SADC

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SADC DFRCDFI Stakeholder Workshop

• 26 March 2009

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Agenda
Credit Ratings in general
Fitchs Rating Scales
Fitchs Profile
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What areCredit Ratings?
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Credit Ratings

• Fitch's credit ratings provide an opinion on the
  relative ability of an entity to meet financial
  commitments, such as interest, preferred
  dividends, repayment of principal, insurance
  claims or counterparty obligations. Credit
  ratings are used by investors as indications of
  the likelihood of receiving their money back in
  accordance with the terms on which they
  invested.
• Assigned to ISSUERS and to OBLIGATIONS

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Who Gets Ratings?

• Financial Institutions
• Corporates
• Sovereigns
• Local authorities
• Debt, loans, preferred stock, other obligations
  of the above
• Debt issued by SPVs

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What Do Ratings Mean?

• Independent, Timely, Prospective
• Ratings measure credit risk more specifically
• Issuer Default Ratings
• Probability of Default only
• Issue ratings for corporates, banks, insurers and
  sovereigns
• Probability of default, adjusted up or down to
  reflect relative loss severity (PDLGD)
• Issue ratings for structured finance
• Probability of default, although underlying
  assets are analysed using loss severity
  assumptions

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What Do Ratings Mean?

• Ratings are ordinal
• AA less likely to default than BB
• Speculative-grade (BB and lower) more likely to
  default than investment-grade (BBB- and higher)
• Ratings are through the cycle opinions
• Ratings measure the obligation under the
  documentation
• Can affect timeliness considerations
• Can affect absolute amount of principal or
  interest obligation

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What Does a Rating Do for my Company?

• Enables better access to debt capital markets
  funding
• Assists in obtaining a better take-up and pricing
  on bond issuance
• Broadens investor base, aids tighter pricing
• Helps in negotiating better pricing with
  correspondent banks
• Helps in maintaining competitive tension between
  correspondent banks
• Reduces level of collateral posted with credit
  card association
• Assists in negotiating better financing terms
  with the World Bank, IFC, etc
• Enables benchmarking to peers
• Both on a local and an international base
• Demonstrates transparency and discipline
• Especially for issuers that are regularly in the
  public domain

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What Do Ratings Not Include?

• Fitch does not verify or audit data from an
  issuer
• Fitch does not require, approve, or endorse
  issuer behaviour
• Ratings are not recommendations to buy/sell or
  hold a security
• Ratings do not constitute investment guidance,
  recommendations or advice
• Ratings are not commentaries on pricing of bonds
• Ratings are not an expression of a percentage
  probability of default
• Credit ratings are not an assessment of anything
  other than credit risk

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What Do Ratings Not Include?

• Corporate Ratings do not incorporate Temporal
  Subordination
• (i.e. a 10-day obligation has less risk than a
  10-year obligation)
• Fraud
• Fraud means active misrepresentation of
  material facts or material embezzlement
• Fraud is not simply mismanagement or
  incompetence our view on management quality
  should be incorporated in the rating
• Erroneous logic They told us they would double
  profits in 6 months if they dont, well, thats
  fraud isnt it?

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Who Uses Ratings?

• Investors
• Banks
• Regulators
• Commercial Counterparties

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Fitchs Rating Scales
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Fitchs Investment Grade Ratings Scale
Short Term Rating
F1
F1
F2
F3
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Fitchs Sub Investment Grade Ratings Scale
Short Term Rating
Long Term Rating
B
C
D
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Rating Addendums

• Add "" or "-
• suffixes that denote relative status within major
  rating categories (BBB-, BB)
• Rating Watch
• Rating Outlook

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Rating Watch

• Notifies a reasonable probability that a rating
  change will take place (most likely relating to
  an expected event)
• "Positive (?) indicates a potential upgrade
• "Negative (?) a potential downgrade
• "Evolving (?) if ratings may be raised, lowered
  or maintained
• Typically resolved over a relatively short period

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Rating Outlook

• Indicates the most likely direction of a rating
  over a one- to two-year period.
• May be positive, stable, or negative
• (Occasionally, Fitch may be unable to identify
  the fundamental trend and in these cases, the
  Rating Outlook may be described as "evolving")
• Most Outlooks are stable

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Mandate to Publication The Ratings Process
Explained
Ongoing dialogue and application of ratings to
new issue and progs
Ratings released to public domain. Full rating
report available to subscribers
Preparation of final rating report and press
release
Rating committee review and decision
Rating committee presentation and draft report
Comments from company
Further analysis
Process requires interactive dialogue with issuer


Management meeting
Questions sent to issuer
Review of publicly available information
Lead and backup analyst designated
Replies in advance of management meeting
Rating Agreement Signed
Company sends A/Cs and other information Dates
for meeting
Time Line sensitive to information flow!
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Fitchs Profile
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Fitch Ratings

• Know Your Risk
• One of only 3 global rating agencies with
  expertise and critical mass across the credit
  spectrum
• Dual headquartered in London and New York
• 7,500 active subscribers globally
• 1,800 employees in 35 countries, 49 offices
  worldwide
• A mass of expertise at your service

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Worldwide Offices and Staff
Dubai
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Why Fitch?

• Fitch is an effective and proven alternative,
  offering issuers and their advisors the benefits
  of
• Critical mass coverage
• Broad investor acceptance
• Clear and transparent methodologies and processes
• Highly skilled and experienced analysts
• A best in class research offering to a world
  wide client base of credit risk managers and
  investors a great shop window for issuer
  visibility
• A complete range of rating products
• A cost effective fee structure
• A strong service ethos dedicated to timely
  delivery of all aspect of its product and service
  offering

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Your contact at Fitch