The Berlin rating agency Scope Ratings has published a new rating methodology specifically designed for investment holding companies.
This methodology “Investment Holding Companies Rating Methodology – Corporates” has undergone a call-for-comments period and has now been finalized. It will be applied to all issuer and debt ratings of investment holding companies. However, the methodology is expected to have a positive impact on only a very limited number of outstanding ratings.
The purpose of the new methodology is to provide a clearer and more refined analytical approach to evaluating investment holding companies. It includes a comprehensive set of business risk and financial risk rating drivers to improve credit differentiation, taking into account the specific characteristics of investment holding companies. The methodology primarily applies to European investment holding companies that are currently rated based on the general corporate rating methodology. It is expected to have a limited positive rating impact on investment holding companies that are already rated by Scope.
As per its policies, Scope promises to promptly review the issuers affected by the new methodology. The reviews and changes to the affected ratings are expected to be completed within six months.
The methodology highlights several key criteria for differentiating investment holding companies from corporate groups or operating holding companies. These criteria include the level of operational integration, investment approach, and influence over core holdings.
Scope’s assessment of an investment holding company’s competitive positioning takes into account factors such as the weighted average industry portfolio risk, portfolio sustainability, portfolio diversification, portfolio liquidity, and investment philosophy.
The evaluation of an investment holding company’s financial strength is based on credit metrics calculated using the company’s standalone financial accounts. This approach is necessary because an investment holding company may not have access to the cash flow, liquidity, or influence over dividend policies of its portfolio companies.
The assessment of the financial risk profile of an investment holding company focuses on recent and forward-looking financial data. Key rating factors considered include the total cost cover, loan/value ratio, and liquidity assessment, particularly for non-investment grade issuers.
During the request-for-comments period, which ended on April 4, 2023, Scope evaluated the comments submitted by market participants. After considering their relevance, significance, and applicability, no additional changes were introduced to the methodology.
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|AA and above||A||BBB||BB||B||CCC and below|
|Total cost cover (x)||>4.0||4.0 to 2.0||2.0 to 1.0||1.0 to 0.5||<0.5||No recurring income|
|LTV (%) Net cash||<15||15 to 30||30 to 50||50 to 70||>70|
|Portfolio market value volatility||Low to medium||Low to medium||Low to medium||Medium to high||Medium to high||Medium to high|
Overall, the Scope Ratings’ Investment Holding Companies Rating Methodology offers some insights into the rating criteria for credit metrics in investment holding companies. However, it lacks specificity and detailed guidelines in certain areas, making it difficult to fully assess the robustness and consistency of the criteria. Clearer definitions, calculation methodologies, and guidelines would enhance the transparency and effectiveness of the credit rating process.
The ambiguities shown are noteworthy, since elsewhere (see RATING.REPAIR) reference was made to possibly too good ratings for investment holding companies that were assessed using the former Scope Ratings methodology.
The Berlin rating agency did not feel compelled to make any fundamental changes to the methodology: “Scope evaluated the relevance, significance and applicability of comments submitted by market participants during the request-for-comments period, which ended on April 4, 2023. No additional changes have been introduced as a result.”
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