Scope Ratings has today published its proposal for a consumer and business services methodology to complement its existing General Corporate Rating Methodology and is calling for comments until 24 November 2023.

The methodology provides a framework for analysing business risks specific to European business-to-business (B2B) and business-to-consumer (B2C) services companies. The methodology can also be applied to non-European issuers where appropriate. The financial risk profile assessment of services companies remains largely based on the metrics outlined in Scope’s general corporate rating methodology.

The new methodology will improve credit differentiation through an industry-specific credit risk evaluation and a more comprehensive and nuanced assessment of credit factors. Scope’s approach further improves transparency and highlights the relative importance of key rating drivers when analysing services corporates.

Scope’s methodology defines B2B and B2C services corporates as those that generate most of their revenue and cash flow from services provided either to other businesses or directly to consumers. Scope classifies services companies as asset-light or asset-heavy. The methodology also differentiates between business models that i) require a specialised workforce; and ii) use an unspecialised workforce, have services that are operated by the customer, or have digitalised services.  IT services are not covered under this methodology.

Methodology highlights

Scope has refined the competitive position assessment for service companies, introducing service strength as a factor specific to the industry and fine-tuning the other three criteria:

1. Market shares: scalability of services introduced as a forward-looking indicator
    
2. Diversification: service offering and cross-selling potential identified as key factors
    
3. Operating profitability: Scope-adjusted return on capital employed and service quality used to assess actual and forward-looking operating profitability
    
4. Service strength: a new credit factor specific to the services industry consisting of i) brand strength and service quality to assess the ability to keep and attract business; ii) revenue stability and predictability as measured by the customer churn rate; and iii) service integration to assess the link to customers and a service’s ease of substitution.

The methodology also covers ESG considerations and how they are consistently incorporated into the credit analysis. In the services industry, social aspects are the most important and include labour treatment and working conditions. Environmental aspects also have some bearing on the credit assessment, such as the environmental impact of assets used to provide the services.

Rating impact and reviews

The methodology as proposed is expected to have limited positive impact on existing credit ratings that will fall into the scope of the methodology.

The methodology is available for download on this link or on www.scoperatings.com.

Call for comments

Scope invites issuers, investors and other interested parties to comment on the proposed methodology by 24 November 2023 as part of the agency’s ongoing commitment to transparency and open dialogue with market participants.

Please send your comments to consultation@scoperatings.com.

Scope will review and publish the content of written responses in accordance with regulatory requirements unless the respondent has explicitly requested confidentiality and will publish the final version of the methodology thereafter.