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Scope Ratings The leading European credit rating agency
2
Who we are and our history
NOTE: *”CRR” stands for the Capital Requirements Regulation, **“Solvency II” stands for the Solvency II Directive. The suggested mappings would be applicable to ratings for sovereigns, banks, covered bonds, and corporates, as well as structured finance instruments (the latter with SF suffixes).
Scope Ratings is a privately owned
credit rating agency registered in
accordance with the EU rating
regulation and operating with an
ECAI status.
Scope Ratings mapping is of equal value for CRR* and Solvency II**
3
Unique European perspective and full service
CRACountry
of origin
Analysts
in Europe
Internationall
y operating
Europe
based
Market
share
below
10%
Financial
InstitutionsCorporates
Public
Finance
Structured
Finance
Project
Finance
Alternative
Investment
Funds
Mutual
Funds
Moody’s USA 488 a a a a a aS&P USA 422 a a a a a aFitch USA 155 a a a a a a
Scope Germany 54 a a a a a a a a a aDBRS Canada 50 a a a a a a a
Morningstar USA 23 a a a aCreditreform Germany 17 a a a a a
CRIF Italy 17 a a aEuler Hermes * Germany 16 a a a a
Capital Intelligence Cyprus 13 a a a a aAxesor Spain 6 a a a a
Spread Research France 5 a a aDagong China 4 a a a a
Full Service
Alternative
InvestmentsMain rating franchises
Source: Moody’s reports of each CRA for the year ended 31 December 2015, own estimates; Scope: current analytical staff (Dec 2016)
* Collaboration with Investors Service, announced in September 2016
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Analytical coverage
STRUCTURED FINANCE
SME CLO Rating Methodology
Auto ABS Rating Methodology
Counterparty Risk
Structured Finance Instruments Methodology
COVERED BONDS
Covered Bonds Rating Methodology
PUBLIC FINANCE
Sub-Sovereign Methodology
FINANCIAL INSTITUTIONS
Bank Rating Methodology
Bank Capital Instruments Methodology
CORPORATES
Short-Term Corporate Debt Ratings Methodology
European Pharmaceuticals
Corporate Rating Methodology
European Renewable Energy Corporates
European Utilities
European Real Estate Corporates
European Automotive Suppliers
European Construction Corporates5)
SOURCE : https://www.scoperatings.com/methodologies/list
5
Selection of recent solicited mandates
Corporates Structured
Finance
Financial
Institutions
Covered
Bonds
Bank
Country of origin: Switzerland
Covered Bonds
Country of origin: France Utility
Country of origin: Norway
SME ABS
Country of origin: Europe
Bank
Country of origin: Germany
Covered Bonds
Country of origin: Germany
RMBS / SME ABS
Country of origin: Spain
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Key differentiating factors in Scope Ratings’ approach
Trust and acceptance from investors and issuers is essential for a rating agency’s success
Analytical excellence
Opinion-driven research reports
Forward-looking analysis
Differentiation through regional
expertise
European alternative to established
credit rating agencies
Scope’s
USP
Service excellence
Redefining communication –
Leveraging market expertise
Quality service, faster and value-
based pricing
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Renewable Energy / Utilities
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Recognition of diversified business models
Scope does not concentrate on a diversified company’s biggest division
Reflecting the whole corporate structure, including all major divisions
Analysing drivers for each represented industry and competitive position
Weighted average assessment for multi-division groups
Scope avoids allocating companies in “buckets”
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Renewable energy methodology or utility methodology – Scope has both
Entry
barriers
Cyclicality
Low Medium High
High CCC/B B/BB BB/BBB
Medium B/BB BB/BBB BBB/A
Low BB/BBB BBB/A AA/AAA
Retail (downstream)
Non-regulated power generation
Regulated upstream & network / grid
Entry
barriers
Cyclicality
Low Medium High
High CCC/B B/BB BB/BBB
Medium B/BB BB/BBB BBB/A
Low BB/BBB BBB/A AA/AAA
Project developers IPP’s sell at market prices
IPP’s under regulated long-term tariffs
Utilities – companies that generate, store, transmit and/or distribute electricity,
from facilities it owns and/or operates
Renewables – such as independent power producers (IPPs) and project
development of renewable energy capacities
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• Short-term debt coverage
• Cyclicality
• Political and regulatory stability
• Entry barriers
• Substitution risks
BU
SIN
ES
SR
ISK
PR
OF
ILE
FIN
AN
CIA
LR
ISK
PR
OF
ILE
• Geographical diversification
• Segmentation - Horizontal diversification | Vertical integration
• Concentration - Supplier and customer concentration | Asset concentration
• EBITDAR margin and its volatility
• Efficiency
• SaD/EBITDA (x)
• FFO/SaD (%)
• Internal finance capacity and dependence on external funding/financing
• EBITDA/interest cover (x)
Issu
er R
atin
g
Capex Coverage
Leverage and Debt Protection
Profitability and efficiency
Diversification
Industry fundamentals
Parent support
IND
US
TR
Y
RIS
KS
CO
MP
ET
ITIV
EP
OS
ITIO
NIN
G
• Market dominance | Size and scope
• Structural aspects (growth prospects) of service territory
Market shares and segment growth
SU
PP
LE
ME
NT
AR
Y K
EY
R
AT
ING
DR
IVE
RS
Financial policy
Liquidity
Peer context
Utility Methodology overview
Size not essential, but competitive position &
market structure is
Many Norwegian utilities lack geographical
diversification, but could be mitigated by
horizontal diversification
Hydro has low marginal cost
Leverage more important than interest cover for
IG companies
Municipality / State owned
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Renewable Energy Methodology overview
• Short-term debt coverage
• Cyclicality and political/regulatory stability
• Entry barriers
• Substitution and merchant risks
BU
SIN
ES
SR
ISK
PR
OF
ILE
FIN
AN
CIA
LR
ISK
PR
OF
ILE
• Geographical diversification
• Product | asset diversification
• EBITDA margin
• Predictability and volatility of margin
• Fuel-specific load factors
• SaD/EBITDA (x)
• FFO/SaD (%)
• Structural free cash flows across the investment cycle
• EBITDA/interest cover (x)
Issu
er R
atin
g
Free cash flow generation
Credit metrics (leverage and debt protection)
Profitability and efficiency
Diversification
Industry fundamentals
Parent support
IND
US
TR
Y
RIS
KS
CO
MP
ET
ITIV
EP
OS
ITIO
NIN
G
• Protection of business model
• Size
Competitive positioning
SU
PP
LE
ME
NT
AR
Y K
EY
R
AT
ING
DR
IVE
RS
Financial policy
Liquidity
Peer context
Take-off contracts & protected business model?
-Size elements more for less regulated business
Geographical diversification most important for
companies that rely on market prices
Higher profitability margin needed to get top
score here than in the utility methodology
Assess the investment cycle.
Expect an IG company to fully cover its Capex
Look at strategic importance, name equality,
debt guarantees, etc.
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Project finance
13
Beyond probability of default
Focus on most likely problems could be blind to catastrophic events
Traditional focus on probability of default
Driven by most likely problems
Weakest counterparties constrain assessment
But what is the severity?
What about catastrophic events?
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Risk of losses for investors results in differentiation of transactions
Probability of default, while important, offers an incomplete picture of risk
Recovery rates are high, but widely dispersed
Focus must be on project outcomes that could result in a loss for investors
Assets are paramount: bottom-up approach vs. one-size-fits-all assumptions
Contract and counterparty analysis is the framework for outcome analysis
Key principles for analysing infrastructure and project finance
Focus on expected loss
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Fundamental analysis
Creditors
Contractors
Operators Operation & maintenance
Engineering, procurement, construction
Rated debt
Development, equity, operational support
Purchase of product or service
Input supply
Hedging, financial services, insurance
Technical, market, legal advice
Permits, licences, rights
Advisers
Government
Revenue
counterparties
Financial parties
Suppliers
Sponsors
Project Co (SPV)
Bottom-up assessment of project, key contractors, and counterparties
Fundamental analysis points at material project outcomes
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Assessing material project outcomes and their impact on expected loss
Expert analysis and project stress-modelling make it possible to gauge the probability of occurrence and
the severity of the different project outcomes
Fundamental analysis points at the project outcomes which represent the largest threat to investors (i.e.
largest contributors to expected loss)
Sensitivity analysis and conditional stress-testing are important because of the potentially catastrophic
loss of certain outcomes which should not be overlooked
Analytical considerations
Expected loss analysis highlights the outcomes that matter to investors
17
Expected loss reflects the likelihood and severity of project outcomes, driven by six main areas of risk
Focus on expected loss for the investor
Risk areas incorporate all risk factors that drive expected loss
Financial strength
Sponsors risk
Project structure and
other risks
Technology and
construction risk
Operational risk
Revenue risk
Expected
loss
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Scope Ratings Access our service offerings via our online channels
www.scoperatings.com/events/list
SOURCE: Online channels of the Scope Group by Scope Corporation AG, October 2016.
accounts.scoperatings.com/login
www.scoperatings.com/events/list
www.scoperatings.com/#/news
www.scopegroup.com
www.linkedin.com/company/Scope-Ratings
www.twitter.com/ScopeRatings
On Bloomberg : <SCOP>
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Berlin (Head Office)
Lennéstraße 5
D-10785 Berlin
Phone +49 30 27891-0
London
Suite 301
2 Angel Square
London EC1V 1NY
Phone +44 20 3457 0444
Madrid
Paseo de la Castellana 95
Edificio Torre Europa
E-28046 Madrid
Phone +34 914 186 973 [email protected]
www.scoperatings.com
Frankfurt am Main
Neue Mainzer Straße 66-68
D-60311 Frankfurt am Main
Phone +49 69 66 77 389-0
Paris
21 Boulevard Haussmann
F-75009 Paris
Phone +33 1 53 43 29 89
Oslo
Haakon VII's gate 6
N-0161 Oslo
Phone +47 21 62 31 42
Milan
Via Paleocapa 7
I – 20121 Milan
Phone +39 02 30315 814
Contact
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Disclaimer
Disclaimer
© 2017 Scope SE & Co. KGaA and all its subsidiaries including Scope Ratings AG, Scope Analysis, Scope Investor Services GmbH (collectively, Scope). All rights
reserved. The information and data supporting Scope’s ratings, rating reports, rating opinions and related research and credit opinions originate from sources
Scope considers to be reliable and accurate. Scope cannot, however, independently verify the reliability and accuracy of the information and data. Scope’s ratings,
rating reports, rating opinions, or related research and credit opinions are provided “as is” without any representation or warranty of any kind. In no circumstance
shall Scope or its directors, officers, employees and other representatives be liable to any party for any direct, indirect, incidental or otherwise damages, expenses
of any kind, or losses arising from any use of Scope’s ratings, rating reports, rating opinions, related research or credit opinions. Ratings and other related credit
opinions issued by Scope are, and have to be viewed by any party, as opinions on relative credit risk and not as a statement of fact or recommendation to
purchase, hold or sell securities. Past performance does not necessarily predict future results. Any report issued by Scope is not a prospectus or similar document
related to a debt security or issuing entity. Scope issues credit ratings and related research and opinions with the understanding and expectation that parties using
them will assess independently the suitability of each security for investment or transaction purposes. Scope’s credit ratings address relative credit risk, they do
not address other risks such as market, liquidity, legal, or volatility. The information and data included herein is protected by copyright and other laws. To
reproduce, transmit, transfer, disseminate, translate, resell, or store for subsequent use for any such purpose the information and data contained herein, contact
Scope Ratings AG at Lennéstraße 5 D-10785 Berlin.
