the presence of a higher local currency country ceiling.

 

Please send comments / feedback via email to internalreview@arcratings.com by no later than 15th May 2015.

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