Rating Method Scope Sovereign Ratings

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Introduction

Scope Ratings GmbH is an European credit rating agency founded in 2012 and headquartered in Berlin, Germany. It is part of Scope Group SE & Co. KGaA, the privately held holding company that also includes Scope Analysis, Scope Risk Solutions, Scope Investor Services and Scope Insights[1].

Scope specialises in the analysis and ratings of financial institutions, corporates, structured finance, project finance, sovereigns and the public sector.

Scope Ratings is registered in accordance with EU rating regulations and operates in the European Union with External Credit Assessment Institutions (ECAI) status[2]. Scope is also registered with the Swiss Financial Market Supervisory Authority (FINMA) for public finance and commercial entities[3]. Scope Ratings has the fourth widest ratings coverage of debt issuance in the sovereign, public entities and supranational institutions as well as non-financial corporates asset classes within the European Union, after only that of Standard & Poor’s, Moody’s and Fitch, and is the credit rating agency of European origin with the widest ratings coverage in these asset classes as well as in structured finance in the EU[4]. Scope rates 100% of EU sovereign debt issuers, and around 75% of the world’s sovereign debt issuers weighted by outstanding debt volume. Scope Ratings is the only European rating agency that rates the European Union[5] alongside its 27 member states.

Sovereign Rating Methodology

Rating Definition and Scale

Scope's sovereign ratings are forward-looking assessments of the ability and willingness of central governments to honour debt obligations to private-sector creditors in full and on time. Ratings are assigned to the issuer, i.e. the sovereign government, and its debt instruments. Scope assigns local-currency ratings and foreign-currency ratings, using long-term (original maturity of over 12 months) and short-term (original maturity of up to 12 months) rating scales.

For Scope, a bond is considered investment grade if its credit rating is BBB- or higher. Bonds rated BB+ and below are considered to be speculative grade. Scope-mapping-long-term-short-term.png

Analytical Pillars and Dual Quantitative-Qualitative Approach

In assigning a sovereign’s credit rating, Scope incorporates the most significant factors that impact the risk of the issuer upholding timely and full payment of interest and principal over a long-term horizon. Scope’s sovereign rating methodology reviews five analytical categories – each of which is assessed under a quantitative model (Core Variable Scorecard, CVS) and a qualitative analyst assessment overlay (Qualitative Scorecard, QS). The five analytical areas:

  1. Domestic economic risk (35% weight);
  2. Public finances risk (30%);
  3. External economic risk (15%);
  4. Financial stability risk (10%); and
  5. Institutional and political risk (10%).


Quantitative Model

The Core Variable Scorecard (CVS) is the first step in determining a country’s sovereign rating – by providing an indicative sovereign rating range. The CVS includes 24 total variables under the five analytical pillars and includes for 11 of these variables a weighted average of the past year’s data, the current year’s data alongside forecasts over a long five-year forward horizon. The CVS model determines aggregate scores for each of the five analytical pillars as well an aggregate country-level score, the latter which maps to a long-term indicative credit rating. To standardise factor-level scores, Scope uses a minimum-maximum algorithm, with scores ranging from 1 to 100 for each of the 24 indicators (100 being the strongest and 1 being the weakest). In the determination of the minimum-maximum range under each variable, Scope excludes outliers.

Qualitative Overlay

Scope complements the quantitative model (i.e. CVS) with the Qualitative Scorecard (QS) to account for analytical elements that cannot be captured by the CVS. The QS assessment requires lead country analysts to judge a sovereign’s comparative strengths relative to a CVS-determined sovereign ‘peer group’ of countries under 15 total QS assessment categories under the five analytical pillars (e.g. three categories per pillar). This framework facilitates Scope’s rating assessments as being through the cycle and contemplates factors even beyond the long five-year forward window of the quantitative model. This could include consideration of long-run sustainable growth, environment, social or governance (ESG) related factors that materialise over the very long-run, or institutional factors. Scope considers, for example, under the QS, factors like advancements made since the Global Financial Crisis to the EU institutional architecture – including those to the ECB’s toolkit – deemed relevant for EU sovereigns’ market access and access to lenders of last resort. Scenario analysis is part of the QS evaluation. The QS can, at most, adjust a sovereign’s credit rating from the CVS indicative rating by up to three notches.

Rating Committee

After CVS (quantitative) and QS (qualitative) evaluations, the lead analyst prepares a rating recommendation. At this stage, the analyst presents the recommendation at Rating Committee level for determination of the sovereign rating. A determination is reached considering the analyst’s recommendation. This stage can also incorporate any extraordinary rating level adjustments at Rating Committee level to account for factors not captured by the CVS or QS.

Model Data and Sources

Scope’s CVS and QS analytical evaluations are based predominantly on public information. Data sources include supranational organisations (such as the International Monetary Fund, the European Commission, the European Central Bank, the Organisation for Economic Co-operation and Development, the World Bank, and the Bank for International Settlements), national statistical offices, national central banks, various government agencies and ministries, as well as other generally accepted public data sources. Scope will not rate a sovereign if data are considered inadequate in coverage or lacking in adequate quality, or if other issues exist that place data into question.

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References

  1. German Wikipedia article - Scope Group, retrieved 2020-6-7.
  2. European Securities and Markets Authority. CRA Authorisation. ESMA.
  3. Swiss Financial Market Supervisory Authority. Recognised credit rating agencies. FINMA.
  4. European Securities and Markets Authority. Report on CRA Market Share Calculation. ESMA.
  5. European Commission. The EU’s credit rating. European Commission.