Credit Analytic Solutions
Transforming Credit Risk Management

Support Does Matter In Credit

August 10, 2015   //   By Alma Chen, Arsene Lui and Giorgio Baldassarri

Government-Related-Entities and Parental Support Overlay

Government involvement in capital markets has been pervasive, even in industrial countries, for a long time; in the United States, for example, historically one observes frequent involvement in lending activities, through loan programs for students, for small businesses, for housing, for exports, and it is estimated that around 25% of all loans during 1980s originated from government agencies or carried government guarantees.

More recently, the severe 2008 financial crisis highlighted the globalised nature and the inherent fragility of the capital markets. Some large financial institutions had to accept government bailouts or face bankruptcy and several corporate firms struggled to secure liquidity during a prolonged recessional economic period, despite accommodating central bank policies and quantitative easing, or recurring to their parent companies’ support. While there is still an ongoing debate over the necessity,  fairness and value-added of the so-called “too big to fail” policies, the 2008 crisis once again confirmed the importance of understanding the credit benefit (or burden) that a firm can experience from direct support by a government or by its parent company.

The latter is usually taken into account by Standard & Poor’s Ratings Services[1], via an adjustment to the standalone credit profile of a firm, that forms an integral part to the final Standard & Poor’s Ratings Services issuer credit rating, but the coverage of such adjustments is limited only to a small universe of few thousand large rated companies, mainly in developed or developing countries. At S&P Capital IQ, we have developed two statistical overlays that aim to quantify the likelihood and impact of governmental and parental support on the creditworthiness of private and public, financial and non-financial firms, globally, thus expanding the scope to emerging and frontier markets. Such overlays can be used in conjunction with
S&P Capital IQ credit risk models, enhancing the credit risk assessment by risk managers and analysts.

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[1] Credit ratings are provided by Standard & Poor’s Ratings Services, which is analytically and editorially
independent from any other analytical group at McGraw Hill Financial.

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