The proposed update to the methodology can be downloaded here.

The proposed update provides refinements to Scope’s analytical approach for assigning credit ratings to government related entities (GREs). The GRE Methodology continues to be based on a qualitative, principles-based ‘segmentation-approach’ to account for the wide variety of entities and organisations, varying jurisdictions and resulting different relationships of GREs with their respective public sponsors.

Methodology highlights

Scope’s approach starts with the analysis of the strength of the relationship between the GRE and its public sponsor. Based on the GRE’s level of integration with the sponsor, Scope then chooses either the ‘Top-Down’ or ‘Bottom-Up’ approach and determines the primary driver of the GRE’s rating.

The ‘Top-Down’ approach takes the public sponsor’s rating as the starting point and then applies indicative notching based on Scope’s assessment of i) the ‘control and regular support’ and ii) the ‘likelihood of exceptional support’ for the GRE.

Scope’s ‘Bottom-Up’ approach starts with the assessment of the GRE’s stand-alone credit quality, and then, applies credit uplift factors. The extent of the upward notching is based on Scope’s assessment of i) the public sponsor’s ‘capacity to provide a credit uplift ’, and ii) the public sponsor’s ‘willingness to provide support’.

Under both approaches, in case of an explicit guarantee covering all of the GRE’s debt obligations, Scope will align the GRE’s rating with that of the public sponsor.

In a third step, Scope performs a supplementary analysis which can have credit-positive or negative implications for the final rating or no implications at all. This can include an assessment of the fundamentals of the GRE (under the ‘Top-Down’ approach) and the risk of potential negative interventions by the government (under both approaches).

Summary of the proposed key changes

With this proposed update of the methodology, Scope proposes to:

• Broaden the application of the approach via the equalisation factor for entities with robust and well-anchored explicit guarantees on their debt;
   
• Refine the qualitative assessment guidance tables of ‘Financial Interdependencies’;
   
• Modify the output of the qualitative scorecard under the ‘Bottom-up’ approach;
   
• Make additional editorial changes.

Call for comments

Scope invites investors, issuers, policymakers and other interested parties to comment on the methodology as part of the agency’s ongoing commitment to transparency and open dialogue with market participants. Please send your comments by 05 June 2023 to consultation@scoperatings.com. Scope will review and publish the content of written responses in accordance with regulatory requirements unless the respondent has specifically requested confidentiality.