Fitch Ratings – Definitions of Ratings and Other Forms of Opinion – Nov 2012 Definitions of Ratings and Other Forms of Opinion Fitch Ratings – Definitions of Ratings and Other Forms of Opinion – Nov 2012 2 UNDERSTANDING CREDIT RATINGS – LIMITATIONS AND USAGE 4 A. CREDIT RATING SCALES 6 SUMMARY OF PRIMARY SCALES 7 A.1 INTERNATIONAL ISSUER AND CREDIT RATING SCALES 9 A.1.1 Long-Term Rating Scales 9 A.1.1.1 Issuer Credit Rating Scales 9 A.1.1.2 Corporate Finance Obligations – Long-Term Rating Scales 12 A.1.1.3 Structured, Project & Public Finance Obligations – Long-Term Rating Scales 15 A.1.2 Short-Term Ratings 18 A.1.2.1 Short-Term Ratings Assigned to Obligations in Corporate, Public and Structured Finance 18 A.1.2.2 Relationship between Short-Term and Long-Term Ratings in Corporate and Public Finance 19 A.2 RECOVERY RATINGS 21 A.3. OTHER INTERNATIONAL CREDIT RATINGS 23 A.3.1 Bank Individual, Viability and Support Ratings 23 A.3.1.1 Support Ratings 23 A.3.1.A Bank Viability Ratings 25 A.3.2 Insurer Financial Strength Rating Definitions 27 A.3.2.1 Long-Term International IFS Ratings 28 A.3.2.2 Short-Term IFS Ratings 30 A.4 NATIONAL RATINGS 31 A.4.1 National Credit Ratings 31 A.4.2 National Long-Term Credit Ratings 32 A.4.3 National Short-Term Credit Ratings 34 A.4.4 National Insurer Financial Strength Ratings 35 A.5 COUNTRY CEILINGS 37 A.6 ADDITIONAL USAGE OF PRIMARY CREDIT RATING SCALES 38 A.6.1 Expected Ratings 38 A.6.2 Private Ratings 38 A.6.3 Program Ratings 38 A.6.4 “Interest-Only” Ratings 38 A.6.5 “Principal-Only” Ratings 38 A.6.6 “Rate of Return” Ratings 38 A.6.7 “Unenhanced” Ratings 39 B. OTHER SPECIALIST RATING SCALES 40 B.1 SERVICER RATINGS 40 B.1.1 General Servicer Ratings 40 B.2 FUND RATINGS 43 B.2.1 International Fund Credit Ratings 43 B.2.2 International Fund Volatility Ratings 44 B.2.3 International Money Market Fund Ratings 46 B.2.4 Fund Quality Ratings 47 B.2.5 National Fund Credit, Fund Volatility, and Money Market Fund Ratings 50 B.2.5.1 National Fund Credit Ratings 50 B.2.5.2 National Fund Volatility Ratings 50 B.2.5.3 National Money Market Fund Ratings 50 B.3 ASSET MANAGEMENT RATINGS 51 B.3.1 Asset Manager Rating Definitions 51 B.3.2 National Asset Manager Rating Definitions 52 C. OTHER FORMS OF OPINION 53 C.1.1 Credit Assessment 53 C.1.2 Rating Assessment Service 53 C.1.3 Shadow Ratings (‘*’) 53 C.1.4 Opinions Provided by Fitch Non-Rating Affiliates 53 Fitch Ratings – Definitions of Ratings and Other Forms of Opinion – Nov 2012 3 D. RATING WATCHES AND RATING OUTLOOKS 54 D.1.1 Rating Watch 54 D.1.2 Rating Outlook 54 D.1.3 Deciding When to Assign Rating Watch or Outlook 54 E. RATING ACTIONS 56 E.1.1 Standard Rating Actions 56 E.1.2 Data Actions 57 E.1.3 Historical Actions 58 E.2.1 Withdrawals 58 Fitch Ratings – Definitions of Ratings and Other Forms of Opinion – Nov 2012 4 Understanding Credit Ratings – Limitations and Usage Ratings assigned by Fitch are opinions based on established criteria and methodologies that Fitch is continuously evaluating and updating. Therefore, ratings are the collective work product of Fitch and no individual, or group of individuals, is solely responsible for a rating. Ratings are not facts, and therefore cannot be described as being "accurate" or "inaccurate". Users should refer to the definition of each individual rating for guidance on the dimensions of risk covered by such rating. Fitch's opinions are forward looking and include analysts' views of future performance. In many cases, these views on future performance may include forecasts, which may in turn (i) be informed by non-disclosable management projections, (ii) be based on a trend (sector or wider economic cycle) at a certain stage in the cycle, or (iii) be based on historical performance. As a result, while ratings may include cyclical considerations and typically attempt to assess the likelihood of repayment at "ultimate/final maturity", material changes in economic conditions and expectations (for a particular issuer) may result in a rating change. Credit ratings do not directly address any risk other than credit risk. Credit ratings do not comment on the adequacy of market price or market liquidity for rated instruments, although such considerations may affect Fitch's view on credit risk, such as access to capital or likelihood of refinancing. Ratings are relative measures of risk; as a result, the assignment of ratings in the same category to entities and obligations may not fully reflect small differences in the degrees of risk. Credit ratings, as opinions on relative ranking of vulnerability to default, do not imply or convey a specific statistical probability of default, notwithstanding the agency's published default histories that may be measured against ratings at the time of default. Credit ratings are opinions on relative credit quality and not a predictive measure of specific default probability. Ratings are opinions based on all information known to Fitch, including publicly available information and/or non-public documents and information provided to the agency by an issuer and other parties. Publication and maintenance of all ratings are subject to there being sufficient information, consistent with the relevant criteria and methodology, to form a rating opinion. In issuing and maintaining its ratings, Fitch relies on factual information it receives from issuers and underwriters and from other sources Fitch believes to be credible. Fitch conducts a reasonable investigation of the factual information relied upon by it in accordance with its rating methodology, and obtains reasonable verification of that information from independent sources, to the extent such sources are available for a given security or in a given jurisdiction. The manner of Fitch’s factual investigation and the scope of the third-party verification it obtains will vary depending on the nature of the rated security and its issuer, the requirements and practices in the jurisdiction in which the rated security is offered and sold and/or the issuer is located, the availability and nature of relevant public information, access to the management of the issuer and its advisers, the availability of pre-existing third-party verifications such as audit reports, agreed-upon procedures letters, appraisals, actuarial reports, engineering reports, legal opinions and other reports provided by third parties, the availability of independent and competent third-party verification sources with respect to the particular security or in the particular jurisdiction of the issuer, and a variety of other factors. Users of Fitch’s ratings should understand that neither an enhanced factual investigation nor any third-party verification can ensure that all of the information Fitch relies on in connection with a rating will be accurate and complete. Ultimately, the issuer and its advisers are responsible for the accuracy of the information they provide to Fitch and to the market in offering documents and other reports. In issuing its ratings Fitch must rely on the work of experts, including independent auditors with respect to financial statements and attorneys with respect to legal and tax matters. Further, ratings are inherently forward-looking and embody assumptions and predictions about future events that by their nature cannot be verified as facts. As a result, despite any verification of current facts, ratings can be affected by future events or conditions that were not anticipated at the time a rating was issued or affirmed. If any such information should turn out to contain misrepresentations or to be otherwise misleading, the rating associated with that information may not be appropriate. The assignment of a rating to any issuer or any security should not be viewed as a guarantee of the accuracy, completeness, or timeliness of the information relied on in connection with the rating or the results obtained from the use of such information. If a rating does not benefit from the participation of the issuer/originator, but Fitch is satisfied that “minimum threshold” information for the given criteria is available from public information and other sources available to Fitch, then the non-participatory issuer, as with all issuers, will be afforded the opportunity to comment on the rating opinion and supporting research prior to it being published. Ratings do not constitute recommendations to buy, sell, or hold any security, nor do they comment on the adequacy of market price, the suitability of any security for a particular investor, or the tax-exempt nature or taxability of any payments of any security. Fitch Ratings does not have a fiduciary relationship with any issuer, subscriber or any other individual. Nothing is intended to or should be Fitch Ratings – Definitions of Ratings and Other Forms of Opinion – Nov 2012 5 construed as creating a fiduciary relationship between Fitch Ratings and any issuer or between the agency and any user of its ratings. Fitch Ratings does not provide to any party any financial advice, or legal, auditing, accounting, appraisal, valuation or actuarial services. A rating should not be viewed as a replacement for such advice or services. Ratings may be changed, qualified, placed on Rating Watch or withdrawn as a result of changes in, additions to, accuracy of, unavailability of or inadequacy of information or for any reason Fitch Ratings deems sufficient. The assignment of a rating by Fitch Ratings shall not constitute consent by the agency to use its name as an expert in connection with any registration statement, offering document or other filings under any relevant securities laws. Fitch Ratings – Definitions of Ratings and Other Forms of Opinion – Nov 2012 6 Introduction Fitch Ratings publishes opinions on a variety of scales. The most common of these are credit ratings, but the agency also publishes ratings, scores and other relative opinions relating to financial or operational strength. For example, Fitch Ratings also provides specialized ratings of servicers of residential and commercial mortgages, asset managers and funds. In each case, users should refer to the definitions of each individual scale for guidance on the dimensions of risk covered in each assessment. A. Credit Rating Scales Fitch Ratings’ 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 the money owed to them in accordance with the terms on which they invested. The agency’s credit ratings cover the global spectrum of corporate, sovereign (including supranational and sub-national), financial, bank, insurance, municipal and other public finance entities and the securities or other obligations they issue, as well as structured finance securities backed by receivables or other financial assets. The terms “investment grade” and “speculative grade” have established themselves over time as shorthand to describe the categories ‘AAA’ to ‘BBB’ (investment grade) and ‘BB’ to ‘D’ (speculative grade). The terms “investment grade” and “speculative grade” are market conventions, and do not imply any recommendation or endorsement of a specific security for investment purposes. “Investment grade” categories indicate relatively low to moderate credit risk, while ratings in the “speculative” categories either signal a higher level of credit risk or that a default has already occurred. A designation of "Not Rated" or "NR" is used to denote securities not rated by Fitch where Fitch has rated some, but not all, securities comprising an issuance capital structure. Credit ratings express risk in relative rank order, which is to say they are ordinal measures of credit risk and are not predictive of a specific frequency of default or loss. Fitch Ratings’ credit ratings do not directly address any risk other than credit risk. In particular, ratings do not deal with the risk of a market value loss on a rated security due to changes in interest rates, liquidity and other market considerations. However, in terms of payment obligation on the rated liability, market risk may be considered to the extent that it influences the ability of an issuer to pay upon a commitment. Ratings nonetheless do not reflect market risk to the extent that they influence the size or other conditionality of the obligation to pay upon a commitment (for example, in the case of index-linked bonds). In the default components of ratings assigned to individual obligations or instruments, the agency typically rates to the likelihood of non-payment or default in accordance with the terms of that instrument’s documentation. In limited cases, Fitch Ratings may include additional considerations (i.e. rate to a higher or lower standard than that implied in the obligation’s documentation). In such cases, the agency will make clear the assumptions underlying the agency’s opinion in the accompanying rating commentary. Fitch Ratings – Definitions of Ratings and Other Forms of Opinion – Nov 2012 7 Summary of Primary Scales A.1 International Issuer and Credit Rating Scales International credit ratings relate to either foreign currency or local currency commitments and, in both cases, assess the capacity to meet these commitments using a globally applicable scale. As such, both foreign currency and local currency international ratings are internationally comparable assessments 1 . The local currency international rating measures the likelihood of repayment in the currency of the jurisdiction in which the issuer is domiciled and hence does not take account of the possibility that it will not be possible to convert local currency into foreign currency, or make transfers between sovereign jurisdictions (transfer and convertibility (T&C) risk). Foreign currency ratings additionally consider the profile of the issuer or note after taking into account transfer and convertibility risk. This risk is usually communicated for different countries by the Country Ceiling, which “caps” the foreign currency ratings of most, though not all, issuers within a given country. Where the rating is not explicitly described in the relevant rating action commentary as local or foreign currency, the reader should assume that the rating is a “foreign currency” rating (i.e. the rating is applicable for all convertible currencies of obligation). A.2 Recovery Ratings The Recovery Rating scale is based upon the expected relative recovery characteristics of an obligation upon the curing of a default, emergence from insolvency, bankruptcy or following a liquidation or termination of the obligor or its associated collateral. As such, while the definitions cite rough percentage bands of recovery given default to illustrate relative orders of magnitude, it is an ordinal scale, and does not attempt to precisely predict a given level of recovery. A.3 Other International Credit Ratings Fitch Ratings provides Viability and Support Ratings of banks, which opine on the likelihood that a bank would run into significant financial difficulties such that it would require support and, in that event, the likelihood that it will receive external support. Additionally, the agency assigns ratings to insurance companies, reflecting their financial strength. A.4 National Credit Ratings In certain markets, Fitch Ratings provides National Ratings, which are an assessment of credit quality relative to the rating of the lowest credit risk in a country. This lowest risk will normally, although not always, be assigned to all financial commitments issued or guaranteed by the sovereign state. National Ratings are not intended to be internationally comparable and are denoted by a special identifier for the country concerned. The performance of National Ratings will also not be strictly comparable over time, given the moving calibration of the entire scale to the entity or entities with the lowest credit risk in a country, whose creditworthiness relative to other entities internationally may change significantly over time. A.5 Country Ceilings Country Ceilings reflect the agency’s judgment regarding the risk of capital and exchange controls being imposed by the sovereign authorities that would prevent or materially impede the private sector’s ability to convert local currency into foreign currency and transfer to non-resident creditors – transfer and convertibility risk. A.6 Additional Usage of Primary Credit Rating Scales 1 On March 25, 2010, Fitch determined it would recalibrate its U.S. Public Finance ratings in certain sectors to maintain their comparability with other international credit ratings ("Recalibration of U.S. Public Finance Ratings"). Rating recalibrations of the U.S. states, Commonwealth of Puerto Rico, District of Columbia, and New York City were implemented on April 5, 2010, and the remaining affected rating recalibrations were implemented on April 30, 2010. Fitch Ratings – Definitions of Ratings and Other Forms of Opinion – Nov 2012 8 The primary credit rating scales may be used to provide a credit opinion of privately issued obligations or certain note issuance programs. The primary credit rating scales may also be used to provide a credit opinion of a more narrow scope, including interest strips and return of principal. Fitch Ratings – Definitions of Ratings and Other Forms of Opinion – Nov 2012 9 A.1 International Issuer and Credit Rating Scales The Primary Credit Rating Scales (those featuring the symbols ‘AAA’-‘D’ and ‘F1’-‘D’) are used for debt and financial strength ratings. The below section describes their use for issuers and obligations in corporate, public and structured finance debt markets. For their use in the context of funds, please refer to section B.2. A.1.1 Long-Term Rating Scales A.1.1.1 Issuer Credit Rating Scales Rated entities in a number of sectors, including financial and non-financial corporations, sovereigns and insurance companies, are generally assigned Issuer Default Ratings (IDRs). IDRs opine on an entity’s relative vulnerability to default on financial obligations. The “threshold” default risk addressed by the IDR is generally that of the financial obligations whose non-payment would best reflect the uncured failure of that entity. As such, IDRs also address relative vulnerability to bankruptcy, administrative receivership or similar concepts, although the agency recognizes that issuers may also make pre-emptive and therefore voluntary use of such mechanisms. In aggregate, IDRs provide an ordinal ranking of issuers based on the agency’s view of their relative vulnerability to default, rather than a prediction of a specific percentage likelihood of default. For historical information on the default experience of Fitch-rated issuers, please consult the transition and default performance studies available from the Fitch Ratings website. AAA: Highest credit quality. ‘AAA’ ratings denote the lowest expectation of default risk. They are assigned only in cases of exceptionally strong capacity for payment of financial commitments. This capacity is highly unlikely to be adversely affected by foreseeable events. AA: Very high credit quality. ‘AA’ ratings denote expectations of very low default risk. They indicate very strong capacity for payment of financial commitments. This capacity is not significantly vulnerable to foreseeable events. A: High credit quality. ‘A’ ratings denote expectations of low default risk. The capacity for payment of financial commitments is considered strong. This capacity may, nevertheless, be more vulnerable to adverse business or economic conditions than is the case for higher ratings. BBB: Good credit quality. ‘BBB’ ratings indicate that expectations of default risk are currently low. The capacity for payment of financial commitments is considered adequate but adverse business or economic conditions are more likely to impair this capacity. BB: Speculative. ‘BB’ ratings indicate an elevated vulnerability to default risk, particularly in the event of adverse changes in business or economic conditions over time; however, business or financial flexibility exists which supports the servicing of financial commitments. B: Highly speculative. ‘B’ ratings indicate that material default risk is present, but a limited margin of safety remains. Financial commitments are currently being met; however, capacity for continued payment is vulnerable to deterioration in the business and economic environment. Fitch Ratings – Definitions of Ratings and Other Forms of Opinion – Nov 2012 10 CCC: Substantial credit risk. Default is a real possibility. CC: Very high levels of credit risk. Default of some kind appears probable. C: Exceptionally high levels of credit risk Default is imminent or inevitable, or the issuer is in standstill. Conditions that are indicative of a ‘C’ category rating for an issuer include: a. the issuer has entered into a grace or cure period following non-payment of a material financial obligation; b. the issuer has entered into a temporary negotiated waiver or standstill agreement following a payment default on a material financial obligation; or c. Fitch Ratings otherwise believes a condition of ‘RD’ or ‘D’ to be imminent or inevitable, including through the formal announcement of a distressed debt exchange. RD: Restricted default. ‘RD’ ratings indicate an issuer that in Fitch Ratings’ opinion has experienced an uncured payment default on a bond, loan or other material financial obligation but which has not entered into bankruptcy filings, administration, receivership, liquidation or other formal winding-up procedure, and which has not otherwise ceased operating. This would include: a. the selective payment default on a specific class or currency of debt; b. the uncured expiry of any applicable grace period, cure period or default forbearance period following a payment default on a bank loan, capital markets security or other material financial obligation; c. the extension of multiple waivers or forbearance periods upon a payment default on one or more material financial obligations, either in series or in parallel; or d. execution of a distressed debt exchange on one or more material financial obligations. D: Default. ‘D’ ratings indicate an issuer that in Fitch Ratings’ opinion has entered into bankruptcy filings, administration, receivership, liquidation or other formal winding-up procedure, or which has otherwise ceased business. Default ratings are not assigned prospectively to entities or their obligations; within this context, non-payment on an instrument that contains a deferral feature or grace period will generally not be considered a default until after the expiration of the deferral or grace period, unless a default is otherwise driven by bankruptcy or other similar circumstance, or by a distressed debt exchange. “Imminent” default typically refers to the occasion where a payment default has been intimated by the issuer, and is all but inevitable. This may, for example, be where an issuer has missed a scheduled payment, but (as is typical) has a grace period during which it may cure the payment default. Another alternative would be where an issuer has formally announced a distressed debt exchange, but the date of the exchange still lies several days or weeks in the immediate future. In all cases, the assignment of a default rating reflects the agency’s opinion as to the most appropriate rating category consistent with the rest of its universe of ratings, and may differ from the definition of default under the terms of an issuer’s financial obligations or local commercial practice. Note: The modifiers “+” or “-” may be appended to a rating to denote relative status within major rating categories. Such suffixes are not added to the ‘AAA’ Long-Term IDR category, or to Long-Term IDR categories below ‘B’. [...]... security Ratings assigned by Fitch Ratings articulate an opinion on discrete and specific areas of risk The above list is not exhaustive, and is provided for the reader’s convenience Readers are requested to review the section Understanding Credit Ratings - Limitations and Usage for further information on the limitations of the agency’s ratings Fitch Ratings – Definitions of Ratings and Other Forms of Opinion. .. Fitch Ratings – Definitions of Ratings and Other Forms of Opinion – Nov 2012 19 Rating Correspondence Table Long-Term Rating Short-Term Rating AAA F1+ AA+ F1+ AA F1+ AA- F1+ A+ F1 or F1+ A F1 A- F2 or F1 BBB+ F2 BBB F3 or F2 BBB- F3 BB+ B BB B BB- B B+ B B B B- B CCC C CC C C C RD/D RD/D Fitch Ratings – Definitions of Ratings and Other Forms of Opinion – Nov 2012 20 A.2 Recovery Ratings Recovery Ratings. .. rates Ratings assigned by Fitch Ratings articulate an opinion on discrete and specific areas of risk The above list is not exhaustive, and is provided for the reader’s convenience Readers are requested to review the section Understanding Credit Ratings - Limitations and Usage for further information on the limitations of the agency’s ratings Fitch Ratings – Definitions of Ratings and Other Forms of Opinion. .. obligations Fitch Ratings – Definitions of Ratings and Other Forms of Opinion – Nov 2012 30 A.4 National Ratings A.4.1 National Credit Ratings For those countries in which foreign and local currency sovereign ratings are below ‘AAA’, and where there is demand for such ratings, Fitch Ratings will provide National Ratings It is important to note that each National Rating scale is unique and is defined to... history of ratings in emerging markets and the restrictive relative nature of the national scales The above list is not exhaustive, and is provided for the reader’s convenience Readers are requested to review the section Understanding Credit Ratings - Limitations and Usage for further information on the limitations of the agency’s ratings Fitch Ratings – Definitions of Ratings and Other Forms of Opinion. .. Fitch Ratings articulate an opinion on discrete and specific areas of risk The above list is not exhaustive, and is provided for the reader’s convenience Readers are requested to review the section Understanding Credit Ratings - Limitations and Usage for further information on the limitations of the agency’s ratings Fitch Ratings – Definitions of Ratings and Other Forms of Opinion – Nov 2012 11 A.1.1.2... propensity of the potential provider of support to do so This probability of support indicates a minimum Long-Term Rating floor of ‘BB-’ Fitch Ratings – Definitions of Ratings and Other Forms of Opinion – Nov 2012 23 4: A bank for which there is a limited probability of support because of significant uncertainties about the ability or propensity of any possible provider of support to do so This probability of. .. Definitions of Ratings and Other Forms of Opinion – Nov 2012 34 A.4.4 National Insurer Financial Strength Ratings National IFS Ratings serve the needs of local insurance markets National IFS Ratings are assigned to an insurer’s policyholder obligations and are an assessment of relative financial strength Consistent with other forms of National Ratings assigned by the agency, National IFS Ratings assess... exhaustive, and is provided for the reader’s convenience Readers are requested to review the section Understanding Credit Ratings - Limitations and Usage for further information on the limitations of the agency’s ratings Fitch Ratings – Definitions of Ratings and Other Forms of Opinion – Nov 2012 14 A.1.1.3 Structured, Project & Public Finance Obligations – Long-Term Rating Scales Ratings of structured... indicates that in the agency’s opinion, there is no reasonable presumption of potential support being forthcoming In practice this approximates to a probability of support of less than 40% Fitch Ratings – Definitions of Ratings and Other Forms of Opinion – Nov 2012 24 A.3.1.2 Bank Viability Ratings Viability ratings (VRs) are designed to be internationally comparable and represent Fitch’s view as to . Fitch Ratings – Definitions of Ratings and Other Forms of Opinion – Nov 2012 Definitions of Ratings and Other Forms of Opinion . credit opinion of a more narrow scope, including interest strips and return of principal. Fitch Ratings – Definitions of Ratings and Other Forms of Opinion