Credit ratings and access to loans for development

Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s.Copyright (c) 2008 Standard & Poor’s, a division of The McGraw-Hill Companies, Inc. All rights reserved.

Access to Development Funding For Local Governments

Lorenzo ParejaAssociate Director International Public FinanceRatings ServicesStandard & Poor’s

September 17, 2008

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S&P Global Coverage

• A division of The McGraw-Hill

Company

• Over 140 years of experience

• Global office network in 24 Countries

• 6300+ employees

• We rate more than 40,000 issuers in

over 100 countries

• We rate 90% of the world’s publicly

issued debt

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Ratings for the African LRGs and GREs

1. Growing interest for LRGs & GREs ratings in Africa: The

experience of S&P

2. The value of a rating

3. Criteria for rating LRGs & GREs

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1. Growing interest for LRGs & GREs ratings in Africa:

The experience of S&P

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Sovereign ratings growth concentrated in non-IG Africa

Sub-Saharan Africa

• Benin (B/Pos.)

• Botswana (A+/Stable)

• Burkina faso (B/Stable)

• Cameroon (B/Stable)

• Gabon (BB-/Stable)

• Kenya (B/Negative)

• Madagascar (B/Stable)

• Mali (B/Stable)

• Mozambique (B+/Stable)

• Nigeria (BB/Stable)

• Senegal (B+/Negative)

• South Africa (A+/Stable)

North Africa

• Egypt (BB+/Stable)

• Morocco (BB+/Positive)

• Tunisia (A/Stable)

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Next Step in Africa : Local and Regional Governments

• LRGs global demand for ratings

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Example of current trend in Emerging markets

Mexico: Ratings on LRGs and Water companies

1 2

858183

76

60

48

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2. The value of a rating

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Rating definition. S&P

Issuer Credit RatingIssuer Credit Rating

‘An opinion of the obligor’s overall capacity to meet its financial

obligations.

This opinion focuses on the obligor’s capacity and willingness to meet

its financial commitments when they come due’.

Standard & Poor’s: Criteria 2007

Constitute a recommendation to buy, sell or hold a particular security

Comment on the suitability of an investment for a particular investor

Measure liquidity, volatility, or market value

S&P does not perform an audit in connection with any rating

A rating is not an opinion if an entity is ”good” or ”bad” – it is a measure of therisk an investor is taking on by investing in that entity’s financial obligations.

A rating does NOT

Note: a rating is requested, agreed and paid for by the borrower/ client/ investors

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Default Risk by Rating. S&P

Source: S&P Annual Global Corporate Default Study (cumulative average default rates by ratings, 1981 to 2007)

2007 Annual Global Corporate Default Study

0

10

20

30

40

50

60

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15

(Time horizon, years)

(%)

BBBBBB

AA

AAAA

AAAAAA

B

BB

CCC/C

Non Investment Grade

Investment grade

• Cumulative average default rates by ratings, 1981 to 2007)

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Standard & Poor’s Global Rating Scales

Capacity to meet its financial commitment

AAA Extremely strong

AA Very strong

A Strong

BBB

Adequate but more susceptible to the adverse effects of economic conditions

AAA

AA+

AA A-1+

AA-

A+

A A-1A-

BBB+ A-2

BBB

BBB- A-3

BB+

BB B

BB-

B+

B

B-

CCC+ C

CCC

CCC-

CC

SD

D D

Long-term Rating Scale

Short-term Rating Scale

Sub-investment grade ratings regarded as having significant speculative characteristics. Around 1/3rd of corporate ratings in Europe, 2/3rds in the US.

BBLess vulnerable to nonpayment than other speculative ratings. However, debt reimbursement capacity could be somewhat impacted in case of adverse economic conditions

B

More Vulnerable to nonpayment than BB but the obligor still has the capacity to meet its financial commitments. Adverse economic conditions will likely impair debt reimbursement capacity

CCCVulnerable to non-payment and is dependent on favorable business, financial and economic conditions.

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Standard & Poor’s National Rating Scales

• South Africa, Nigeria, Brazil, Mexico, Russia, Canada….

• National Scales:

– Issuer credit rating: ‘An opinion of the obligor’s overall capacity to meet its financial obligations …relative to other national obligors’

– Use of National Scales:

More granular ratings

Emphasis on comparability with other national obligors

Excludes risks common to all national obligors (e.g. transfer risk)

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Benefits of Ratings in the Marketplace

Borrowers/Issuers

• Enables capital structure to be optimised

• Broadens lender base

• Determines cost of funds in

public market

Investors

• Independent assessment of credit quality of entity and specific issue

• Enhances secondary market liquidity

Intermediaries

• Key consideration for structuring and pricing transaction to sell

• Allows approach to wider group of Investors

Borrowers/Issuers

• Enables capital structure to be optimised

• Broadens lender base

• Determines cost of funds in

public market

Investors

• Independent assessment of credit quality of entity and specific issue

• Enhances secondary market liquidity

Intermediaries

• Key consideration for structuring and pricing transaction to sell

• Allows approach to wider group of Investors

Other benefits

• Diversification of financing sources

• Discipline & Accountability

• Transparency. International benchmarking of risks

• PPPs

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Other ratings-related products

• Credit Assessment (CA)

- Credit assessments are preliminary indicators of creditworthiness expressed in either a broad rating category or in descriptive terms. They provide an evaluation of the general strengths and weaknesses of an issuer, obligor.

- Credit assessments represent a point-in-time evaluation and are generally confidential.

- Standard & Poor's does not maintain ongoing surveillance on credit assessments.

• Private Credit Analysis (PCA)

- Confidential credit opinions on entities that do not have a public credit rating

• Rating Evaluation Service (RES)

- An assessment of the credit impact of a proposed strategic initiative/ hypothetical scenarios before it is implemented.

- Provides a timely credit evaluation and an indicative rating outcome for each scenario

- Carried out by the same analysts who are responsible for all other rating decisions with the same issuer

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Rating Criteria for LRGs and GREs(Local and Regional Governments, Government-Related Entities)

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LRG and GREs

• LRG and GRE analytical peculiarities

– Accounting and information issues

– Rating stability

– Emerging Countries specificities

• LRG and GRE: The rating process

Previous to Management

meeting

Management Meeting Committee

date

Release to capital markets

Surveillance

Data requirements

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Key Rating Factors: Local and Regional Governments

1. Inter-governmental system supportiveness and predictability

2. Demography, Economic structure and growth prospects

3. Political stability and management sophistication

4. Financial flexibility

5. Budgetary performance, projections

6. Debt burden

7. Liquidity and debt management

8. Off balance sheet liabilities

For detailed information, see article ”Rating International Local And Regional Governments: A Primer”, on RatingsDirect

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Key Rating Factors: Government-related entities

• 1. Stand alone ratings incorporate Ongoing Government support

• 2. Extraordinary support could enhance a rating on a GRE

• 3. Public-policy based GREs

• 4. Commercial GREs

• 5. Government guarantees

• 6. Rating a GRE above its own government

• 7. Foreign currency considerations

For detailed information, see article ”Rating Government-related entities: A Primer”, on RatingsDirect

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Contact Details

• Analytical contacts– Ben Faulks - Associate Director, Sovereign Ratings

[email protected]

– Myriam Fernandez de Heredia -Senior Director, International Public Finance

[email protected]

– Moritz Kraemer - Managing Director, Sovereign Ratings

[email protected]

– Lorenzo Pareja - Associate Director, International Public Finance

[email protected] + 34 91 389 69 62 (Madrid, Spain)

• Business Development contacts– Sofya Tolstykh - Associate Director, Sovereign/Public Finance Ratings Group EMEA

[email protected] +44 2071763685 (London, UK)

– Konrad Reuss – Managing Director, Africa

[email protected]

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Analytic services and products provided by Standard & Poor’s are the result of separate activities designed to preserve the independence and objectivity of each analytic process. Standard & Poor’s has established policies and procedures to maintain the confidentiality of non-public information received during each analytic process.

www.standardandpoors.com

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Standard and Poor’s Main Policies*

Issuer Confidential Information

Avoiding Selective Disclosure

Management Meetings

Role of the Rating Committee Chairperson

Appeal

Pre-Publication Notice to Issuers

Rating Release

Surveillance

* Main Policies and Terms and Conditions attached to the Credit Ratings Briefing Book

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Initial rating assignment typical time frame

Rating Request

60 Days0 Days 30 Days

Credit Committee

PreliminaryDiscussions

Management MeetingPlanning

Supply of Requested/Available Information/Documentation

Discussion of conclusions

with rated entity

Possible Appeal

Management Meetings

Timing may be accelerated/extended to accommodate financing schedules.

1st week 4thweek 3rd week 2nd week 8th week 7th week 6th week 9th week

Release to capital markets

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LONG-TERM PUBLIC FINANCE CREDIT RATINGS DEFINITIONS

AAA An organization rated 'AAA' has the highest rating assigned by Standard & Poor's. The obligor's capacity to meet its financial commitment is extremely strong.

AA An organization rated 'AA' differs from the highest-rated obligations only to a small degree. The obligor's capacity to meet its financial commitment on the obligation is very strong.

A An organization rated 'A' is somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions than obligations in higher-rated categories. However, the obligor's capacity to meet its financial commitment on the obligation is still strong.

BBB An organization rated 'BBB' exhibits adequate protection parameters. However, adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity of the obligor to meet its financial commitment on the obligation.

BB An organization rated 'BB' is less vulnerable to nonpayment than other speculative issues. However, it faces major ongoing uncertainties or exposure to adverse business, financial, or economic conditions which could lead to the obligor's inadequate capacity to meet its financial commitment on the obligation.

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LONG-TERM PUBLIC FINANCE CREDIT RATINGS DEFINITIONS

B -An organization rated 'B' is more vulnerable to nonpayment than obligations rated 'BB', but the obligor currently has the capacity to meet its financial commitment on the obligation. Adverse business, financial, or economic conditions will likely impair the obligor's capacity or willingness to meet its financial commitment on the obligation. Adverse business, financial, or economic conditions will likely impair the obligor`s capacity or willingness to meet its financial commitments.

CCC - An organization rated 'CCC' is currently vulnerable to nonpayment, and is dependent upon favorable business, financial, and economic conditions for the obligor to meet its financial commitment on the obligation. In the event of adverse business, financial, or economic conditions, the obligor is not likely to have the capacity to meet its financial commitment on the obligation. In the event of adverse business, financial or economic conditions, the obligor is not likely to have the capacity to meet its financial commitments.

CC - An organization rated 'CC' is currently highly vulnerable to nonpayment.

C -The `C` rating may be used to cover a situation where a bankruptcy petition has been filed or similar action has been taken but payments on financial commitments are being continued.

D - The `D` rating, unlike other ratings, is not prospective; rather it is used only where a default has actually occurred –and not where a default is only expected.

Plus (+) or minus (-) The ratings from 'AA' to 'CCC' may be modified by the addition of a plus (+) or minus (-) sign to show relative standing within the major rating categories.

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External imbalances

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Cu

rre

nt

Ac

co

un

t B

ala

nc

e (

% o

f G

DP

)

CEE Africa Middle East

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Gross external financing

70

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100

110

120

130

2003

2004

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2007

2008

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2010

% o

f C

A r

ec

eip

ts a

nd

FX

re

se

rve

s

CEE Africa Middle East

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Public debt

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2003

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Gro

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Ge

n.

Go

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De

bt

(% o

f G

DP

)

CEE Africa Middle East