S&P Global Ratings is requesting comments on proposed revisions to its approach to assessing the impact on our adjusted financial metrics of financing--other than common equity--contributed by controlling shareholders. We call this noncommon equity financing in our existing methodology and refer to it as controlling-shareholder financing in this methodology. Examples of this type of financing can include preferred shares, shareholder loans, Class A units, or convertible debentures, among others.

These criteria apply globally to all issuers that use the corporate methodology (which includes certain financial entities) and corporate issuers rated under the operating leasing company, investment holding company, and real estate methodologies. These criteria apply to real estate operating companies but do not apply to real estate investment trusts.

Once approved, this proposed methodology will supersede "The Treatment Of Non-Common Equity Financing In Nonfinancial Corporate Entities." The current methodology will remain in effect until we finalize the proposed methodology.

KEY CHANGES

This proposal adopts many of the same key factors of the existing criteria but simplifies our approach. Key changes from the existing criteria are:

• Our proposed approach simplifies our analysis by focusing on the contractual provisions in the controlling-shareholder financing documents.
• We no longer consider in our analysis whether the controlling-shareholder financing must be owned and sold together with the common equity, often referred to as "stapling."
• We no longer account for whether the controlling shareholder owns the company's senior-ranking obligations in our analysis of the shareholder financing.
• We evaluate the terms under which redemptions of controlling-shareholder financing can occur and assess whether the redemption will lead to deterioration of the issuer's creditworthiness. We no longer consider whether the majority portion of the controlling-shareholder financing will remain outstanding for the life of the debt.
• We no longer distinguish between types of controlling shareholders and instead focus our analysis on the contractual terms of the controlling-shareholder financing.
• We are changing the thresholds at which the government or group support is considered but offer a simplified path for issuers who receive government or group support above the thresholds.

In addition, we removed the paragraphs and tables that discuss financial policy assessment, as well as the definition of financial sponsor, strategic owners, and control since these concepts are part of our "Corporate Methodology" and "Group Rating Methodology."

IMPACT ON OUTSTANDING RATINGS

There are approximately 400 ratings on corporate issuers and certain financial services companies in scope of the proposed methodology. Based on current information, our preliminary testing indicates that if the proposed methodology is adopted, we would take a limited number of rating actions, most of which would be one-notch changes. In addition, if we adopt the proposed methodology, we expect that we would exclude controlling-shareholder financing from approximately 10% of in-scope issuers' leverage and coverage metrics where it is currently included as debt. A very small number of issuers that currently have the controlling-shareholder financing excluded from their leverage and coverage metrics may have this treatment reversed because of the proposed methodology.

WHEN AND HOW TO SUBMIT COMMENTS

S&P Global Ratings is seeking feedback on the proposed criteria by Jan. 10, 2025. We encourage interested market participants to submit their written comments to https://disclosure.spglobal.com/ratings/en/regulatory/ratings-criteria. Comments may also be sent to CriteriaComments@spglobal.com should participants encounter technical difficulties.

PROPOSED METHODOLOGY

Overview

This methodology describes how S&P Global Ratings treats financing, other than common equity, that is contributed by a company's controlling shareholder. We call this capital controlling-shareholder financing (CSF). These criteria do not apply to the evaluation of financing provided by non-controlling shareholders, which we analyze using our hybrid capital or ratios and adjustment methodologies (see Related Criteria).

We apply these criteria to assess whether to exclude CSF from our adjusted debt, leverage, and coverage metrics. We do this when the CSF terms indicate that this financing will act as a cushion to conserve cash and absorb any potential losses ahead of the company's debt.

These criteria apply globally to all issuers that use our corporate methodology (including certain financial entities) and corporate issuers rated under the operating leasing company, investment holding company, and real estate methodologies. While the criteria apply to real estate operating companies, they do not apply to real estate investment trusts because of their different financial structures.

Chart 1

Analytical Approach

Our starting assumption, before further analysis, is to include CSF as debt in our adjusted leverage and coverage metrics. We will exclude the CSF from our adjusted leverage and coverage metrics when we believe it will act as loss-absorbing or cash-conserving capital in times of stress.

Chart 2

We will exclude from debt when our review of all relevant CSF documentation conclusively shows that the instrument is not subject to any of the following debt-like provisions (see below sections for more details on each provision):

• Provision 1: Terms that require cash payments.
• Provision 2: Terms that provide the CSF investor with creditor protections.
• Provision 3: Structural features that incentivize CSF redemption and lead to deterioration of the issuer's creditworthiness.

We will also include the CSF as debt in our adjusted leverage and coverage metrics if we cannot obtain all relevant documentation (not only summary terms and conditions) necessary to assess the instrument.

Provision 1: Terms that require cash payments

The ability to defer cash payments during periods of financial stress is a key characteristic of equity-like instruments. Contractual terms requiring mandatory cash payments to the CSF before the company's debt matures would result in the CSF's inclusion as debt in our leverage and coverage measures.

Some examples of terms that would lead us to include the CSF as debt in our metrics under this provision include:

• Mandatory (non-deferrable) cash interest payments.
• Mandatory amortization payments.
• A final maturity date in advance of debt.
• The ability to accelerate repayment of the instrument while any higher-ranking debt is outstanding.
• Unrestricted redemption rights (through allowed repayment, calls, or other economically similar mechanisms).
• A put option that would cause it to be repaid in advance of debt.

Deferrable interest payments would not lead us, in and of themselves, to include the CSF as debt in our metrics. This is because the deferability feature allows the controlling shareholder to receive cash interest payments when the company is prospering, and to defer cash interest payments when the company is under stress.

Likewise, the ability to redeem the CSF (for example, through call options or other repayment mechanisms), in and of itself, does not automatically mean we would include the CSF in our leverage metrics. To assess the impact of these features, we focus on the extent to which they undermine the principle that the CSF will be outstanding and would be able to absorb losses or conserve cash if the company experiences credit stress.

If the CSF includes terms that enable repayment (including accelerated repayment), repurchase, or redemption without any offsetting constraints, we do not exclude the CSF from our leverage and coverage calculations. However, if strong contractual or intercreditor provisions exist to protect the credit quality of the higher-ranking obligations, we may take the view that the repayment option is neutralized and exclude the CSF from our leverage and coverage calculations. For example, this may happen if the payments are seen as similar to dividends (i.e. variable) and are either linked to a level of improved financial performance or senior lender approval is required to make any prepayment.

On the other hand, non-variable (re)payment profiles that are not dependent on the issuer's financial performance would be considered more akin to servicing a debt-like obligation than being a discretionary dividend-like payment. Likewise, if the senior debtholders provide a blanket advance approval, then the instrument would be included in our leverage and coverage calculations.

Provision 2: Terms that provide the CSF investor with creditor protections

Equity-like instruments typically do not contain protective provisions that could lead to default, restructuring, or bankruptcy. For us to exclude the CSF from debt in our metrics, we must be confident that it does not contain any creditor-like protections and that it is unguaranteed, unsecured, and subordinated to the company's debt. If the CSF contains credit protective terms or lacks subordination, we include it as debt in our leverage and coverage calculations.

Some examples of terms that would lead us to include the CSF as debt in our metrics under this provision include:

• Conditions that grant security or guarantees to the CSF.
• Events of default or other rights in the CSF that could potentially lead to an issuer's payment default, bankruptcy, liquidation, or similar, including terms that grant the CSF the right to prevent or impair payments to any senior-ranking obligations.
• Senior or pari-passu ranking in payment priority with respect to the company's debt obligations in the event of bankruptcy, liquidation, or similar proceedings.

Provision 3: Structural features that incentivize CSF redemption and lead to deterioration of the issuer's creditworthiness

We review all relevant documentation for any contractual or structural features that incentivize its redemption and, in our view, could lead to deterioration in the issuer's creditworthiness. When we believe the CSF will not absorb losses or conserve cash in stress scenarios, we include the CSF as debt in our adjusted leverage and coverage metrics. We would do so regardless of what the terms and conditions in the documentation might otherwise indicate.

Some examples of when we would include the CSF in our leverage and coverage metrics are:

• The documentation requires an asset transfer to the CSF holders ahead of the full payoff of the company's debt.
• The CSF coupon rate is onerous;
• Or if there is a material increase in the cost of servicing the CSF that is likely to encourage the company to redeem the financing and negatively impact the company's creditworthiness.

When a detailed and holistic evaluation of the terms and conditions does not lead to a clear and conclusive determination that the controlling shareholders will allow the CSF to conserve cash and absorb losses in times of financial stress, we will typically include the CSF as debt in our adjusted leverage and coverage metrics.

The following are examples of elements that we consider under this provision:

• The issuer's statements regarding early redemption of the CSF.
• The issuer's past behavior concerning the use of the CSF.
• Structural features in the documentation that we believe circumvent the limitations on mandatory cash payments or creditor protections described in provisions 1 and 2; or there is reason to believe that the issuer will attempt to circumvent restrictions in the future.

Cases Where Issuers Have A Very High Or Better Likelihood Of Extraordinary Government Support, Or Highly Strategic Or Better Group Status

In certain cases, when we expect high levels of support from a parent or government, we do not assess the impact of the CSF using provisions 1 through 3. We do this when:

• We determine that an issuer is a government related entity (GRE) and we assess the likelihood of extraordinary government support as very high or better using our methodology for Rating Government-Related Entities.
• An issuer is part of a group and the issuer's group status is core or highly strategic using our Group Rating Methodology.

In those cases, we would exclude the CSF from our adjusted debt and leverage if all the following three conditions are true:

• The CSF is contractually or structurally subordinated to all debt in the capital structure.
• The CSF terms do not contain any stipulations that could cause a default or allow for payment acceleration of the CSF or debt.
• We believe that the government or parent has the ability and resources to support the issuer, and it will do so even during times of stress.

If the CSF documentation does not lead us to believe that all three of the conditions above are met, or the documentation is unclear with respect to any of the conditions, we will assess the CSF using provisions 1 through 3 above.

Cases In Which The CSF Is Also Owned by Minority Investors

There are cases when CSF is provided through an instrument funded by the controlling shareholder and by minority investors. In these cases, we evaluate, on an ongoing basis, the controlling shareholder's ability to make binding decisions for all investors on the instrument.

If the documents give the controlling shareholder the ability to make decisions that bind all the CSF investors, then we may exclude the entire amount of the instrument from our adjusted leverage and coverage calculations if the conditions in the criteria are met. If the minority investors can act independently (for example, to block interest deferral, or to request a redemption of the CSF, etc.), then we would include the entire amount of the instrument(s) as debt in our leverage and coverage calculations. We would also include the instrument as debt in our calculations if we cannot clearly discern that the controlling shareholder makes decisions that bind all the investors.

In cases of joint ventures where no investor fully controls the issuer, we assess whether the joint venture owners' interests are aligned in a manner akin to that of a controlling shareholder. If we believe that the joint venture owners' interests align and they act as if there were one controlling shareholder, we will exclude the entire amount of the instrument from our adjusted leverage and coverage calculations if the conditions in the criteria are met. If we cannot determine that there is an alignment of shareholder interests, we conclude that there is no controlling shareholder and, therefore, these criteria do not apply.

RELATED PUBLICATIONS

Criteria To Be Fully Superseded

• The Treatment Of Non-Common Equity Financing In Nonfinancial Corporate Entities, April 29, 2014

Related Criteria

• Corporate Methodology, Jan. 7, 2024
• Group Rating Methodology, July 1, 2019
• Corporate Methodology: Ratios And Adjustments, April 1, 2019
• Rating Government-Related Entities: Methodology And Assumptions, March 25, 2015
• Principles Of Credit Ratings, Feb. 16, 2011

Other Publications

• S&P Global Ratings Definitions, updated periodically and available on CapIQ.

The proposed criteria represent the specific application of fundamental principles that define credit risk and ratings opinions. Once proposed criteria become final, their use is determined by issuer- or issue-specific attributes as well as our assessment of the credit and, if applicable, structural risks for a given issuer or issue rating. Methodology and assumptions may change from time to time as a result of market and economic conditions, issuer- or issue-specific factors, or new empirical evidence that would affect our credit judgment.