Sovereign
Brady Bonds
Corporates
Banks
Utilities
International Future-Flow Securitizations
Project Finance
Contacts
Sovereign
DCR rates the foreign and local currency obligations of sovereign governments, their agencies and other sovereign-related entities at their request.
DCR’s sovereign debt ratings are assessments of the creditworthiness of sovereign obligors. The rating is based on a synthesis of relevant public and nonpublic information acquired in the due diligence process.
Ordinarily, the rating assigned to senior obligations of sovereign governments represents a ceiling for other ratings assigned to issuers domiciled within the government’s jurisdiction. Hence, debt of other issuers in a country may approach–but typically do not exceed–the rating of the sovereign.
It is important to note, however, that innovative structures–such as offshore trusts, foreign parent guarantees, the involvement of a preferred creditor or a high proportion of foreign currency cash flows–may successfully mitigate some sovereign risk elements.
The sovereign ceiling concept reflects the government’s priority access to foreign exchange and its substantive ability to influence monetary, taxation and exchange rate policies.
The foundation of DCR’s approach to sovereign ratings is an evaluation of the overall coherence, consistency and appropriateness of economic policy, and an understanding of the political constraints underlying this policy.
This assessment serves as a primary predictor of a country’s vulnerability to external or internal shocks that may jeopardize its capacity or willingness to service its external obligations in a timely manner.
Analysis begins with the premise that economic policies that lead to sustained improvements in social welfare will form a base for political stability.
Political stability will, in turn, allow policymakers to reach optimal, long-run decisions, even if those decisions require short-term sacrifices by the public. Thus, we depict sovereign risk as a continuous cycle in which economic, political and social policies must be in sync.
With these principles in mind, DCR organizes its analysis into four key components: economic policy and performance; balance of payments; public and private sector debt structure; and social and political factors.
In studying the economic performance of a sovereign, DCR evaluates the country’s macroeconomic stabilization, fiscal policy, monetary policy, exchange rate and incomes, structural efficiency, and development orientation.
The current account and capital account are also analyzed in their entirety. DCR monitors the level of reserves closely--with particular importance on the regularity with which reserve information is distributed.
DCR also looks closely at the external debt obligations of a country and analyzes its political and societal factors, which could affect the timely servicing of these obligations.
MENU
Brady Bonds
Brady instruments refer to restructured commercial bank debt of a variety of developing countries that fell into arrearages during the debt crisis in the 1980s. So far, 13 countries have successfully negotiated Brady-type debt restructuring agreements with their commercial bank creditors.
These agreements have resulted in the conversion of commercial bank debt into foreign currency denominated securities and have provided a measure of relief to debtor countries.
Argentina, Brazil, Mexico and the Philippines are DCR-rated countries that have issued Brady debt. DCR rates their Brady instruments at each countries’ sovereign rating.
Arguments have been made regarding the attractiveness of Brady instruments relative to other categories of sovereign foreign currency obligations. Some would argue that Brady debt is weaker than other kinds of sovereign debt because it represents old restructured liabilities, and these instruments have very long maturities in countries with uncertain credit horizons. Others believe that Brady debt may have superior credit quality because of the collateralization of principal and part of interest payments.
DCR’s ratings incorporate the view that these factors tend to partially offset each other.
Most types of Brady bonds are collateralized by zero-coupon U.S. Treasury bonds, with partial collateralization (one to one-and-a-half year) of interest payments. However, from a credit standpoint, DCR views these instruments essentially as sovereign credits because they incorporate a significant component of pure sovereign risk in the overall payment stream over its remaining life, which is at least 25 years.
From a legal standpoint, Brady debt is ranked pari passu with most other foreign currency obligations. Therefore, countries would find it difficult to differentiate this category of external obligations from other public long-term foreign currency debt.
Brady bonds are typically extremely liquid in the secondary market, and although most of them are registered instruments there are few restrictions on their transferability. As a result, Brady instruments sometimes represent a benchmark for trading levels of sovereign credits.
DCR believes that liquidity, wide dispersion of ownership and the benchmark status of these securities acts as a strong disincentive for governments to differentiate or treat Brady creditors less favorably than other foreign currency creditors. In particular, wide dispersion of ownership renders a selective restructuring of these obligations difficult.
A sovereign obligor may consider the prospect of selectively defaulting on Brady instruments only in times of extreme economic stress. That situation would inevitably result in the country facing severe constraints in further access to foreign currency financing. Such a liquidity squeeze would both reflect and rapidly precipitate a generalized deterioration in sovereign creditworthiness, severely impacting the prospects of timely servicing of most other foreign currency obligations.
Given these considerations, DCR believes that rating distinctions between Brady and other public foreign currency obligations are relatively marginal. At times of financial stress the interest collateralization provides a cushion of comfort to investors while the country resolves its economic difficulties. However, this is not sufficient to effect a rating distinction. Therefore, DCR generally rates Brady debt at the same level as other sovereign foreign currency debt.
MENU
Corporates
DCR rates the publicly and privately owned debt and preferred stock securities of international corporations. Ratings reflect a relative evaluation of credit quality, which is the likelihood of timely payment of principal and interest, and in the case of preferred stock ratings, preferred stock dividends.
The analysis of international corporations issuing foreign currency-denominated debt is complex. DCR breaks the analysis into qualitative and quantitative factors.
Qualitative factors that DCR considers when analyzing an international corporate include: management skill, business mix, cyclicality, competitive environment, technological change, government policies, market protection, raw material availability, customer profile, plant efficiency, labor relations, financial flexibility and currency mismatch.
DCR also measures financial performance and risk by looking at the company’s cash flow and comparing it to its capital spending and other outlays.
Generally, foreign corporations face an upper limit to their rating imposed by the sovereign risk of their home country. The "sovereign ceiling" is not impenetrable. Companies with large, offshore operations may be able to structure transactions that mitigate sovereign risks.
Preferred stock securities are rated on the same scale as debt securities. However, the preferred ratings recognize the securities’ more junior position in the capital structure and, for weaker credits, the potential interruption of preferred stock dividends.
Ratings are not intended to reflect potential changes in the market value of securities due to fluctuations in interest rates and/or exchange rates. Ratings give no consideration to the current market prices of the rated securities and do not constitute investment recommendations.
MENU
Banks
DCR’s approach to international bank analysis is comprehensive, linking quantitative data with qualitative information to assess the risk of untimely payment of principal and/or interest.
While thorough quantitative analysis is important, the qualitative aspects of DCR’s analysis cannot be overemphasized.
It is important to look "beyond the numbers" to analyze the intangible strengths and weaknesses of an institution.
Before it can evaluate any individual bank, DCR conducts an extensive review of the banking industry. This assessment, including an opinion of the industry’s stage of development, helps establish a framework for analyzing individual banks.
Next, DCR reviews the economic and political situation in which a bank operates. DCR’s assessment of the creditworthiness of the country is an important element in its evaluation of that country’s banking system. DCR’s view is that a coherent and consistent economic program is critical to developing an environment that permits financial intermediaries to grow and succeed.
Given this vital inter-relationship, DCR bank analysts actively participate in the sovereign rating process.
DCR also looks closely at the bank’s management team and strategies, because well-run institutions are generally characterized by a deep and stable management structures.
DCR closely reviews the bank’s loan quality. Another key factor is the bank’s earnings and earning quality. DCR analyzes a bank’s success in optimizing the risk-return tradeoff. DCR’s ratio analysis also looks at asset quality, liquidity and funding, asset and liability management, and capital.
While DCR emphasizes the total earning power of the institution in appraising creditworthiness, it gives considerable weight to the position of security in the capital structure due to the substantial leverage inherent in the banking industry.
DCR’s frequent and in-depth discussions with each bank’s management team form the basis of DCR’s qualitative assessments.
The size of the institution is not an overriding factor in the rating decision. Rather, DCR believes a more individual approach is appropriate due to differences in risk management controls and procedures, as well as other competitive characteristics of each institution.
Because the qualitative analysis is highly subjective, DCR relies on the proficiency and background of its veteran staff of former industry practitioners, regulators, consultants, auditors and other professionals.
DCR’s ratings are not intended to reflect potential changes in the market value of securities due to fluctuations in interest rates and/or exchange rates. Ratings give no consideration to the current market prices of the rated securities and do not constitute investment recommendations.
Preferred stock securities are rated on the same scale as debt securities. However, the preferred ratings recognize the securities’ more junior position in the capital structure and, for weaker credits, the potential interruption of preferred stock dividends.
MENU
Utilities
DCR rates the publicly and privately owned debt and preferred stock securities of international utilities. Ratings reflect a relative evaluation of credit quality that are intended to provide investors with a comprehensive assessment of the company’s ability and willingness to service its obligations.
International utilities play a vital role in economic development, particularly in emerging markets. They require large amounts of capital to fund the rapid growth of their operations. As a result, these utilities frequently are among the first issuers to seek international credit ratings as a way to access global capital markets. They regularly return to fund expansion and technological improvements in this capital-intensive business.
Emerging market utilities face a number of critical credit issues that typically are not part of U.S. utility ratings. A state-owned utility requires an assessment of the company’s relationship with the government and its strategic role in the country’s economic program.
Recently privatized utilities often are inefficient, which presents opportunities to improve productivity and profitability. Foreign regulatory practices often provide incentives for utilities to improve operations, while typically allowing for greater competition. Finally, most emerging market utilities are experiencing above-average growth, necessitating large capital spending programs to meet burgeoning demand.
As in the case of bank and corporate ratings, DCR first looks at the local market economics, industry structure and local regulations, while carefully considering the relevant sovereign risks.
Next, DCR considers an array of qualitative factors including: management capability and strategy, business mix, regulation, pricing structure, service area and market characteristics, competitive environment, diversified activities, power and fuel supply, purchased power contract terms, technological changes, plant efficiency, labor productivity, and off-balance sheet obligations.
DCR also incorporates a number of key financial ratios into the analysis of international fixed-income securities. As in the case of international corporates, DCR looks at cash flow, earnings variability, profitability, financial flexibility, liquidity, capital structure, capital expenditure budget, financing needs and dividend requirements.
An analysis of changes in key ratios over time shows the direction of the company’s condition. Because DCR’s analysis is forward-looking in nature, its ratings are influenced more by projected trends than by the absolute level of recent statistical data.
MENU
International Future-Flow Securitizations
International future-flow securitizations have proliferated primarily in response to the capital needs of operationally strong companies located in emerging markets. Such companies typically rely on bank or Eurobond debt, much of which is issued internationally and denominated in a foreign currency. The pricing and overall availability of these traditional debt instruments have, however, been constrained by sovereign considerations.
Securitization of future cash flows helps exporters with a strong credit quality in high sovereign risk countries access funds at a lower cost of financing.
International future-flow securitizations are broadly defined as structured debt offerings sponsored by an offshore originator and secured by receivables due from international obligors. The future receivables are generally sold by the originating company to an offshore trust that issues certificates or notes. In addition, receivable obligors are directed to make payments directly to the offshore trust.
Because payments on the receivables do not enter the country in which the issuer is located, DCR believes they are not directly subject to convertibility and transfer risks. Consequently, the ratings of such transactions are not strictly constrained by the foreign currency rating of the host country. All sovereign risks are not mitigated by this structure; however, international future-flow securitization ratings are still constrained by certain political and economic risks inherent in the host country.
Unlike traditional securitizations where high ratings are achieved by isolating quality assets from the credit of the originator, the ratings of international future-flow transactions are invariably linked to the credit of the originator. Originating companies create performance risk in future-flow securitizations because they must deliver a product or service before the receivable is created. Therefore, when assessing the credit quality of a future-flow transaction, DCR first measures the originator’s performance risk.
DCR believes performance risk is related to, although distinguishable from, the probability of insolvency of the originator. Therefore, when convertibility and transfer risks are largely mitigated, the ratings of international future-flow securitizations become closely related to the originating company’s ability to service its local currency debt obligations (local currency rating).
Depending on the type of goods or services generating the receivables and the structure of the transaction, international future-flow securitizations can, under special circumstances, achieve ratings slightly higher than the senior unsecured local currency rating of the originating company. Specifically, if the receivables are likely to be generated and made available to investors while the originator is insolvent, (i.e., performance risk is less than insolvency risk) DCR will consider transaction ratings higher than the originator’s senior unsecured local currency rating.
In addition, the obligor profile of international future-flow securitizations should be commensurate with the transaction’s rating.
Sovereign considerations, which include currency controls, export controls and other sovereign risks are carefully weighed in the rating process.
DCR also studies the structural features and basic terms of the transaction. Structural enhancements or specified event triggers, which either accelerate amortization of the transaction or obligate the originator to repurchase receivables are generally required.
MENU
Project Finance
The volume of project financings in the international markets has grown significantly in recent years as a result of increased demand for infrastructure projects in emerging markets.
The recent popularity of build-own-operate-transfer (BOOT), build-lease-transfer (BLT), build-own-operate (BOO) and other structures has caused a substantial rise in the use of project finance as a means of financing infrastructure projects in both emerging and economically developed countries.
Historically, these projects has been financed by a combination of equity, internally generated cash flows and debt that has generally been provided by commercial banks, export credit agencies and multilaterals. The capital markets have not been widely used to raise debt for infrastructure projects.
However, there has been in increase the use of capital markets as a source of funding for infrastructure projects because:
- The demand for infrastructure projects in emerging markets is increasing at a rapid pace, while governments are facing increasing financial constraints;
- Commercial banks are not a natural source of financing for these projects due to the relatively long-term nature of the loans required by the projects; and
- The analysis takes a significant amount of time, because of its complexity.
DCR has rated or reviewed many different types of project finance transactions in the international markets including: telecommunications, power projects, toll roads, airports, mines and pipelines.
DCR generally breaks down the analysis into the following areas: sponsors, pre-completion risk, operation risk, off-take risk, country risk and structural aspects. These factors can be applied to most project financings; however, their relative importance varies with each specific project.
In international financings, it is especially important that projects have strong economics, because they operate in untested or uncertain environments. Strong projects can achieve investment-grade ratings. In these cases, the construction risk of the project is assumed by the contractors and/or sponsors.
Typically, the rating of a project will be constrained by the rating of the sovereign. However, DCR has reviewed some projects that mitigate sovereign risks and achieve a rating above that of the country in which they are being constructed. These projects usually have political risk insurance, as well as transactions structured to take advantage of certain multilateral and export credit agencies.
MENU
Contacts
Latin America:
Corporates/Industrials: Juan Csillagi (312-368-5438)
Fin'l Institutions: Chuck Orabutt (312-368-3153)
Insurance: Julie Burke (312-368-3158)
Project Finance: John Dell (312-368-3161) and Jim Stork (312-368-3125)
Structured Finance: Christopher Donnelly (212-908-0237)
Sovereigns: Jaime Sanz (212-908-0230)
Utilities: Dan Kastholm (312-368-2070)
Europe:
Corporates/Industrials: Martin Squires (011441714177931)
Fin'l Institutions: Chuck Orabutt (312-368-3153)
Insurance: Larissa Knepper (011441714177934)
Sovereigns: Dan Bond (212-908-0221)
Structured and Project Finance: Damian Thompson (011441714177930)
Utilities: Martin Squires (011441714177925)
Asia:
Fin'l Institutions: Chuck Orabutt (312-368-3153)
Corporates/Industrials: Chin Gan (01185229010501)
Structured and Project Finance: Chin Gan
Sovereigns: Dan Bond (212-908-0221)
Utilities: Dan Kastholm (312-368-2070)
Middle East/Africa:
Richard Wilson (011441714177935)
MENU
DCR’s Ratings are Continuously Monitored
DCR’s ratings are continuously monitored and reviewed. Regular meetings with issuers and access to credit rating committee members ensures DCR ratings reflect the most accurate and up-to-date information.
DCR supports its credit ratings with frequent research publications and timely dissemination of credit information to institutional investors.
![[BEMCI]](images/bemh.gif)
The information and opinions contained herein
do not necessarily express the opinions of BradyNet, Inc.
This report has been prepared solely for informational
purposes and is not a solicitation of any transaction in the securities
with which it deals or an offer to enter into any such transaction. Prices
and/or other information in this report are subject to change without
prior notice.
Copyright © 1996 BradyNet, Inc.
Please read our disclaimer.
Home Page |
BradyNet Pro |
Search |
CyberExchange
Forfaiting |
Closing Prices |
Live Prices |
New Issues |
Ratings
BradyNet Tour |
BradyNet FORUMs |
BradyNet Email Directory |
Index (Site Map)
Analysis & Research |
BradyNet Center |
News |
Jobs
General Correspondence: bradynet@bradynet.com
Questions/Problems? support@bradynet.com
This site copyright © 1995-2000 BradyNet.com
This site copyright © 1995 BradyNet, Inc.
