INTRODUCTION TO THE BOND RATING METHODOLOGY
- Purpose and Technique
The credit worthiness rating and bond rating is a process in which the firms’ ability to repay the loan made available to them, their risk exposures, their ability to pay are determined or the risk that the principal, interest and similar liabilities of capital market instruments representing the indebtedness are not met is assessed and classified impartially and justly.
Rating is an important instrument guiding the market players. The investors direct their investments by risk categories established by rating firms. Since the classification of rating results is expressed in result symbols with international recognition in general, there exists uniformity in practice across the countries. The Kobirate rating result symbols are developed according to this principle.
The credit Worthiness Rating and Bond Rating Methodologies of Kobirate International Credit Rating and Corporate Governance Services Inc. consist of qualitative and quantitative factors.
Grades assigned by Kobirate not only reflect the company’s present financial strength but also foresee the future direction of such ability.
The bond rating is an assessment measuring firm’s ability to discharge its liabilities and to repay its debts in time and in full.
By rating, it is designed to determine how a borrower (for example issuer of bond) or a borrowing instrument (for example a debenture) is credible in general.
Firm’s ability to repay the principle and interest underwritten under a certain agreement depends on continuity of firm’s production of goods or services in stability and maintenance of a stable financial structure generating the necessary cash flows.
Accordingly, one of the most important elements in rating of bond issued is that the volume of cash inflows and cash movements are regular, and to what extent they are corresponding to the payments of principal and interest due and payable.
- Rating the Issues and the Issuers
In order to initiate the bond rating service, the Bond Rating Service Agreement must be signed.
The concept of Issuer means the joint stock companies, state owned enterprises including those under privatisation under the regulations, local governments and establishments operating under special regulations relating to such administrations.
The term issue means the issue and sale of bonds by the issuers with or without public offer.
On international context, the bond rating system must contain two obviously diversified separate operational dimensions.
Firstly, corporate credit rating in which the risk that the firm that issues bond may be in default is determined. Secondly, special risk factors that might result in loss to be incurred by investors due to issuing conditions of securities issued are found out and assessed.
Kobirate’s methodology is designed systematically to consider all the basic risk factors of such two dimensions.
Borrower’s risk is measured by using the corporate credit rating methodology. In case of a bond without any feature other than maturity and interest, normally, it must bear the issuer’s rating grade.
The analysis to be made in process of credit rating by Kobirate International Credit Rating and Corporate Governance Services Inc. is based on, the historic operations in at least 3-5 years the financial and non-financial data for the same period and documentation relating to such data by independent audit firms and professionals who are authorised to audit under Act. No. 3568 in compliance with the accounting principles established by Turkish Accounting Standards Board.
- Corporate Credit rating Grade Descriptions and mathematical score ranges of Kobirate International Credit Rating and Corporate Governance Services Inc. apply to bond rating.
- Bond rating is achieved in accordance with Kobirate’s corporate credit rating rules and principles.
- Kobirate corporate credit rating processes and phases are followed in the same way in bond rating.
- In the process of bond rating, the same documentation and data are required which are required in Kobirate corporate credit rating process documentation and data are transmitted on line to firms to receive bond rating service, and printed questionnaires are sent to firms whose infrastructures are not fit for data transfer.
- Before and after the commencement of bond rating process, the accounting policies and relevant procedures of firm are reviewed the impact of such procedures and practices on company performance and the extent to which the same reflect the company performance are assessed.
In order for firm data to compare with the sector and other firms soundly, it is ensure that the following necessary arrangement are made or differences are considered to render the data to be suitable for quantitative analysis.
- Consolidation principles
- Inventory evaluating method
- Evaluation and depreciation methods for fixed assets
- Recognitions of revenue and expense items
- Evaluation of cash and investments
- Provisions for and evaluation of accounts receivable
- Evaluation of Intangible fixed assets and its method
- Retirement and severance pay liabilities
- Other and contingency liabilities if any
The corporate credit rating and bond rating grades to be assigned by Kobirate will be finalized by Kobirate Credit Rating Committee at the end of examinations and proposals made by Kobirate rating specialists.
The regulators are notified of the composition and nature of Credit Rating Committee.
The corporate credit rating system developed at Kobirate, workshops prepared by credit rating specialists, data supplied by firms, the report containing rating specialists’ suggestions and the final report approved by Kobirate Credit Rating Committee are archived in digital media and kept for durations required by regulators.
In case of bond issued with other firm’s guarantee, the guarantor’s rating grade must be considered. Maturity matters here. The maturity of firm’s rating grade must be concurrent with that of bond issued.
In the bond rating methodology, firm’s corporate credit rating, together with properties of issued bond examined under 3 main headlines are incorporated in the rating process.
They follow:
- If pre-emptive right is available for repayment
- Reliability of securities
- Assurances provided by terms of aggrement.