OREANDA-NEWS. Fitch Ratings has today published its updated rating criteria for supranational institutions. The broad rating approach remains unchanged and the new criteria do not have any impact on existing ratings. However, some important amendments have been introduced, which may affect rating sensitivities. These changes are presented in the updated version of our Supranationals Rating Criteria..

The report describes Fitch's criteria for rating supranationals, of which most are multilateral development banks (MDBs). It also covers supranational financial guarantors (SFGs) when their rating is support-driven, with their standalone rating assessed through Fitch's insurance criteria, and supranational administrative bodies (SABs). The rating approach for SABs is consistent with the broad principles of the MDB criteria, while taking into account the specific characteristics of each entity. Supranationals are rated using these criteria for both new and ongoing rating reviews.

Fitch's broad principles for rating supranationals remain unchanged: the agency first determines the MDB's standalone credit quality, which Fitch refers to as its intrinsic rating (IR), and then assesses the likelihood of it receiving extraordinary financial support from shareholders, which considers both the capacity and propensity to support. In the new approach, the Issuer Default Rating (IDR) is based on the IR plus a credit uplift reflecting support from shareholders; this adjustment will generally not exceed three notches.

The approach to assessing the MDB's IR has also been revised. Fitch determines a separate assessment for solvency and for liquidity, on a scale ranging from 'aaa' to 'd'. The IR is derived from the solvency assessment and capped by the liquidity assessment (ie. the lower of the two); it is then adjusted for the business environment, through a potential adjustment of three notches, either up or down.

The assessment of solvency is based on two broad factors: capitalisation and risks. Individual factors are assessed separately on a four-grade scale. Capitalisation depends essentially on capital ratio measures and on an analysis of internal capital generation. The assessment of risks relies on five sub-factors - credit risk, concentration risk, equity risk, market risk, and risk management - and uses quantitative variables and qualitative assessments.

Fitch's assessment of the liquidity of an MDB aims at measuring the size and quality of its liquid assets relative to its present and future cash needs. The key indicators are the ratio of liquid assets-to-short-term debt and the quality of treasury assets. Other factors, such as access to funding from capital markets or the banking system, and alternative sources of liquidity, are also incorporated in the analysis.

In the new approach, the determination of the IR for MDBs also includes an assessment of the institution's business environment; this leads to three possible outcomes: High Risk, Medium Risk and Low Risk. The assessment is based on two broad factors: business profile, which takes into account the risk associated with the strategy and the governance of the MDB; and operating environment, which reflects the risks associated with the countries of operation and the bank's head-office location.

The IR is potentially adjusted by a credit uplift, reflecting shareholders' capacity and propensity to provide extraordinary financial support. Capacity to provide such support is measured by the rating of callable capital subscribed by shareholders ensuring full coverage of the MDB's net debt, or by the average rating of key shareholders. Propensity to support is assessed via qualitative factors such as the importance of the MDB and the enforceability of the support mechanism.