Training on sovereign risk credit analysis, October 24

Credit Ratings: Meaning and Use

This section features information on the ACRA rating process, including its rating scales and rating definitions, as well as details of the regulatory practices of using ACRA ratings in normative and legal acts of the Russian Federation.

Rating definitions

A credit rating assigned to a rated entity by ACRA is an ACRA’s subjective opinion on the current and future (with a horizon of up to three years) ability of that rated entity to meet its financial obligations. In economic terms, the credit ratings assigned by ACRA under the national scale reflect a relative default probability of rated entities (or securities) when compared to the highest possible creditworthiness level in the Russian economy – the one that ACRA embeds in debt obligations of the Government of the Russian Federation and certain derivatives thereof.

A credit rating assigned by ACRA to structured finance instruments and obligations is an Agency’s subjective opinion on the likelihood and the magnitude of losses that may be related to rated obligations issued by a special purpose vehicle (SPV, or a similar issuer and rated entity) and that depend on the ability of this SPV to meet its financial obligations secured by the pledge of monetary claims and/or other property owned by this SPV and/or by third parties.

A rating assigned by ACRA to structured finance instruments and obligations may be a subjective opinion on both the likelihood of timely payments of individual components of the debt obligation in question (for example, interest only), or of its total amount (principal and interest). As a rule, credit ratings of structured finance instruments and obligations reflect:

  • Credit quality of certain assets in the collateral portfolio of financial obligations issued by an SPV (or a similar issuer and rated entity);
  • Legislative and contractual arrangements that define a special legal status of an SPV and reduce the probability of its bankruptcy;
  • A procedure for cash flow distribution between holders of one or more SPV’s issues and transaction counterparties;
  • Credit and operating risks associated with transaction counterparties and the impact of such risks on SPV financial obligations’ credit quality;
  • Mechanisms aimed at supporting credit quality and/or liquidity of SPV’s financial liabilities.

A reliability rating assigned by ACRA to an asset management company is an ACRA’s subjective opinion based on research results and reflecting the current and future ability of the asset management company to provide trustors with quality services under a standard trust management agreement. The term ‘quality services’ denotes lawful trust management services offered by asset management companies and aimed at maximizing returns under a set risk level, provided that trustor interests prevail over the company’s own ones, and due diligence and prudent investor principles are respected.

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