Fitch publishes a variety of rating opinions. The most common of these are credit ratings, but Fitch also publishes ratings, scores and other relative measures of financial or operational strength. For example, Fitch Ratings also provides specialized ratings of servicers of residential and commercial mortgages, asset managers and managed funds. Additionally, Fitch publishes quantitatively-based ratings, such as Q-IFS ratings, that are point-in-time measures of an insurance company’s standalone financial strength based solely on statistical models.
Publication and maintenance of all ratings is subject to an information threshold.
Entities or issues carrying the same rating are of similar but not necessarily identical quality since the ratings are relative measures of risk and ratings categories may not fully reflect small differences in the degrees of risk.
Fitch’s 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 their money back in accordance with the terms on which they invested. Fitch’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 use of credit ratings defines their function: “investment grade” ratings (international Long-term ‘AAA’ — ’BBB-’ categories; Short-term ‘F1’ — ‘F3’) indicate relatively low to moderate credit risk, while those in the “speculative” or “non investment grade” categories (international Long-term ‘BB+’ — ’D’; Short-term ‘B’ — ‘D’) either signal a higher level of credit risk or that a default has already occurred. 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.
Depending on their application, credit ratings address benchmark measures of probability of default as well relative expectations of loss given default. For example, issuers are typically assigned Issuer Default Ratings that are relative measures of default probability. Similarly, short-term credit ratings give primary consideration to the likelihood that obligations will be met on a timely basis. Securities, however, are rated taking into consideration probability of default and loss given default. As a result, for entities such as corporations security ratings may be rated higher, lower or the same as the issuer rating to reflect expectations of the security’s relative recovery prospects, as well as differences in ability and willingness to pay. While recovery analysis plays an important role throughout the ratings scale, it becomes a more critical consideration for below investment-grade securities and obligations, particularly at the lower end of the non-investment-grade ratings scale where Fitch often publishes actual Recovery Ratings that are complementary to the credit ratings.
Structured finance ratings typically are assigned to each individual security or tranche in a transaction, and not to an issuer. Each structured finance tranche is rated on the basis of various stress scenarios in combination with its relative seniority, prioritization of cash flows and other structural mechanisms.
International credit ratings assess the capacity to meet foreign currency or local currency commitments. Both “foreign currency” and “local currency” ratings are internationally comparable assessments. The local currency 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.
Fitch Ratings also provides Individual and Support ratings of banks, which opine on the likelihood that a bank will get into difficulties, and in that event, whether it will indeed receive external support. In addition, Fitch Ratings provides specialized ratings of servicers of residential and commercial mortgages and other asset types. Asset manager ratings opine on the relative operational and financial capabilities of asset managers, trustees and others. Managed fund credit and/or volatility ratings are assigned to bond funds, certain fixed-income indices and collateralized mortgage obligations. Many of these ratings are offered internationally and in some cases on a national basis applying appropriate ratings modifiers and identifiers.
Ratings are based upon information obtained directly from issuers, other obligors, underwriters, their experts, and other sources Fitch Ratings believes to be reliable. Fitch Ratings does not audit or verify the truth or accuracy of such information, and has undertaken no obligation to so audit or verify such information or to perform any other kind of investigative diligence into the accuracy or completeness of such information. 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 and Fitch Ratings assumes no responsibility for this risk. 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.
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's 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 due to changes in interest rates and other market considerations.
Ratings are opinions reflecting the ability of an entity or a securities issue to meet financial commitments such as interest, preferred dividends, and repayment of principal, in accordance with their terms. Ratings are not themselves facts, and therefore cannot be described as being 'accurate' or 'inaccurate.'
Fitch Ratings does not have a fiduciary relationship with any issuer, subscriber or any other individual. Nothing is intended to or should be construed as creating a fiduciary relationship between Fitch Ratings and any issuer or between Fitch Ratings and any user of its ratings.
Ratings may be changed, qualified, suspended, 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.
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.
The assignment of a rating by Fitch Ratings shall not constitute consent by Fitch Ratings to use its name as an expert in connection with any registration statement, offering document or other filings under any relevant securities laws.
International Long-Term Credit Ratings (LTCR) may also be referred to as Long-Term Ratings. When assigned to most issuers, it is used as a benchmark measure of probability of default and is formally described as an Issuer Default Rating (IDR). The major exception is within Public Finance, where IDRs will not be assigned as market convention has always focused on timeliness and does not draw analytical distinctions between issuers and their underlying obligations. When applied to issues or securities, the LTCR may be higher or lower than the issuer rating (IDR) to reflect relative differences in recovery expectations. The following rating scale applies to foreign currency and local currency ratings:
Investment Grade
AAA: Highest credit quality. ‘AAA’ ratings denote the lowest expectation of credit risk. They are assigned only in case 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 credit 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 credit risk. The capacity for payment of financial commitments is considered strong. This capacity may, nevertheless, be more vulnerable to changes in circumstances or in economic conditions than is the case for higher ratings.
BBB: Good credit quality. ‘BBB’ ratings indicate that there is currently expectations of low credit risk. The capacity for payment of financial commitments is considered adequate but adverse changes in circumstances and economic conditions are more likely to impair this capacity. This is the lowest investment grade category
Speculative Grade
BB: Speculative.
‘BB’ ratings indicate that there is a possibility of credit
risk developing, particularly as the result of adverse economic change
over time; however, business or financial alternatives may be available
to allow financial commitments to be met. Securities rated in this category
are not investment grade.
B: Highly speculative.
• For issuers and performing obligations, ‘B’ ratings
indicate that significant credit risk is present, but a limited margin
of safety remains. Financial commitments are currently being met; however,
capacity for continued payment is contingent upon a sustained, favorable
business and economic environment.
• For individual obligations, may indicate distressed or defaulted
obligations with potential for extremely high recoveries. Such obligations
would possess a Recovery Rating of ‘R1’ (outstanding).
CCC:
For issuers and performing obligations, default is a real possibility.
Capacity for meeting financial commitments is solely reliant upon sustained,
favorable business or economic conditions. • For individual obligations,
may indicate distressed or defaulted obligations with potential for average
to superior levels of recovery. Differences in credit quality may be denoted
by plus/minus distinctions. Such obligations typically would possess a
Recovery Rating of ‘R2’ (superior), or ‘R3’ (good)
or ‘R4’ (average).
CC:
For issuers and performing obligations, default of some kind appears probable.
• For individual obligations, may indicate distressed or defaulted
obligations with a Recovery Rating of ‘R4’ (average) or ‘R5’
(below average).
Grade C:
For issuers and performing obligations, default is imminent.
• For individual obligations, may indicate distressed or defaulted
obligations with potential for below-average to poor recoveries. Such
obligations would possess a Recovery Rating of ‘R6’ (poor).
RD: Indicates an entity that has failed to make due payments (within the applicable grace period) on some but not all material financial obligations, but continues to honor other classes of obligations.
D:
I Indicates an entity or sovereign that has defaulted on all of its financial
obligations. Default generally is defined as one of the following:
• Failure of an obligor to make timely payment of principal and/or
interest under the contractual terms of any financial obligation ;
• The bankruptcy filings, administration, receivership, liquidation
or other winding-up or cessation of business of an obligor; or
• The distressed or other coercive exchange of an obligation, where
creditors were offered securities with diminished structural or economic
terms compared with the existing obligation.
Default ratings are not assigned prospectively; within this context, non-payment on an instrument that contains a deferral feature or grace period will not be considered a default until after the expiration of the deferral or grace period.
Issuers will be rated 'D' upon a default. Defaulted and distressed obligations typically are rated along the continuum of ‘C’ to ‘B’ ratings categories, depending upon their recovery prospects and other relevant characteristics. Additionally, in structured finance transactions, where analysis indicates that an instrument is irrevocably impaired such that it is not expected to meet pay interest and/or principal in full in accordance with the terms of the obligation’s documentation during the life of the transaction, but where no payment default in accordance with the terms of the documentation is imminent, the obligation may be rated in the ‘B’ or ‘CCC-C’ categories.
Default is determined by reference to the terms of the obligations' documentation. Fitch will assign default ratings where it has reasonably determined that payment has not been made on a material obligation in accordance with the requirements of the obligation's documentation, or where it believes that default ratings consistent with Fitch’s published definition of default are the most appropriate ratings to assign.
The following ratings scale applies to foreign currency and local currency ratings. A Short-term rating has a time horizon of less than 13 months for most obligations, or up to three years for US public finance, in line with industry standards, to reflect unique risk characteristics of bond, tax, and revenue anticipation notes that are commonly issued with terms up to three years. Short-term ratings thus place greater emphasis on the liquidity necessary to meet financial commitments in a timely manner.
F1
Highest credit quality. Indicates the strongest capacity for timely payment
of financial commitments; may have an added “+” to denote
any exceptionally strong credit feature.
F2
Good credit quality. A satisfactory capacity for timely payment of financial
commitments, but the margin of safety is not as great as in the case of
the higher ratings.
F3
Fair credit quality. The capacity for timely payment of financial commitments
is adequate; however, near term adverse changes could result in a reduction
to non investment grade.
B
Speculative. Minimal capacity for timely payment of financial commitments,
plus vulnerability to near term adverse changes in financial and economic
conditions.
C
High default risk. Default is a real possibility. Capacity for meeting
financial commitments is solely reliant upon a sustained, favorable business
and economic environment.
RD
Indicates an entity that has defaulted on one or more of its financial
commitments, although it continues to meet other obligations.
D
Indicates an entity or sovereign that has defaulted on all of its financial
obligations.
Notes to Long-term and Short-term ratings: 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 rating category, to categories below ‘CCC’, or to Short-term ratings other than ‘F1'. (The +/- modifiers are only used to denote issues within the CCC category, whereas issuers are only rated CCC without the use of modifiers.)
Rating Watch: Ratings are placed on Rating Watch to notify investors that there is a reasonable probability of a rating change and the likely direction of such change. These are designated as "Positive", indicating a potential upgrade, "Negative", for a potential downgrade, or "Evolving", if ratings may be raised, lowered or maintained. Rating Watch is typically resolved over a relatively short period. Rating Outlook: An Outlook indicates the direction a rating is likely to move over a one to two-year period. Outlooks may be positive, stable or negative. A positive or negative
Rating Outlook does not imply a rating change is inevitable. Similarly, ratings for which outlooks are ‘stable’ could be upgraded or downgraded before an outlook moves to positive or negative if circumstances warrant such an action. Occasionally, Fitch Ratings may be unable to identify the fundamental trend. In these cases, the Rating Outlook may be described as evolving.
Program ratings (such as those assigned to MTN shelf registrations) relate only to standard issues made under the program concerned; it should not be assumed that these ratings apply to every issue made under the program. In particular, in the case of non-standard issues, i.e. those that are linked to the credit of a third party or linked to the performance of an index, ratings of these issues may deviate from the applicable program rating.
Variable rate demand obligations and other securities which contain a short-term ‘put’ or other similar demand feature will have a dual rating, such as AAA/F1+. The first rating reflects the ability to meet long-term principal and interest payments, whereas the second rating reflects the ability to honor the demand feature in full and on time.
Interest Only: Interest Only ratings are assigned to interest strips. These ratings do not address the possibility that a security holder might fail to recover some or all of its initial investment due to voluntary or involuntary principal repayments.
Principal Only: Principal Only ratings address the likelihood that a security holder will receive their initial principal investment either before or by the scheduled maturity date.
Rate of Return: Ratings also may be assigned to gauge the likelihood of an investor receiving a certain predetermined internal rate of return without regard to the precise timing of any cash flows. ‘
PIF’: Paid-in –Full; denotes a security that is paid-in-full, matured, called, or refinanced.
‘NR’ indicates that Fitch Ratings does not rate the issuer or issue in question.
‘Withdrawn’: A rating is withdrawn when Fitch Ratings deems the amount of information available to be inadequate for rating purposes, or when an obligation matures, is called, or refinanced, or for any other reason Fitch Ratings deems sufficient.
Individual Ratings
Individual Ratings are assigned only to banks. Individual Ratings, which are internationally comparable, attempt to assess how a bank would be viewed if it were entirely independent and could not rely on external support. These ratings are designed to assess a bank’s exposure to, appetite for, management of and capacity to absorb risk and thus represent Fitch’s view on the likelihood that it would run into significant difficulties such that it would require support.
The principal factors we analyse to evaluate the bank and thus to determine these ratings take into account profitability and balance sheet integrity (including capitalisation), franchise, management, operating environment and prospects. Consistency is an important consideration. Others include a bank’s size (in terms of equity capital) and diversification (in terms of involvement in a variety of activities in different economic and/or geographical sectors).
Individual Rating Definitions
A denotes:
A very strong bank. Characteristics may include outstanding profitability
and balance sheet integrity, franchise, management, operating environment
or prospects.
B denotes:
A strong bank. There are no major concerns regarding the bank. Characteristics
may include strong profitability and balance sheet integrity, franchise,
management, operating environment or prospects.
C denotes:
An adequate bank, which, however, possesses one or more troublesome aspects.
There may be some concerns regarding its profitability and balance sheet
integrity, franchise, management, operating environment or prospects.
D denotes:
A bank, which has weaknesses of internal and/or external origin. There
are concerns regarding its profitability, substance and resilience, balance
sheet integrity, franchise, management, operating environment or prospects.
Banks in emerging markets are necessarily faced with a greater number
of potential deficiencies of external origin.
E denotes:
A bank with very serious problems, which either requires or is likely
to require external support.
F denotes:
A bank that has either defaulted or, in Fitch's opinion, would have defaulted if it had not received external support. Examples of such support include state or local government support; (deposit) insurance funds; acquisition by some other corporate entity or an injection of new funds from its shareholders or equivalent.
(s) An Individual rating may be followed by the suffix “(s)”, denoting that it is largely based on public information, supplemented by data obtained from the rated entity.
Note: In addition, we use gradations among these five ratings, i.e. A/B, B/C, C/D, and D/E.
SUPPORT RATINGS
The Support Ratings do not assess the qualityof a bank. Rather they communicate Fitch Ratings’ judgement on whether the bank would receive support should this become necessary. It is emphasised that these ratings are exclusively the expression of Fitch’s opinion even though the principles underlying them may have been discussed with the relevant supervisory authorities and/or owners.
1 denotes:
A bank for which there is an extremely high probability of external support.
The potential provider of support is very highly rated in its own right
and has a very high propensity to support the bank in question. This probability
of support indicates a minimum Long-term rating floor of ‘A-’.
2 denotes:
A bank for which there is a high probability of external support. The
potential provider of support is highly rated in its own right and has
a high propensity to provide support to the bank in question. This probability
of support indicates a minimum Long-term rating floor of ‘BBB-’.
3 denotes:
A bank for which there is a moderate probability of support because of
uncertainties about the ability or propensity of the potential provider
of support to do so. This probability of support indicates a minimum Long-term
rating floor of ‘BB-‘.
4 denotes:
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 support indicates a
minimum Long-term rating floor of ‘B’.
5 denotes:
A bank for which external support, although possible, cannot be relied
upon. This may be due to a lack of propensity to provide support or to
very weak financial ability to do so. This probability of support indicates
a Long-term rating floor no higher than ‘B-’ and in many cases
no floor at all.
