Tuesday, June 19, 2007

Standard & Poor’s Revised Sovereign Recovery Ratings Criteria

Standard & Poor's launched a revised global Recovery Ratings Scale and new Sovereign Recovery Ratings criteria. In brief, besides the usual rating system the new one created a ‘recovery rating scale’ for speculative grade countries. In turn, according to the next table, countries’ recovery ratings vary from 1+ through 6. A recovery rating of 1 will increase the country rating by 2 notches whereas a recovery rate of 4 does not affect the country rating. In turn, the overall rating system no longer incorporates the probability of default but mostly the probability of recovery.




In the next table, Erste Bank summarizes the S&P outcomes for the 25 speculative-grade sovereign issuers.



The first column in the above table is the usual ratings attribute by S&P. The second column, however, is the ‘recovery rating’. In this case, Brazil and Colombia, for instance, have the same (BB+) ratings but Colombia has higher recovery ratings than Brazil. Given that a better than average recovery rating was assigned to Colombia but not to Brazil, Colombia’s foreign currency long term issue have been upgraded to BBB-.

The original S&P document explain why Colombia has higher recovery rating than Brazil. The recovery rating takes into account the likely default or restructuring scenarios. These scenarios set the relevant parameters for the subsequent recovery analysis, as they envisage the economic, fiscal, and political conditions around default. The default or restructuring scenarios underlying the recovery analysis typically are derived from the key rating constraints that affect the issuer credit rating.

S&P’s said that the expansion of recovery ratings to sovereign issues reflects the market's increasing focus on post-default recovery prospects. “It also meets the demand for greater clarity and specificity with respect to recovery prospects on different debt instruments of all types of issuers worldwide.”

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