Standard & Poor’s Ratings Services is requesting comments on a proposal to expand global coverage of recovery ratings and analytics and to increase the weight of recovery prospects in issue ratings. We view this proposal as a natural evolution of the groundbreaking work we began in 2003 by rolling out recovery ratings for secured debt instruments of industrial speculative-grade issuers. Our traditional approach of using fundamental and quantitative analysis to assess the two main components of credit risk— default and recovery—will be expanded to cover secured, unsecured, and subordinated debt of speculative-grade (rated ‘BB+’ or below) industrial, financial services, sovereign, and non- U.S. public finance issuers.
We propose that issue ratings for rated debt be based on a blend of default and recovery prospects, reflecting a revised “notching” framework (i.e., raising or lowering a specific issue rating from that of its issuer credit rating). Looking down the road—and using our expanded experience with recovery ratings such as we are proposing— we may move toward a more explicit and quantifiable “expected loss” approach to issue ratings.
Our current proposal for expanding coverage of recovery ratings is in response to the market’s broad acceptance of our over 1,600 recovery ratings in place today, its increasing focus on postdefault recovery prospects, and its demand for greater clarity and specificity with respect to recovery prospects on different debt instruments of all types of issuers globally.
By providing a default indicator, a recovery indicator, and a blended issue rating, our intent is to enhance ratings transparency, provide market participants the opportunity to deconstruct the risk of default and loss as components of the rating, and facilitate prevailing valuation and risk management disciplines in use in the credit markets.
The introduction of the proposed methodology represents a meaningful transition in the ratings product. Consistent with our larger transparency initiative, we encourage market participants to review these potential changes and invite feedback to the specific questions posed or other issues raised by these proposed adjustments.
