articles Ratings /ratings/en/research/articles/240107-credit-rating-model-corpengine-corporate-methodology-model-engine-for-corporate-credit-ratings-12885054.xml content esgSubNav
Discover more about S&P Global’s offerings
Register Reset Password
In This List
COMMENTS

Credit Rating Model: corpengine (Corporate Methodology Model Engine) For Corporate Credit Ratings
COMMENTS

Your Three Minutes In Electric Power: EPA Emissions Rules Could Hamper Power Production Economics And Utility Credit Metrics

COMMENTS

South And Southeast Asia Unicorns: A New Credit Story Post-IPO

COMMENTS

China GRE Ratings List

COMMENTS

Credit FAQ: How South And Southeast Asian Firms Will Fare As Currencies Depreciate


Credit Rating Model: corpengine (Corporate Methodology Model Engine) For Corporate Credit Ratings

S&P Global Ratings' corpengine (Corporate Methodology Model Engine) is used to help determine issuer credit ratings (ICRs) to corporate issuers globally.

Redesigned Implementation Of Existing Prior Model

The corpengine model is a new, R-based implementation of the Excel-based Corporate Criteria Scoring Template (CCST) model, which it replaces. As a scoring engine, the corpengine can be interacted with in multiple ways, such as with a user interface. The new R-based implementation offers several enhancements from the Excel-based version:

  • The user interface is separate from the model, offering additional applicable development flexibility.
  • Multiple user interfaces can be designed to invoke the model. In Excel, the interface is integrated into the model which means only one interface can be used.
  • Performance enhancements with calculation times up to 30x faster.

Purpose Of The Model

The published criteria articles listed in the "Related Criteria" section below describe the methodology used to determine stand-alone credit profiles (SACPs) and ICRs for existing and new industrial corporate and utilities issuers.

The corpengine implements criteria-based assessments we make for corporate and utilities issuers such that when populated it will calculate indicative SACPs and ICRs.

The user determines the assessments for the individual components in the corpengine user by applying our criteria titled "Corporate Methodology," published Jan. 07, 2024. These assessments are further supplemented by our published sector-specific criteria (see the "Related Criteria" section below).

Analytical assessments derived using "Corporate Methodology," sector-specific criteria, and other supplementary criteria (such as "Methodology And Assumptions: Liquidity Descriptors For Global Corporate Issuers," published Dec. 16, 2014, and "Methodology: Management And Governance Credit Factors For Corporate Entities," published Jan. 07, 2024) are inputted into the corpengine. The corpengine, in turn, evaluates these individual assessments against the various matrices and tables outlined in the criteria. A completed set of inputs into the corpengine will calculate an indicative SACP and ICR, which the user can use to form a rating recommendation that is presented to a credit committee.

Summary Description Of The Model

The corpengine is implemented in a modular fashion, whereby specific factors of the "Corporate Methodology" are implemented as individual functions. These functions are then called collectively by an overarching (engine) function to produce an indicative SACP and ICR whenever the model is called by the user. The model outputs range from 'AAA' to 'D'. The individual functions can be categorized into six groups: business risk profile (BRP), financial risk profile (FRP), modifiers, group rating methodology (GRM), government-related entities (GRE), and ratings above the sovereign (RAS).

Functions related to the BRP include the country risk and industry risk, which combine to produce the corporate industry and country risk assessment (CICRA). The combination of the CICRA and competitive position assessment produces the business risk profile assessment.

Functions related to the FRP assessment capture cash flow/leverage analysis, whereby a time series of standard core and supplemental ratios are weighted by time, considered against an applicable benchmark table and compared. Any cash flow volatility is also considered.

Functions relating to modifiers include adjusting the anchor assessment, which is produced by combining the BRP and FRP. These modifiers are the diversification/portfolio effect, capital structure, financial policy, liquidity, management and governance, captive finance, and comparable ratings analysis. The adjustments are applied by the model according to the criteria logic and using information input on each modifying factor. This result is the SACP, unless the user determines that the criteria for assigning 'CCC+', 'CCC', 'CCC-', and 'CC' ratings are applicable to the issuer, in which case these criteria then supplement the "Corporate Methodology" criteria within the corpengine.

Functions relating to the last three groups—GRM, GRE, and RAS—can lift or cap the SACP to arrive at the indicative ICR. For example, the ICR on the subsidiary of a group can benefit from the higher credit quality of its parent, or it can be capped by a weaker parent's credit quality. Similarly, the ICR on a domestically strong corporate issuer may be constrained (capped) by the weaker sovereign rating of its domicile country. The applicability of these considerations varies significantly: Nearly all corporate issuers are considered part of a group, but most corporate issuers are not government-related, and most corporate issuers have indicative ratings below their sovereign rating and therefore do not require us to stress-test their ability to have a ICR above that of the sovereign. In addition, the application of these modules does not always modify the SACP to arrive at the ICR. For example, the parent company of a group typically has the same credit quality as the group. Similarly, a company with low extraordinary likelihood of support from a higher-rated government will, in most cases, have no impact on its ICR from the consideration of the GRE criteria.

Assumptions Underlying The Model

The model assumptions are derived from the criteria listed below in the "Related Criteria" section. Increments for industry risk breakdowns are assumed to follow the same rounding to 5% as is the case for country risk breakdowns, as set out in paragraph 43 of the "Corporate Methodology".

Inputs To The Model

Inputs into the corpengine reflects our assessments of how the issuer fares based on the key factors in our criteria. High-level assessments for each module of the corpengine are summarized in the table below.

High-Level Assessments To The corpengine
Module Input No. of levels Lower bound Upper bound
Business Risk Profile Country Risk 6 ‘1, Very Low Risk’ ‘6, Very High Risk’
Industry Risk 6 ‘1, Very Low Risk’ ‘6, Very High Risk’
Competitive Position 6 ‘1, Excellent’ ‘6, Vulnerable’
Financial Risk Profile Cash Flow/Leverage 6 ‘1, Minimal’ ‘6, Highly Leveraged’
Modifiers Diversification/Portfolio Effect 3 ‘1 (Significant Diversification)’ ‘3 (Neutral)’
Capital Structure 5 ‘Very Positive’ ‘Very Negative’
Financial Policy 3 ‘Positive’ ‘Negative’
Liquidity 5 ‘Exceptional’ ‘Weak’
Management & Governance 4 ‘Positive’ ‘Negative’
Captive Finance 2 'Neutral' 'Negative'
Comparable Rating Analysis 3 ‘Positive’ ‘Negative’
Group Rating Methodology Group Credit Profile 23 ‘aaa’ ‘d/sd’
Status 5 ‘Core’ ‘Non-strategic’
Government-related entities Sovereign Rating 23 ‘AAA’ ‘D/SD’
Likelihood of extraordinary government support 6 ‘Almost certain’ ‘Low’
Ratings above the sovereign Sovereign Rating 23 ’AAA’ ‘D/SD’
Stress test result 2 ‘Pass’ ‘Fail’
SD--Selective default.

Further granularity exists for several of the above inputs, to reflect the sub-assessments defined in the corporate criteria.

For example, the corpengine captures the competitive position assessment by recording and combining sub-assessments for competitive advantage, scale/scope/diversification, operating efficiency, and profitability. Profitability is itself determined by assessing absolute profitability and the volatility of profitability.

Similarly, the corpengine makes use of historical and forecasted ratios determined by the user using a forecast model (ESP). A weighted average of each ratio (categorized as core or supplementary) is compared against a benchmark table to return a sub-assessment. These assessments are collectively reviewed by the user to determine the final cash flow/leverage assessment.

The corpengine also determines or, in some cases, helps the user determine various intermediate assessments, such as the initial rating outcome or "anchor" (the combination of business risk and financial risk before any impact from modifiers, GRM, GRE, or RAS) and incorporates the criteria logic regarding how the various sub-assessments are combined, sequenced, and prioritized to form intermediate assessments until an ICR is determined. These sub-assessments have not been described as modules or inputs in this article.

Certain assessments are company-specific and determined with the help of the corpengine during the scoring process, while others are inputs—which are not specifically linked to a company and can be revised anytime outside of the issuer review process. For example, the country risk and industry risk assessments contain sub-assessments, which may change as part of a wider country- or industry-specific review.

Data Used In Model Development And Calibration

A randomized selection of issuer data was used during the model development phase to determine if the model generated an appropriate relative ranking of credit risk. This data set was selected across geographies, portfolios, industries, and rating categories.

The calibration process was carried out independently at the criteria level. At the time of the implementation of the updated "Corporate Methodology," only 5% of ratings changed.

The Limits And Uncertainties Of The Model

The corpengine should be used for corporate entities, except investment holding companies and pure commodities trading companies.

Sometimes the corpengine is not able to capture all possible scenarios outlined in the criteria given the complexity that arises when several criteria pieces are applied together. In these cases, a manual override can be used to select an indicative SACP or ICR that is in line with the criteria.

Related Criteria And Research

Related Criteria

This report does not constitute a rating action.

Primary Contact:Ross Raybould, London + 44 20 7176 3626;
ross.raybould@spglobal.com
Secondary Contact:James E Wagner, New York + 1 (212) 438 1542;
james.wagner@spglobal.com

No content (including ratings, credit-related analyses and data, valuations, model, software, or other application or output therefrom) or any part thereof (Content) may be modified, reverse engineered, reproduced, or distributed in any form by any means, or stored in a database or retrieval system, without the prior written permission of Standard & Poor’s Financial Services LLC or its affiliates (collectively, S&P). The Content shall not be used for any unlawful or unauthorized purposes. S&P and any third-party providers, as well as their directors, officers, shareholders, employees, or agents (collectively S&P Parties) do not guarantee the accuracy, completeness, timeliness, or availability of the Content. S&P Parties are not responsible for any errors or omissions (negligent or otherwise), regardless of the cause, for the results obtained from the use of the Content, or for the security or maintenance of any data input by the user. The Content is provided on an “as is” basis. S&P PARTIES DISCLAIM ANY AND ALL EXPRESS OR IMPLIED WARRANTIES, INCLUDING, BUT NOT LIMITED TO, ANY WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE, FREEDOM FROM BUGS, SOFTWARE ERRORS OR DEFECTS, THAT THE CONTENT’S FUNCTIONING WILL BE UNINTERRUPTED, OR THAT THE CONTENT WILL OPERATE WITH ANY SOFTWARE OR HARDWARE CONFIGURATION. In no event shall S&P Parties be liable to any party for any direct, indirect, incidental, exemplary, compensatory, punitive, special or consequential damages, costs, expenses, legal fees, or losses (including, without limitation, lost income or lost profits and opportunity costs or losses caused by negligence) in connection with any use of the Content even if advised of the possibility of such damages.

Credit-related and other analyses, including ratings, and statements in the Content are statements of opinion as of the date they are expressed and not statements of fact. S&P’s opinions, analyses, and rating acknowledgment decisions (described below) are not recommendations to purchase, hold, or sell any securities or to make any investment decisions, and do not address the suitability of any security. S&P assumes no obligation to update the Content following publication in any form or format. The Content should not be relied on and is not a substitute for the skill, judgment, and experience of the user, its management, employees, advisors, and/or clients when making investment and other business decisions. S&P does not act as a fiduciary or an investment advisor except where registered as such. While S&P has obtained information from sources it believes to be reliable, S&P does not perform an audit and undertakes no duty of due diligence or independent verification of any information it receives. Rating-related publications may be published for a variety of reasons that are not necessarily dependent on action by rating committees, including, but not limited to, the publication of a periodic update on a credit rating and related analyses.

To the extent that regulatory authorities allow a rating agency to acknowledge in one jurisdiction a rating issued in another jurisdiction for certain regulatory purposes, S&P reserves the right to assign, withdraw, or suspend such acknowledgement at any time and in its sole discretion. S&P Parties disclaim any duty whatsoever arising out of the assignment, withdrawal, or suspension of an acknowledgment as well as any liability for any damage alleged to have been suffered on account thereof.

S&P keeps certain activities of its business units separate from each other in order to preserve the independence and objectivity of their respective activities. As a result, certain business units of S&P may have information that is not available to other S&P business units. S&P has established policies and procedures to maintain the confidentiality of certain nonpublic information received in connection with each analytical process.

S&P may receive compensation for its ratings and certain analyses, normally from issuers or underwriters of securities or from obligors. S&P reserves the right to disseminate its opinions and analyses. S&P's public ratings and analyses are made available on its Web sites, www.spglobal.com/ratings (free of charge), and www.ratingsdirect.com (subscription), and may be distributed through other means, including via S&P publications and third-party redistributors. Additional information about our ratings fees is available at www.spglobal.com/usratingsfees.

 

Create a free account to unlock the article.

Gain access to exclusive research, events and more.

Already have an account?    Sign in