"Management in a credit institution", 2007, N 2

The paradox of the rating system is that the company itself (in this case, the bank) pays for the rating assignment. However, we note that the fee is charged not for the rating level, but for passing the rating determination procedure. That is, the payer reimburses the costs of the rating agency for a thorough analysis of not only public reporting, but also additional information that cannot be obtained from open sources. Rating agencies have become as important market participants as brokers. A further increase in their influence on the financial market should be accompanied by the regulation and regulation of their activities. In addition to international rating agencies, national rating companies have emerged and are developing in each country, however, this material is not aimed at emphasizing the advantages of international ratings over national ones.

Benefits of obtaining a rating for a bank

The level of credit rating appears in all annual reports of banks. It is indicative that the reduction of the credit rating by 1 - 2 levels is modeled by all leading banks in the analysis of liquidity risk, since such a change entails an increase in the cost of attracting resources.

According to Standard & Poor's, it is a unique tool for assessing the credit risk of issuers and debt obligations in various sectors of the economy. With the help of a credit rating, it is possible to compare the creditworthiness of issuers and debt obligations of corporations, financial institutions, public authorities and local governments. In addition:

• a credit rating is an assessment of credit risk, that is, the ability and desire of the issuer to fulfill its obligations on time and in full, while rankings cover narrower aspects of economic and financial activity;
• The ratings are characterized by a clear definition of credit risk, corresponding to the rating categories of the scale, independent of the number of ratings assigned and the type of objects being rated, while the rank entirely depends on the composition of the objects, their number and features: it is enough to remove at least one object from the list, and all ranks will change.

A credit rating is the opinion of a rating agency based on both quantitative and qualitative information, while rankings are focused solely on quantitative indicators such as revenue, capital, profit, etc.

Table 1

Benefits of obtaining international credit ratings

To whom it profitable	What does it consist of benefit	Why is it profitable
1	2	3
Issuers	Higher flexibility funding	Being independent reasonable and competent opinion, credit rating helps expand access the issuer to borrowed funds and other sources of capital, thereby increasing its financial flexibility
More attractive terms attract borrowed money	Credit rating represents an independent and reliable creditworthiness assessment issuer, on the basis of which market participants can take informed financial decisions. This may entail lower acquisition costs borrowed money. For those issuers that attract third party guarantees individuals, credit rating can reduce the cost of such a guarantee or more efficient raise funds without purchasing a guarantee
Grade creditworthiness business partner	Credit score often used by banks and others financial intermediaries for decision-making on lending, money market transactions, insurance, leasing and any other situations where required creditworthiness assessment business partner. Many companies prefer not to disclose your financial information in the process of business negotiations. In this case issuer credit rating allows you to save more level of information secrecy
Internal strategic control	Issuer credit rating helps company management determine the cost borrowing in the future
Receipt credit rating by international scale	If the issuer intends get a credit score Standard & Poor's by international scale, receiving national scale rating will significantly speed up this process. Ratings by national and international scale based on unified methodology, and, most likely, of all, work on them will be carried out one team of analysts. Issuers, wishing to receive two rating, have an advantage, so as a rating procedure in this case it will be the same that saves a lot of time and efforts of the issuer's management
Investors and creditors	Credit rating - simple and understandable indicator credit risk	Credit ratings specific companies of a specific debt obligations may be used as simple and handy tool identifying credit risk and comparing it with your own investment strategy investor
Award score for risk	Credit rating represents is an important indicator to identify a part the required income of the investor, which is necessary for compensation for a particular risk default
Monitoring investment portfolio	For pension managers trusteeship, mutual funds and other forms of trust financial management credit ratings are excellent system tool monitoring. Credit changes ratings can mean the need for appropriate correction of investment portfolio
Financial intermediaries	Simplification pricing and underwriting	Investment banks and others financial intermediaries, operating in the bond market, can use credit rating when planning and placement of bond issues
Marketing	The credit rating can promote the placement of new bond loans, aimed at expanding the circle investors, as well as reduce uncertainty about issuer's creditworthiness/ loan. Standard & Poor's will be glad to present relevant reports during the period preparation of issues for placement
Monitoring creditworthiness business partner	The credit rating can used by financial intermediaries as monitoring tool own assets for credit risk that act as directed client, as well as in their own interests

The ratings do not provide a definite forecast of the probability of default, but it should be noted that over a long period of time, the default rate on US corporate bonds rated "AAA" has averaged less than 0.10% per year, while the default rate on bonds rated "BBB" reached 0.35%, and bonds rated "B" - 3.0%.

Issuers or issues of securities that are rated at the same level have similar, but not necessarily identical, creditworthiness because the rating categories do not fully reflect small differences in credit risk.

Types of credit ratings of international agencies

It is necessary to clearly distinguish between ratings that are assigned only on the basis of public reporting, and ratings that are assigned precisely in the manner described above. The first type of ratings are not recognized, as a rule, by investors as a serious source.

An investment grade rating indicates a relatively low probability of default (non-payment), while a speculative grade (or non-investment grade) rating indicates a higher probability of default or that a default has occurred in the past. Banks are required in various countries to invest in securities that are at least investment grade. Credit ratings are used by investors as indicators of the likelihood that payments will be made in accordance with the terms on which the investment was made.

International rating agencies assign not only credit ratings, but also corporate governance ratings, which are not considered in this publication. However, we note that a high corporate governance rating has a positive effect on the credit rating.

International rating agencies have also developed a national rating scale as a relative level of creditworthiness within a particular country. Therefore, these ratings are not intended to compare issuers from different countries, but rather take into account the specifics of credit risk in a given country. The use of such a rating is acceptable only within a certain part of the risk of the portfolio of operations in the local market of a given country, given the various risks that are taken into account by foreign and local currency ratings for this country.

Credit ratings are assigned to governments (sovereign rating, or country risk), local governments (municipalities) and corporations (private and public). Distinguish between the rating of the issuer and the rating of the security itself, naturally, the rating of the security will not be higher than the rating of the issuer itself.

Ratings may be supplemented with a "+" or "-" sign to indicate relative position within the main rating categories. These badges are not added to "AAA" ratings or rating categories below "CCC". The mark "not rated" means that the agency does not assign public ratings to the respective issuer or issue. Withdrawn is marked when a rating is withdrawn if the agency considers that the amount of information available is not sufficient for rating purposes, or if the bonds are due, revoked or refinanced.

In some cases, agencies include an issuer or security on a special Rating Watch list to notify investors of the existing likelihood of a reasonable change in the rating, as well as the direction of such a change. The latter can be defined as "positive", which indicates the possibility of an increase in the rating, "negative" - ​​in case of a possibility of a downgrade, or "developing", if the rating can be upgraded, downgraded or confirmed at the same level. Typically, a rating is placed on the Rating Watch list for a relatively short period of time.

Leading international rating agencies

There are national rating agencies in every country, but it is difficult for them to compete in terms of authority, professionalism of experts, recognition of the name in the market with international agencies. Three companies are the leaders in assigning a credit rating at the international level:

Standard & Poor's;

Moody's Investor Service;

Table 2 allows you to compare the rating systems of the three leading agencies. Ratings have a certain gradation of values ​​from the highest to the lowest quality of creditworthiness of the assessed issuers. According to stock market observers, S & P is the most conservative rating agency, Moody's is an authority for investors in Western Europe, and Fitch is a young agency whose specialization is bank ratings. However, such a statement does not seem qualified enough.

table 2

Quality ratings of long-term loans from leading rating agencies<1>

Moody's	standard & Poor's	Fitch Ratings	Rating value
Aaa	AAA	AAA	The best possible rating for valuable papers. Even circumstances will change the probability that solvency of the issuer suffered as a result of the foreseeable events, very small
aa	AA	AA	Very high quality. Solvency is not essential susceptible to predictable events
A	A	A	Investment grade, considered reliable investment. Ability repay on time is high, but there the likelihood that it could be subject to negative the consequences of changes in economic and political circumstances
Baa	BB	BB	Lowest rating investment grade. Needs monitoring, even though considered adequate under the conditions ability to timely repayment. Negative business environment changes can have a negative impact on solvency
Ba	BB	BB	Considered a speculative class with the possibility of increasing credit risks
B	B	B	Considered highly speculative significant credit risks and limited stock reliability. Current debt obligations are met, but execution could be difficult to change circumstances
Caa	CCC	CCC	Considered highly speculative significant credit risks
Ca	CC	CC	May be defaulted or considered over-speculative
C	C	C	Considered junk. Is in default
Con (Conditional)			Rating is conditional (conditional) before receiving additional information or fulfillment of requirements
N/R (not rated)	N/R (Not rated)	N/R (Not rated)	Securities not assigned rating, for example the issuer does not applied to any agency getting a rating. Is not always means valuable poor quality paper she deserves a closer look study, because most issuers who expect for a good rating, would apply for receiving it

<1>Source: http://www.publicbonds.org/major_players/ratesys.htm.

All of these firms evaluate new issues, monitor completed issues of securities and publish relevant reports.

Table 3

Comparative characteristics of international rating agencies<1>

Parameter	Moody's	Standard & Poor's	Fitch
Headquarters	USA, New York (www.moody's. com)	USA, New York (www.standardsandpoors.com). com); for the CIS countries office in Moscow (www.standardsandpoors.com). ru)	USA, New York, and Great Britain, London (www.fitchratings.com). com); by country CIS office in Moscow (www.fitchratings.com). ru)
Affiliation	Moody's Corporation	Subdivision financial services McGraw-Hill Corporation Companies, Inc. However its activities Standard & Poor's carries out regardless McGraw-Hill	Was purchased in 1997 by a group Fimalac (Paris, France), composed which includes apart from Fitch Ratings also company Algorithmics by management financial risks
Income	Income - $1.2 billion; profit - $363 million (2003)	Income from financial services - 1.7 billion Doll.; profit (corporations) - 687 million dollars (2003)	Income from financial services - 476 million euros; profit - 149 million euro (2005)
Direction business	- Ratings and analytical research	- Ratings and analytical research	- Ratings and analytical research
Scales business	- 100 ratings countries (governments); - 11 000 companies- issuers; 25 000 state issuers; - 2400 employees, in including over 1000 analysts	- 6500 employees, in including 1500 analysts	- Ratings 3100 financial institutions, including 1600 banks and 1400 insurance companies; - 89 countries; - 45 000 municipal tools; - 1500 employees
Start activities	In 1900 founded John Moody. In 1914 there was created corporation Moody's investors Service	In 1860 founded Henry V Poor. AT 1916 Standard Statistics Bureau, which was created in 1906 for providing financial information about American companies, start assign ratings issuers. - Poor's Publishing Company and Standard Statistics Bureau merged in 1941 and formed Standard & Poor's Corporation. In 1966 McGraw-Hill Companies acquired Standard & Poor's	- Founded in 1913 John Knowles Fitch. published financial reports and worked for New York stock exchange. - In 1924 Fitch proposed a scale ratings (from "AAA" to "D") for independent analysis of financial investment. - Fitch took over two competitors Duff & Phelps Credit Rating Co. (Chicago) in April 2000, and in 2001 - Thomson bank watch

<1>According to agency websites.

The credit rating of debt obligations is not a recommendation as to whether to sell or buy a particular debt obligation, nor is it an opinion on the market price of a debt obligation and the investment attractiveness of a debt obligation for a particular investor. Also, all rating agencies emphasize that ratings do not insure against default.

• country ranking;
• industry rating (in this case, the financial sector);
• the rating of the issuer itself (in our case, the bank).

Rating assignment

1. The issuer applies to a rating agency for a rating.
2. The parties sign an agreement on analysis, rating assignment and its support.
3. The agency appoints a group of analysts who collect public information, then interview bank executives.
4. The rating committee of the agency reviews the assessment prepared by analysts.
5. The issuer is informed about the assigned rating.
6. The issuer agrees to the dissemination of information about the rating.

It is necessary to collect information about the issuer of a qualitative nature. Since the information transparency of issuers remains at a rather low level, public information is often not enough to conduct an in-depth analysis of the creditworthiness. Agencies assign a rating only when sufficient information is available, based on a transparent methodology that takes into account quantitative and qualitative parameters, financial risks and business risks.

At the same time, the company valuation methodology differs in that it analyzes the characteristics of the business (market, competitive position, management and strategy), financial profile (financial policy, profitability, capital structure, cash flow indicators, financial flexibility), and in relation to banks, the emphasis is on studying business factors (market position, ownership structure, strategy and management), as well as financial factors (asset quality, profitability, funding and liquidity management, capital).

For example, Standard & Poor's upon receipt of a request for a rating, forms an analytical group, which must include at least one analyst with experience in the CIS countries. A lead analyst is appointed to manage the process, being the main contact person for the issuer. Before the official meeting, the group analyzes information provided by the issuer upon request, as well as information from other sources that Standard & Poor's considers reliable: financial statements for previous periods, forecasts of financial indicators and cash flows, transaction documentation, legal opinions and other data.

1. officially published financial statements and detailed annual reports;
2. various declarations, press releases, conferences, presentations of issuers;
3. market data, including the dynamics of securities rates, trading volumes, etc.;
4. data and research of associations, international organizations;
5. data from supervisory, regulatory, ministries;
6. scientific publications and news in the field of finance;
7. forums with financial sector experts, regulators and academics;
8. information received on the basis of meetings and dialogues with the heads of the issuer.

Between the moment of applying for a rating and the moment when the issuer is informed about the assigned rating, usually 6 to 8 weeks pass. In some cases, the process of assigning a rating can be accelerated at the special request of the issuer. The main factor determining the duration of the rating process is the issuer's ability to quickly - before meeting with management - prepare the necessary information and respond to additional requests for information that may arise during this meeting.

For corporations and financial institutions, the availability of financial statements in accordance with international standards (IFRS) is an important advantage. All confidential information provided to the company is kept strictly confidential.

firstly, they do not audit and do not confirm the accounts of the companies they rate;

For each rating, the agencies publish a press release, a brief and complete rationale for the rating on their websites, however, a detailed description of the issuer is in some cases available only to subscribers, while the subscription itself can be free or paid, or allow a certain free trial period.

Rating change

In cases where it seems necessary to change the rating, a preliminary analysis is carried out, the result of which may be the registration of this rating in the CreditWatch list (special attention) of the Standard & Poor's agency.

Registration in this list indicates that the rating may be changed in the near future. This serves as a signal to investors that further analysis is underway.

Once a rating is assigned, the agency's analysts constantly monitor all factors that may affect it, such as changes in the capital structure, takeovers of other companies or other major economic events. Significant events related to the issuer's activities are monitored daily. Meetings of analysts with management are envisaged.

Significant events related to the issuer's activities are monitored regularly. Based on information obtained from the issuer or other public sources, the rating may be upgraded or downgraded as often as the issuer's creditworthiness changes. In the event that no significant events occur, a formal review of the rating (its confirmation or change) is carried out once a year.

If the assigned rating does not meet the issuer's expectations, the latter may challenge this decision. For the appeal period, Standard & Poor's refrains from publishing the value of the assigned rating until any new information provided by the issuer is analyzed.

Moody's agency sets its opinion on the likely change in the rating in the medium term. The rating outlook is set from the following four categories to choose from:

positive - Positive (POS);

negative - Negative (NEG);

stable - Stable (STA);

developing - Developing (DEV - the situation may change depending on the outcome of some event).

In some cases, where the issuer has multiple perspectives in different directions, Moody's will indicate the sign "(m)" (meaning multiple different perspectives), and Moody's written research report will explain this diversity and justify the reasons for the discrepancy. The RUR (Rating(s) Under Review) rating assignment indicates that the issuer has one or more ratings that are being reviewed for possible change, and this ignores the rating assignment. When an outlook is not defined for an acceptable issuer, the designation NOO (No Outlook) may be given - there is no certainty of the outlook.

The TWR symbol applies primarily to issues that have already been redeemed or redeemed without a rating.

Underlined rating (underlying rating) represents Moody's published assessment of the credit quality of a particular loan in the absence of credit improvement. Moody's issues public information regarding the underlined rating, at the request of the issuer in relation to debt (loan), the credit quality of which is generally improving. The rating scale is identical to that used by Moody's for long-term liabilities.

Moody's also uses a watchlist to indicate that a rating is under review for a possible change in the short term. The rating may be placed in the analysis category for a possible increase (upgrade, or UPG), for a possible downgrade (or DNG) or (in rare cases) for an uncertain direction (or UNC).

Bank refusal from the rating

There are precedents when a bank refuses a rating if it does not see the need for it. So, in Ukraine, one of the first precedents was the termination of the rating of Privatbank by Standard & Poor's. In Russia, this is a fairly common practice. Only in 2006, three banks abandoned their ratings. In January 2006, the Fitch rating agency withdrew the ratings of a Russian bank Avangard, which became the first Russian bank to completely withdraw its support from international ratings, had good ratings: long-term rating "B-", short-term rating "B", support rating 5, individual rating "D" and long-term rating on the national scale "BB +" (rus), ranking 45th in terms of equity (3.52 billion rubles) and 47th in terms of net assets (20.62 billion rubles).

What are the reasons for this bank?

First, the bank wants to save money, believing that spending $60,000 a year to maintain international ratings is not economically viable for it.

Secondly, these costs are not considered efficient. Since there is a standardized approach to assessing the degree of risk to borrowers, provided for by the Basel II agreement, which guides international financial institutions when setting risk limits for Russian banks, supporting international credit ratings for most Russian banks is inappropriate.

Thirdly, the decrease in interest rates in Russia and their increase in America have led to the fact that the cost of borrowing in the domestic market is almost equal to the cost of borrowing in the international market.

Thus, at the beginning of 2006, Alfa-Bank officially announced its intention to terminate the contract with Fitch Ratings. Now, for the next year, instead of the rating of three international agencies, the bank will have Standard & Poor's and Moody's ratings. This bank is remarkable in that it conducts tenders for the purchase of any goods and services - from stationery to ratings. It turned out that Fitch's terms were less favorable for the bank. Although the reason for this decision is also associated by the bank's management with the need to optimize costs and the sufficiency of the other two ratings, the low rating assigned to the bank played an important role, according to experts. One of the main goals of the competition was to reduce costs. The choice was made according to the criteria of the cost of services and their quality. This is the only time that a private bank has chosen a rating agency through a tender.

In October 2005, Delta Credit bank terminated the contract with S&P, explaining that the agency was unable to provide him with the required service. Prior to that, there was only one case in the history of the Russian banking system: in March 2005, Menatep SPb bank actually refused the S&P rating, ceasing to provide information to the agency. The bank considered unfair the agency's downgrading of its ratings because of the history with the Yukos corporation. However, in cases with other banks, experts most often named the main reason for their unwillingness to have low ratings. Other bankers believe that for a large bank operating in different markets, all three ratings are needed, or at least two. The real reason may be that the bank is unhappy with the rating assigned to it, which turns out to be lower than the rating of banks of comparable competitiveness.

However, today all banks in the CIS countries seek to attract cheap money from the West, and the confidence of Western financial institutions largely depends on the presence of an international rating, that is, such a rating is a kind of payment for resources. If the bank works with foreign counterparties, then the presence of an international rating is, in principle, mandatory. Today, only those banks that focus on counterparties only within the country can say that an international rating is not needed.

Problems of the reliability of the rating assessment

In the West, the absolute credibility of the ratings was called into question after a series of scandals related to the fall of stock market giants such as Enron, Parmalat, and others. At the same time, the ratings of reputable companies clearly lagged behind the market's recognition of high default risks. In 2005, the United States held a wide discussion of a new document that would regulate the activities of rating agencies. The question remains whether it is legitimate for rating agencies to charge the issuers themselves for assigning ratings. After all, issuers are interested in obtaining a good rating (we do not take into account the extreme case when a bank receives a rating only for the very fact of being included in the rating).

The agency is interested in earning income from ratings, and, as practice has shown, such efforts to maintain good relations with customers have sometimes taken the form of a delay in downgrading or assigning a favorable rating. For example, the agency warns of a rating downgrade and allows the issuer to quickly improve its performance. This is especially sensitive for an issuer that was in the "investment securities" class and risks falling one class lower, into the "speculative" category (or, as analysts call it, becoming a "fallen angel"). Indeed, as a result, requirements may be put forward to the issuer for early repayment of the debt or closing of credit lines, and this will further aggravate the financial position of the issuer and even lead to bankruptcy.

Thus, in the case of Enron (USA), credit agencies hoped that the delay in downgrading this corporation would buy time for a possible merger with another company that could cover Enron's debts. Although we must not forget that the credit rating differs fundamentally from the stock price and cannot be changed only on the basis of the issuer's quarterly report, but is designed for a long term.

It is known that the analysis carried out by rating agencies affects the determination of the interest rates that borrowers pay on their debts. Therefore, it was recognized that the activities of rating agencies should be regulated as well as the activities of the issuers themselves.

The fall of Enron Corporation exposed the facts when agencies gave investors biased assessments of the creditworthiness of borrowers. Rating agencies reported cheerfully on the activities of this corporation just before its collapse.

Moody's then denied accusations that it was more aware of the "fallen" companies than other analysts. Moody's referred to the fact that the rating was based on public financial statements. At the same time, it was recognized that meetings with the issuer's management were held, but the issuers shared information at their own discretion and chose the level of its disclosure themselves.

Market participants, in particular Bank of America representatives, noted at the time that if these agencies simply react to those changes in risk that the market has already priced into securities rates, then such ratings lose their usefulness.

Thus, credit rating agencies continued to support Enron's investment grade debt five days before the company was declared bankrupt. It was difficult then to understand why rating agencies Standard & Poor's and Moody's did not downgrade Enron's debt to junk status until December 2001, while special purpose enterprises with secured capital (so called SPEs, equity-backed special purpose entities) used by Enron to maintain a good debt-to-equity ratio were well known to the public before the default was announced, and therefore certainly to the rating agencies.

Western media reported that former US Secretary of the Treasury Robert Rubin, who now holds a high position in Citigroup, lobbied for Enron's interests in rating agencies.<1>. It turned out that he helped falsify accounting data in order to hide Enron's financial condition from the rating agencies. In particular, he called the US Department of the Treasury to put pressure on credit agencies in favor of Enron when they were going to lower the rating of this corporation. Rubin also spoke directly to the management of Moody's Investors Service to convince him of the need to increase the credit rating for Enron. Citigroup invested almost $ 1 billion in this corporation and was considering it for a takeover deal and receiving a commission for such a deal, therefore was interested in protecting Enron's credit rating.

<1>See: http://www.opec.ru/news_doc.asp?d_no=19319.

An open discussion of the work of rating agencies also revealed the problem of overloading analysts, who sometimes make their assessments mechanically. Otherwise, it is simply impossible to imagine how one expert manages to simultaneously rating 55 companies. As a result, one had to doubt the reliability and depth of the qualitative and quantitative analysis of issuers. All this only increased the problem of agencies' interest in hiding negative information about issuers for fear of losing their clients.

Another problem is that, similarly to audit firms, rating agencies provided advice, including to issuers, on how to improve performance to increase the rating. In this case, the rating agencies inevitably came into conflict with the interests of investors, for the sake of which the ratings are assigned.

The delimitation of the interests of a consultant and an analyst is one of the urgent tasks for all rating agencies. Although in practice, the same Moody's agency has only 1% of all income from consulting. Rating agencies often face a dilemma: to downgrade or not to downgrade issuers that have recently been given a high rating. Agencies compete with investment banks, advising clients how to improve your financial condition to improve your credit ratings.

Until recently, there was no ban on employment in issuers who work in rating agencies. As a result, the two roles clash at the worker level, as revealed during the WorldCom corporate scandal investigation. Then it turned out that Clifford Alexander, chairman of Moody's, was a member of the board of directors of this corporation. Moreover, he left his post at WorldCom Corporation only a year before declaring its bankruptcy.

Therefore, many institutions, including regulatory bodies, do not allow employees to work for other companies that are related to this employer, not only during the entire employment in this institution, but also for some time after they have left their job.

In early February 2004, a loud insider scandal erupted in Russia, when half an hour before S&P announced that Russia had been assigned a credit rating, a rush buying up of shares began. Informed citizens could then earn about 700% per annum. And in October 2003, a similar story happened with another Moody's rating agency: the "catch" of insiders amounted to 550% per annum<1>.

<1>See: http://www.ko.ru/document.asp?d_no=11202.

After a series of such scandals, all three of the leading credit rating agencies announced actions to review their work.

Reforming agency oversight

In response to the corporate scandals of 2001, the U.S. Congress, in the Sarbanes-Oxley Act, required the SEC to investigate credit rating agencies, examining the role of these agencies for investors and paying attention to what hinders the fair assessment given by these agencies. It was also instructed to investigate whether there are any barriers to entry into the credit rating market and whether there are conflicts of interest that interfere with the work of rating agencies.

In January 2003, the SEC completed and circulated its research report, identifying five key issues for further in-depth analysis:

1. information flows;
2. potential conflicts of interest;
3. antitrust or unfair competitive practices in the marketplace;
4. removal of possible barriers to market entry;
5. constant supervision.

In June 2003, the SEC submitted a concept for discussion.

In October 2004, the International Organization of Securities Commissions (IOSCO) submitted for public comment its code of conduct for credit agencies.

In March 2005, the SEC issued a proposed Nationally Recognized Statistical Rating Organization (NRSRO) designation rule, stating that it lacks the authority to conduct ongoing oversight of credit rating agencies.

In March 2006, the US Senate Banking Committee held its third hearing to assess existing oversight and the performance of credit rating agencies. In June 2006, the Financial Services Committee of the House of Representatives approved the Credit Rating Agency Duopoly Relief Act, since in the United States the rating services market is actually divided between two agencies - Standard & Poor's and Moody's.

In September 2006, US President George W. Bush signed the Credit Rating Agencies Act into law to reform the regulation of credit rating agencies in the US.

Thirdly, it provides more reliable protection against conflicts of interest and incorrect use of insider information.

The SEC documents noted that a credit rating is traditionally considered to be an opinion communicated to investors to help them determine the credit risk associated with issuing obligations. That is, it was emphasized that this is an opinion, not a recommendation. However, the new Law determines that rating agencies are closer in their status to brokers, investment banks than to the mass media. Agencies are similar to brokers, as they have the same system of payment for services and organizational structure, are providers of information for investors and monitor corporate governance in issuers.

The credit rating industry is an integral part of the global financial system. Downgrading a credit rating from investment grade to speculative could seriously damage a company's financial stability. Considering such influence of a credit rating, it is impossible to be limited to definition of a rating only as opinion. Therefore, the new Credit Rating Agency Act in the US clarifies that a credit rating has the same legal status as the information provided by brokers. This increase in accountability should increase the motivation of agencies to act in the interests of investors, as well as improve relations between rating agencies and issuers.

It is expected that the new Law will allow the development of new rating agencies, which are likely to occupy some niches in the rating market, such as insurance market ratings. However, there is a recognized risk that "newcomers" may inflate their ratings in an effort to attract new customers, and this will destabilize the credit rating industry.

Under the new Law, the Securities and Exchange Commission is empowered to prohibit companies from combining consulting and rating services. Only other firms will be engaged in consulting. A ban is also introduced for analysts from rating agencies to hold positions in other companies.

The need arises to introduce a mechanism for regulating rating agencies in other countries.

G.B. Petrov

banking expert

company "Synergy"

A credit score is an analytical indicator used by financial institutions to check the current level of solvency of a potential client. During the scoring process, an employee of a credit institution carefully examines information about a potential borrower, analyzing current credit history indicators and the data presented in the income statement.

How to check your current credit score?

A credit rating check will be needed at the stage of applying for a large loan. Long-term loans designed for gradual repayment are issued only after the potential borrower provides indisputable evidence of solvency. Clients who have been denied a loan by a financial institution or offered an excessively high interest rate may have their scoring reviewed. This is done in order to find the reasons for such a decision.

1. current solvency of the borrower.
2. The presence or absence of existing debt obligations.
3. Credit history status.
4. Willingness to provide security for the debt in the form of collateral or the involvement of guarantors.
5. The accuracy of the information provided in the application.
6. Social factors, including marital status.

When it comes to responsible financial management, the borrower must be sure of their creditworthiness. The appearance of delinquencies on debt obligations is often due to unreasonable financial requests of the client. The scoring was created to compare financial burden indicators with the borrower's income level. If the regular profit of a potential client is significantly lower than future payments on the loan, it is better to refuse the transaction or adjust its conditions.

1. In the financial institution chosen for cooperation. At the stage of applying for a loan, employees of the lending department check the information about the borrower. The report obtained during the scoring is filed with the case file. The information provided is not disclosed even to the borrower. A financial institution has every right to refuse lending to a potential client if the rating does not meet the requirements.


2. Registration of a free report, which every citizen of the country can receive once a year.


3. Through specialized credit bureaus, whose representatives, for a small fee, will not only perform scoring, but also provide several useful recommendations for improving the credit rating. The resulting report can be used in the process of applying for an immediate loan.

The annual free credit report is compiled by representatives of the largest credit bureaus in the country. If a potential borrower needs to receive a second credit report over a short period, they will have to pay for scoring. The cost of the service depends on the depth of processing of the information received.

For example, a client can additionally order from an experienced credit manager the development of recommendations to obtain the most favorable transaction conditions.

There is also an option to subscribe to a service, the essence of which is to receive monthly SMS or e-mail messages with a detailed credit report. Access to the information presented in the report will provide excellent conditions for thoughtful transaction planning.

You can use the received data to improve your credit rating. Thought out to the smallest detail, the lending process has a positive effect on the financial capabilities of the borrower, providing excellent conditions for using profitable loans.

The resulting analytical information can also be used to improve the rating, increasing the likelihood of obtaining both the loan itself and lowering the interest rate.

Factors affecting credit rating indicators:

1. Timely return of loans.
2. borrower's income level.
3. The presence of property that can be used to pay off debts.
4. Providing packages of documents necessary for the conclusion of the transaction.
5. Credit history status.
6. Reviews of financial institutions about a potential borrower.

The credit rating is calculated using the listed factors, but additional parameters may be indicated in the report. Careful scoring will allow you to predict the likelihood of delay. The borrower must repay the loan in full within the period specified in the agreement. A high score means that the borrower is more likely to repay the loan. Obviously, a financial institution will provide favorable transaction conditions to the client who provides the least amount of risk.

• Making payments to repay the debt strictly according to the schedule agreed in the contract.
• Waiver of optional expenses.
• Budget planning for the term of the loan agreement.
• Improvement of credit history, for example, by obtaining and modern repayment of microcredits.
• The use of additional services to reduce the level of financial burden.
• Providing reliable information in the application for a loan.

One of the first things you need to do to improve your credit score is pay off your current debt. Responsible financial behavior includes a number of simple actions that are available to every borrower. It is enough to refuse ill-conceived expenses to reduce the risk of financial difficulties. Payments must always be made on time. Even a single delay will affect the state of the credit history, worsening the rating of the borrower. To avoid missed payments and delinquencies that have a negative impact on your credit score, you can enable special notifications sent to your financial phone number and email address.

Services for borrowers with a good credit score

For most borrowers, large purchases become available only after obtaining a high credit rating. When a person needs a loan, one has to turn to trusted financial institutions, because long-term large loans can only be issued after obtaining a credit rating.

Some borrowers believe that the lack of credit history is a positive factor. In fact, the inability to calculate a credit rating is even worse than the presence of mediocre and poor performance, since the lender is not able to calculate the actions of the borrower.

Credit ratings can only be assigned by accredited rating agencies subject to regulation. In Russia, inclusion in the register of credit rating agencies and regulation of activities for assigning credit ratings are within the competence of the Central Bank of the Russian Federation - the Bank of Russia.

Rating (credit rating) - the Agency's opinion on the ability of a rated entity to fulfill its financial obligations (creditworthiness, financial reliability, financial stability) and (or) on the credit risk of its individual financial obligations or debt (derivative) financial instruments, expressed using a rating category (rating level).

Credit rating (type of credit rating) - the Agency's opinion on the ability of the rated entity to fully fulfill the obligations of a credit nature, both current and arising in the course of its activities for a period of up to 1 year.

The financial strength rating is the Agency's opinion on the ability of a rated entity to fulfill its financial obligations to customers, counterparties and creditors. As a rule, financial strength ratings are assigned to companies that rarely use loans and credits (credit-based obligations) as part of their core operating activities, this is their difference from credit ratings.

The financial strength rating is the Agency's opinion on the ability of a rated entity to fulfill its financial and contractual obligations, primarily to customers and counterparties. Ratings are assigned to organizations that, due to the specifics of their activities, as a rule, do not assume obligations under credits, loans, debt securities.

2) How can you check the quality of credit ratings?

Calibration.

The key goal of the Agency is to conduct an objective qualitative analysis of the objects of the rating in order to assign a rating in accordance with the rating methodology and publish such an assessment for use by all interested parties.

The correctness of classification, depending on the type of rating, is understood as:

· for derivative ratings (ratings of the quality of services, quality of corporate governance, investment attractiveness, compliance with Shariah requirements, etc.) – compliance of the actually observed properties of the rating object with the properties determined by the description of the level of the rating scale in the Agency's methodology.

The excess of the historical probability of default over the predicted probability indicates the incorrect assignment of ratings by the Agency. (The historical probability of default is based on calculations based on the Rating Transition Matrix and default statistics; for the predicted probability, calculations are based on market indicators of credit risk in accordance with Section 3 of these Regulations.)

3) What are the main types of errors in assigning credit ratings?

Incorrect data

Incorrect interpretation of grades

Incorrect filling of the model

Procedure Violation Errors

Errors in methodology

Rating model - a system for scoring the main criteria used to assign ratings, including the set of main criteria itself, divided into blocks, the method for determining the values ​​​​of the assessment of the criteria, the basic indicators, the assessment of which determines the score for each criterion, the ranges for determining quantitative criteria, the weight of each indicator in the final score of the model, a method for calculating the final score and a method for determining the rating by the final score.

The construction of mathematical models is possible in the following ways (depending on the nature and volume of a priori information, there are two ways to build models of objects and control systems):

· analytically, i.e. derivation from physical laws, mathematical axioms or theorems;

experimentally, i.e. by processing the results of the experiment and selecting approximating (approximately coinciding) dependencies.

Analytical method used to build models of objects of a well-studied nature. In this case, all the necessary information is available, but it is presented in a different form. The models realized in this case are presented in the form of schemes with lumped parameters (components). On such models are based, for example, theoretical mechanics and theoretical electrical engineering.

Methods of control theory abstract from the specific nature of objects and operate with more abstract - mathematical (symbolic) models.

The analytical method of modeling consists of two main stages:

− construction of the object scheme;

− construction of a mathematical description of the circuit in the required form.

In this case, the fundamental problems of modeling are solved at the first (informal) stage, and the second is the procedure for transforming the forms of representation of models. This allows you to develop and use various computer programs for automating the compilation of equations according to schemes.

Experimental way is used when the properties of an object are insufficiently studied or too complex for an analytical description. It consists in active experiments on an object or passive registration of its behavior in the normal operation mode (Fig. 1.19, a).

8) The main regulatory documents of the Bank of Russia governing the use of national credit ratings.

5) How is the probability of default calculated?

The historical probability of default on a particular group's rating is the probability of a given rating defaulting if the rating remains unchanged, plus the probability of downgrading an arbitrary number of notches and then defaulting with a new rating level.

A point estimate of the default probability is calculated - the ratio of the number of defaults in a given category to the total number of observations - the sum of the number of ratings in this category at the beginning of the period, the number of newly assigned ratings for the period, and the number of ratings that migrated into this category during the period.

An additional probability of default is calculated - the sum of the products of the probability of rating migration from a given category to each of the lower categories by a point estimate of the probability of default for each of the lower categories, except for D (since the transition from C- to D is both a transition and a rating default).

The historical probability of default is calculated for each rating category - the sum of the point estimate of the probability of default and the additional probability of default. Similar calculations are made for the levels at the time of default, as well as for 1.3 and 12 months before the specified event.

You can compare the ratings of different RAs using the so-called regular comparison method.

The idea of ​​forming a single rating space (URS) is to choose a rating scale (hereinafter referred to as the base one) and form a system for mapping the ratings of all considered rating agencies and internal ratings into the base scale for each class of rating subjects.

7) How can credit ratings be applied?

Similar information.

Credit rating is an independent and reliable assessment of an issuer's creditworthiness, on the basis of which market participants can make informed financial decisions. This may entail a reduction in the issuer's costs of raising borrowed funds. For those issuers that raise funds against third-party guarantees, a credit rating may reduce the cost of such a guarantee or raise funds more efficiently without purchasing a guarantee.

In recent decades, credit ratings have become a universally recognized and convenient benchmark for determining the degree of creditworthiness of federal governments, regional administrations, banks, and non-financial companies. An objective assessment of the solvency of economic entities by independent experts is in modern business practice the same necessary element of doing business and public administration as regular audits.

A credit rating is often used by banks and other financial intermediaries to make lending decisions, money market transactions, insurance, leasing, and any other situation where an assessment of a business partner's creditworthiness is required. Many companies choose not to disclose their financial information during business negotiations. In this case, the issuer's credit rating serves as a reliable benchmark of creditworthiness.

Credit rating is one of the most important tools for increasing the attractiveness of borrowers in the eyes of creditors, allowing them to obtain an objective and understandable indicator of the financial condition of borrowers. The independence of the rating agency from financial market participants contributes to increasing confidence in the borrower.

A credit score facilitates the underwriting process. Investment banks and other financial intermediaries operating in the bond market may use a credit rating when planning and placing bond issues.

Principles for the provision of rating services

Independence: A credit rating is an independent opinion of a rating company on the creditworthiness of an issuer. The independence of Standard & Poor's opinion from the interests of any market participants, government and commercial organizations is one of the most important guarantees of objectivity and impartiality of credit ratings. Along with the high quality of analytics, independence determines the accuracy of Standard & Poor's credit ratings.

Publicity of analytical criteria: a key practice that gives investors a complete understanding of Standard & Poor's analytical approaches to risk assessment. All Standard & Poor's criteria are available in various languages, including Russian, and are posted on the Standard & Poor's website.

Collegiality: a decision-making procedure that eliminates any possibility of manipulating the opinion of analysts responsible for the analysis of a particular issuer. The rating committee is the most important mechanism in the process of assigning a credit rating, which guarantees the impartiality of analysts' assessments, quality control and the futility of pressure on the opinion of analysts from outside. The rating committee is formed from specialized specialists, depending on the industry and other characteristics 5-9 of the issuer. The task of the rating committee includes a detailed discussion of the rating report for this issuer and the assignment of a rating at a certain level by voting.

Interactivity: the principle on the basis of which interaction with the issuer is built in the process of assigning a credit rating and subsequent monitoring of it. Based primarily on information received from the issuer itself, a painstaking, detailed discussion of all possible situations that could affect its creditworthiness. Interactivity implies regular meetings with the issuer's management and constant informational contact, which makes it possible to promptly respond to ongoing changes.

Information privacy: a fundamental condition of work that allows the issuer to guarantee non-disclosure of confidential information transferred to analysts and disclosure of the rating only with the consent of the issuer.

Use of rating scales: the scale makes it possible to compare issuers of different economic nature (corporations, regions, municipalities, banks, insurance companies, etc.) in terms of credit risk, and takes the issuer and its obligations out of the narrow industry context.

Ongoing research into default probability: are carried out on the basis of a wide statistical sample for all rating categories to control the quality of the rating opinion and (if necessary) adjust the methodology.

Rating agencies

Moody's Interfax Rating Agency

Moody's Interfax Rating Agency is a universal rating agency that provides a full range of rating services for all sectors of the economy.

Aaa.ru- issuers, or debt obligations with a rating of Aaa.ru, are characterized by the highest creditworthiness in relation to other issuers in the country.

Aa.ru- issuers, or debt obligations with a rating of Aa.ru, are characterized by very high creditworthiness in relation to other issuers in the country.

A.ru- issuers, or debt obligations rated A.ru, have above average creditworthiness among other issuers in the country.

Baa.ru- issuers, or debt obligations with a rating of Baa.ru, represent the average level of creditworthiness among issuers in the country.

Ba.ru- issuers, or debt obligations rated Ba.ru, have a creditworthiness level below the average for issuers in the country.

b.ru- issuers or debt obligations rated B.ru have low creditworthiness relative to other issuers in the country.

Caa.ru- issuers, or debt obligations with a rating of Caa.ru, are characterized as speculative and have a very low creditworthiness relative to other issuers in the country.

Ca.ru- issuers, or debt obligations with a rating of Ca.ru, are characterized as highly speculative and have extremely low creditworthiness relative to other issuers in the country.

c.ru- issuers, or bonds rated C.ru, are characterized as highly speculative and have the lowest creditworthiness relative to other issuers in the country.

Moody's Interfax Rating Agency supplements the ratings of each category from aa before Caa indexes 1, 2 and 3. Index 1 indicates that the obligation has a higher rank in its rating category; index 2 indicates an average rank, and index 3 indicates a lower rank in that category.

Standard & Poor's

Issuer's credit rating according to the international scale Standard & Poor's expresses the current opinion on the general creditworthiness of the debt issuer, guarantor or guarantor, business partner, its ability and intention to timely and fully meet its debt obligations.

The credit rating of debt obligations according to the international scale Standard & Poor's expresses the current opinion on the credit risk for specific debt obligations (bonds, bank loans, loans, other financial instruments).

The values ​​of credit ratings on the international scale Standard & Poor's include a long-term rating that assesses the ability of the issuer to fulfill its debt obligations in a timely manner. Long-term ratings range from the highest category - "AAA" to the lowest - "D". Ratings ranging from "AA" to "CCC" may be supplemented with a plus (+) or minus (-) sign indicating intermediate rating categories in relation to the main categories.

A short-term rating is an assessment of the likelihood of timely repayment of obligations that are considered short-term in the respective markets. Short-term ratings also range from 'A-1' for the highest quality obligations to 'D' for the lowest quality obligations. Ratings within the 'A-1' category may contain a plus sign (+) to highlight stronger commitments in that category.

In addition to long-term ratings, Standard & Poor's has special ratings for preferred stocks, money market funds, mutual bond funds, the solvency of insurance companies and companies working with derivatives.

AAA- a very high ability to timely and fully meet their debt obligations; the highest rating.

AA— high ability to timely and fully meet their debt obligations.

A— Moderately high ability to meet its debt obligations on time and in full, but more sensitive to the impact of adverse changes in commercial, financial and economic conditions.

BBB— a sufficient ability to meet its debt obligations on time and in full, but greater sensitivity to the impact of adverse changes in commercial, financial and economic conditions.

BB- out of danger in the short term, but more sensitive to the impact of adverse changes in commercial, financial and economic conditions.

B— higher vulnerability in the presence of unfavorable commercial, financial and economic conditions, but at present it is possible to fulfill debt obligations on time and in full.

CCC— at the moment there is a potential possibility of default by the issuer of its debt obligations; the timely fulfillment of debt obligations is largely dependent on favorable commercial, financial and economic conditions.

CC— at present, there is a high probability of default by the issuer of its debt obligations.

C— bankruptcy proceedings have been initiated against the issuer or similar action has been taken, but payments or performance of debt obligations continue.

SD- selective default on this debt obligation while continuing timely and full payments on other debt obligations.

D— default on debt obligations.

Stable - unlikely to change.

Developing - possible increase or decrease in the rating.

You can also determine the issuer's credit rating on the Russian Standard & Poor's scale. Russian issuers mean all issuers of debt obligations, guarantors and guarantors, insurance companies located in the Russian Federation or operating in Russian financial markets. The business partner rating is a type of credit rating issuer.

An issuer's credit rating is not equivalent to the rating of its specific debt obligations, since it does not take into account the nature and security of a particular obligation, as well as its relative status in the event of bankruptcy or liquidation of the issuer and the protection of creditors' rights thereon. The creditworthiness of the guarantors, or guarantors, for specific obligations of the issuer, as well as other forms of credit risk mitigation, may provide the basis for an upgrade in the credit rating of the obligation relative to the issuer's credit rating.

The issuer's credit rating is not a recommendation as to whether to sell or buy the issuer's debt obligations, and is not an opinion on the market price of the debt obligations and on the investment attractiveness of the issuer for a particular investor. The credit rating is based on current information obtained from the issuer or from other sources that Standard & Poor's considers reliable. Standard & Poor's does not audit in connection with any credit rating and may occasionally rely on unaudited financial information. An issuer's credit rating may be changed, suspended or withdrawn as a result of any change in or lack of information, or for other reasons.

Issuer credit rating:

ruAAA. The issuer's rating of 'ruAAA' means the issuer's very high ability to timely and fully meet its debt obligations relative to other Russian issuers. This is the highest credit rating on the Russian Standard & Poor's scale.

ruA. An issuer rated 'ruA' is more exposed to adverse changes in commercial, financial and economic conditions than issuers rated 'ruAAA' and 'ruAA'. Nevertheless, the issuer is characterized by a moderately high ability to timely and fully meet its debt obligations relative to other Russian issuers.

ruBBB. The 'ruBBB' issuer rating reflects the issuer's sufficient ability to timely and fully meet its debt obligations relative to other Russian issuers. However, this issuer is more sensitive to adverse changes in commercial, financial and economic conditions than higher-rated issuers.

ruBB, ruB, ruCCC, ruCC. Issuers rated "ruBB", "ruB", "ruCCC" and "ruCC" on the Russian Standard & Poor's scale are characterized by high credit risk relative to other Russian issuers. Despite the fact that such issuers have some degree of reliability, they are more are subject to uncertainty and unfavorable factors compared to other Russian issuers.

ruBB. An issuer with a ruBB rating has less credit risk than Russian issuers with lower ratings. However, uncertainty or the impact of adverse changes in commercial, financial and economic conditions may result in an issuer's inability to meet its debt obligations in a timely manner and in full.

ruB. The 'ruB' issuer rating reflects a lower credit profile than the 'ruBB' rating. Currently, this issuer is able to fulfill its debt obligations on time and in full. However, unfavorable changes in commercial, financial and economic conditions are likely to prevent the issuer from meeting its debt obligations on time and in full.

ruCCC. The issuer's rating of 'ruCCC' means that at the moment, in the conditions of the Russian financial market, there is a potential possibility of default on its debt obligations. The timely fulfillment of debt obligations is largely dependent on favorable commercial, financial and economic conditions.

ruC. The ruC issuer rating is assigned when the issuer is subject to bankruptcy proceedings, a ban on its core business, a court decision is expected to impose a penalty on property, or in another similar case. In the process of litigation (or external management), the relevant body may decide to pay off part of the debt obligations and default on the remaining obligations. Standard & Poor's description of the credit rating of debt obligations provides a more detailed explanation of the possible impact of such decisions on the credit rating of specific debt obligations.

Rating «RUSD» in the conditions of the Russian financial market, it is assigned when Standard & Poor's believes that the issuer has defaulted on a particular issue or several issues of its debt obligations, but will continue to make timely and full payments on other debt obligations. In the description of the credit rating of Standard & Poor's debt obligations "s provides a more detailed explanation of the possible impact of such decisions on the credit rating of specific debt obligations.

Standard & Poor's specialized ratings are assigned to certain types of debt, bank loans, investment projects and private placements of securities, using the same scale as for other debt instruments. Private placement ratings include an assessment of guarantee and collateral obligations necessary in order to reduce the risk of loss in the event of a default Bank loan ratings serve the needs of the syndicated loan and project finance markets and include an assessment of the prospects for a lender to receive funds in the event of a default, based on an analysis of the value of collateral or other protective mechanisms usually provided in such schemes .

Bank loans, private placements and other financial instruments such as guaranteed bonds, when well protected and able to adequately compensate the lender, may be rated higher than the issuer itself. In contrast, instruments that are inferior in priority to repayment of the issuer's principal debt are usually rated lower than the issuer's rating.

Many mutual fund managers use Standard & Poor's ratings assigned to managed funds to highlight the advantages of their bond and cash funds against competitors' funds. Ratings provide investors with information about the creditworthiness of funds and the level of quality of their management.

Structured instrument credit ratings include an assessment of:

• the quality of the assets that are being securitized;
• payment structures;
• legal purity of transactions.

The use of structured instruments makes it possible to reduce credit risks by transferring securitized assets off the issuer's balance sheet.

The priority of tranches in the issuance of structured instruments allows the issuance of obligations with a credit quality higher than the credit quality of securitized assets.

Indicators of the state of stock markets are Standard & Poor's indices, used by investors around the world to evaluate the effectiveness of investments, as well as as a basis for a wide range of financial instruments, such as index funds, deposit products, futures, options and funds traded on exchanges ( ETFs). The S&P 500 index includes 500 leading companies in the leading sectors of the American economy and covers more than 80% of the shares of American companies. The S&P Global 1200 index covers approximately 70% of the world's capital markets, includes seven of the most common indices, many of which are leaders in their regions. Standard & Poor's indexes are created as investment portfolio indexes that are representative of the market in a broad sense and at the same time have practical significance for investors.

Fitch Ratings

Ratings Fitch Ratings are opinions about the ability of issuers to meet their financial obligations on time or about the timely repayment of an issue of securities, including obligations such as interest payments, dividends on preferred shares or payments of principal. Ratings can be assigned to a wide range of issuers and securities, including states, governments, structured finance instruments and corporate issuers; debt obligations, preferred shares, bank loans and counterparties. Ratings can also assess the financial strength of insurance companies and financial guarantors.

Credit ratings are used by investors as indicators of the likelihood that payments will be made in accordance with the terms on which the investment was made. Thus, the use of credit ratings determines their function: investment grade ratings (international long-term "AAA" - "BBB"; short-term "F1" - "F3") indicate a relatively low probability of default, while ratings of speculative, or non-investment, ( sub-investment) category (international long-term "BB" - "D"; short-term "B" - "D") may indicate a higher probability of default or that a default has already occurred.

The ratings do not provide a definite forecast of the probability of default, however, it should be noted that over a long period of time, the default rate on US corporate bonds rated "AAA" has averaged less than 0.10% per year, while the default rate on bonds rated "BBB" reached 0.35%, and bonds rated "B" - 3.0%.

Issuers or issues of securities that are rated at the same level have similar, but not necessarily identical, creditworthiness because the rating categories do not fully reflect small differences in credit risk.

Credit ratings and research by Fitch Ratings are not recommendations to buy, sell or hold any security. The ratings do not constitute a commentary on the adequacy of the market price, the suitability of a particular security for particular investors, or the application of tax exemptions or tax treatment to any payments on any securities.

The ratings are based on information obtained directly from issuers, other obligors, underwriters, their experts and other sources that Fitch considers reliable. Fitch does not audit or verify the correctness or accuracy of such information. Ratings may be changed or withdrawn as a result of changes or unavailability of information, as well as for other reasons.

The ratings assigned to securities issuance programs refer only to the standard issues within the specific program. These ratings do not apply to all releases within the program. In particular, in the case of non-standard issues, i.e. those associated with third party credits or index performance, their ratings may differ from the rating of the corresponding program.

Credit ratings do not directly assess any risks other than credit risks. In particular, these ratings do not address the risks of loss due to changes in interest rates or other market factors.

Individual ratings assigned only to banks. The purpose of these internationally comparable ratings is to evaluate the bank if it were completely independent and could not rely on external support. These ratings measure a bank's exposure to risk, risk appetite and risk management and thus represent the agency's view of the likelihood of significant difficulties such that the bank will require support.

The main factors that the agency analyzes when evaluating a bank and determining the level of this rating include profitability and balance sheet integrity (including capitalization), client base and management, operating environment and development prospects. Finally, an important factor is policy consistency and the size of the bank (volume of own funds) and diversification (scale of activity in various sectors of the economy and geographical coverage).

An exceptionally stable bank. The characteristics of such a bank may include exceptionally high profitability and balance sheet integrity, a very large client base and high quality management, an exceptionally favorable operating environment and development prospects.

A stable bank with no significant concerns. Among the characteristics of such a bank may be high profitability and integrity of the balance sheet, a large client base and high quality management, favorable operating environment and development prospects.

A bank with adequate soundness that also has one or more concerns. There may be concerns about the profitability and integrity of such a bank's balance sheet, the size of its customer base and the quality of its management, operating environment or development prospects.

A bank that is characterized by certain shortcomings, both internal and related to external factors. There are concerns about its profitability and balance sheet integrity, customer base and management quality, operating environment or development prospects. Banks operating in emerging economies inevitably face a greater number of potential externalities-related shortcomings.

A bank that is experiencing very serious difficulties and that already needs or is likely to need external support.

Why inXXIcentury credit ratings assigned by rating agencies according to the methodsXXcentury, unacceptable for making effective economic decisions

Valery Galasyuk- Academician of the AES of Ukraine, General Director of the COWPERWOOD auditing firm (Dnepropetrovsk), member of the Presidium of the Council of the Union of Auditors of Ukraine, member of the Audit Chamber of Ukraine, Deputy Chairman of the Board of the Association of Taxpayers of Ukraine
Maria Soroka 1999-2000 - consultant of the COWPERWOOD auditing firm (COWPERWOOD consulting group)
Victor Galasyuk - director of the credit consulting department of the information and consulting company "INCON-CENTER" (consulting group "COWPERWOOD"), laureate of competitions for young appraisers of the Ukrainian Society of Appraisers

The issue of building credit ratings is currently one of the most discussed in the media. The increased interest in this issue is due, first of all, to the development of the Ukrainian market of borrowed financial resources. Along with the use of the most traditional instrument of debt financing - bank lending, the subjects of economic relations began to attract additional financial resources through the issuance of debt securities. So, for example, in 2001 the volume of issue of corporate bonds amounted to UAH 694.32 million. Over the previous five years, this amount was only UAH 339.515 million. In 2002, according to the forecasts of the SSMSC, the volume of corporate bonds issue will double again.

In a “functioning” financial market, creditors are faced with the following questions: “In what debt securities can free cash resources be invested in order to provide the desired return with minimal risk? Is the issuer of debt securities able to fulfill its obligations under them in full and on time?”

Often, for a lender, assessing the borrower's ability to fulfill its obligations is an impossible task, since he does not have the necessary information for this. In such a situation, the lender needs to obtain relevant information from independent entities that professionally carry out this assessment. In countries with developed market economies, a credit rating assigned by specialized rating agencies has long been used as such an assessment.

A review of the activities of the world's leading rating agencies Standard and Poor's, Moody's, IBCA, SERM, Fitch, as well as a number of Russian and Ukrainian rating agencies shows that, along with credit ratings, they offer other ratings (Fig. 1), however, within the framework of this article, we We will consider only credit ratings.

It should be noted that in modern rating practice there is no single generally accepted definition of "credit rating".

So, according to experts from one of the leading rating agencies Standard & Poor's, “a credit rating expresses the opinion of this agency about the general creditworthiness of the borrower or about his creditworthiness in relation to a particular debt security or other financial obligation. The rating is a conclusion not only about ability, but also about the willingness of the borrower to pay obligations in a timely manner.

Specialists of the Russian rating agency Expert RA argue that "a credit rating in the classical sense is a standardized assessment of creditworthiness, on the basis of which a company belongs to a certain class, regardless of the level of reliability of other companies." Under the corporate credit rating experts of the agency "Expert RA" understand "a standardized subjective assessment of the probability of full and timely fulfillment by the debtor of obligations to pay interest and repay the principal part of the debt on debt obligations and other related obligations to the holder of a debt security" .

According to the specialists of the Ukrainian rating agency "Rating - Bank Service", the bank's credit rating should "determine the bank's ability to repay (return) the loan and interest on it, in a more general formulation, to fulfill its obligations on time and in full" .

The bank's credit rating, assigned by the independent rating agency "Transparent Ukraine", "expresses the current opinion of the RA "Transparent Ukraine" on the ability of the bank's management to efficiently attract resources and place them securely, maintaining high (but not excessive) liquidity, and at the same time, achieve the highest possible profitability, using all existing financial instruments.

For example, issuer credit rating , assigned by Standard & Poor's, is “this is the current opinion on the ability and willingness of the debtor to fulfill its financial obligations. This is an opinion on the overall creditworthiness of a legal entity, it differs from the credit rating of an individual issue. Unlike the latter, the issuer's credit rating does not take into account the nature and conditions of a specific obligation, its status in the event of bankruptcy, guarantors, insurance and other attributes specific to such an instrument” .

Under credit issue rating Standard & Poor's specialists understand "the current assessment of the issuer's creditworthiness in relation to a particular financial obligation, a particular type of financial obligation, or a particular financial project."

Short-term credit ratings of the issue assigned to debt that was issued with an original maturity of 12 months or less, and long-term issue credit ratings – debt obligations with a maturity of more than 12 months.

Currently, there are many methods for constructing credit ratings. This is primarily due to the fact that each rating agency carries out ratings on the basis of individual rating methods. Methods for constructing credit ratings of the world's leading rating agencies (Moody's, Standard and Poor's (USA), IBCA (UK)) mostly consist in the fact that, based on the results of a study of borrowers' activities, as well as external conditions, the borrower or its debt obligations are classified as class, which reflects the corresponding credit rating.

Along with foreign rating agencies, national rating agencies have recently appeared on the rating services market. For the most part, domestic methods for determining a credit rating repeat or are guided by the methods of the world's leading rating agencies.

Specialists of rating agencies in their activities emphasize that the importance and value of credit ratings lies in the fact that they provide information for the participants in financial markets to make various economic decisions. Thus, according to existing estimates, in foreign countries, about 75% of private investors form their preferences on the basis of the relevant ratings; for institutional investors, this value is strictly equal to 100%. In addition, according to Standard & Poor's, “Ratings are often used in risk-related decision making outside of traditional capital markets. Banks, corporations, governments all use ratings as a guide for making decisions in areas such as trading, swap contracts, interbank transactions, correspondent banking and other activities associated with counterparty risk.

Since the main task of both theoretical economists and practical economists is transformation of information flows into a format convenient for making economic decisions , insofar as the task of the rating agency is to provide an independent and professional assessment of the borrower's ability to fulfill its debt obligations on the basis of extensive information received from the borrower and from the external environment and present this assessment in the form of a credit rating in such an informational format that external users of credit ratings could make the necessary economic decisions on their basis.

The main elements of the credit rating assignment process are shown in Figure 4.

Figure 4 Key Elements of the Credit Rating Process

In this article, our focus will be mainly on the results of the credit rating process.

As can be seen in Figure 4, the performance of any rating agency includes two components: the credit rating itself and the rating report. In most cases, only a credit rating has a public character, and it is on its basis that users of ratings make economic decisions. The rating report includes a rationale for the assigned credit rating and proves that the credit rating adequately reflects the borrower's ability to meet its obligations to creditors. The rating report is most often not available to a wide range of users and is provided only to the customer of the rating.

Because the useful is only the information that allows the subjects of economic relations to make effective economic decisions, then credit ratings, being information for making economic decisions, should contain precisely useful information. Otherwise, these ratings cannot be used to make effective economic decisions.

It is known that information is useful from the point of view of making economic decisions, it must satisfy a number of requirements, the main of which are:
- authenticity - determines how information corresponds to the real course of events and processes that it reflects.
- timeliness - determines the correspondence of information to the time of need for it, taking into account the period of its possible useful use.
- informative - determines how informative the information is for making a specific decision.
- uniqueness - determines whether the format of information presentation provides its unambiguous perception by the subject making the decision.
- comparability - determines the possibility of conducting a comparative analysis.
Let's analyze the credit ratings assigned by rating agencies in terms of their compliance with these requirements.

At first glance, it may seem that the reliability of a credit rating depends solely on the degree of reliability of the information, the use of which is provided for within a certain methodological approach for determining a credit rating. That is, when determining a rating, a rating agency should strive to use the information that has the greatest reliability.

Most of the existing rating methodologies provide for the use of the borrower's public financial statements, other information provided by the borrower, and external information as source information. Reliability public financial statements of the borrower is ensured by the consistent implementation of the principles of accounting, as well as the principles and procedures of the audit. Concerning other information provided by the borrower and external information, then the assessment and ensuring its reliability is carried out by the rating agency independently (Fig. 5

Figure 5 Providing reliable information used to determine a credit rating.

In this way, with some caution, it can be argued that credit ratings are currently determined on the basis of reliable information.

However, it should be noted that the credibility of a credit rating is not determined solely by the credibility of the source information . It is possible that a credit rating determined on the basis of reliable information is not reliable (Fig. 6).

Figure 6 . Inaccuracy of a credit rating obtained on the basis of reliable source information

This situation may result from:
- use of inadequate methodological tools for determining a credit rating, as a result of which the information contained in the credit rating does not correspond to the real course of events and processes that it reflects;
- errors in the process of implementing rating methods;
- a significant change in the processes that reflect the credit rating.

If we assume that the methods for determining credit ratings correspond to the tasks of assessing the ability of the borrower to fulfill its obligations in full and at the same time the accuracy of their implementation is ensured as much as possible, then the reliability of the credit rating is determined by whether the processes that reflect the credit rating have changed significantly or not.

Events and processes change significantly quite often, but credit ratings assigned by rating agencies often do not change for months or even years. Consequently, the information contained in the credit ratings of rating agencies is most often not reliable.

In addition, the study of the reliability of credit ratings allowed us to draw a very important conclusion. Since events and processes change from moment to moment, the information contained in a credit score will never be absolutely reliable unless it is determined in real time. Therefore, one can only say about the reliability of the credit rating at a certain point in time either about relative credibility of the credit rating.

The difference between timely information and untimely information is that timely information allows its users - decision makers, to respond in a timely manner to a change in the situation, while untimely information does not.

The degree of timeliness of information is the higher, the shorter the time interval between the event and the moment in which the information user became aware of it.

With an increase in the time interval for providing information to the user, in the end, there comes a point in time when the information no longer reflects the actual situation (which is associated with a change in the situation itself). The reaction of users of this information to a change in the situation is no longer timely, as it does not meet the conditions and requirements of the new situation. Information at this point in time turns from timely to untimely.

The flow diagram of information flows in time during the implementation of the rating procedure, making economic decisions based on credit ratings and their implementation is shown in Fig.7.

Based on Fig. 7 the credit rating timeliness condition in mathematical form can be represented as follows:

. (1)

It should also be noted that in the current economic conditions, ensuring the timeliness of a credit rating is becoming an increasingly difficult task. Trends in the development of the economy indicate that the speed of economic processes is increasing significantly. First of all, this applies to liquid asset markets, especially financial markets. As a result, the duration of the "interval of relative stability of the credit rating" () is significantly reduced.

For example, on the official website of Standard and Poor’s in Russia it is reported that “usually the rating is reviewed at least once a year, when a meeting with the issuer is held. However, Standard and Poor's reserves the right to change the rating at any time during the normal cycle of observation.

In addition, most rating agencies do not report the so-called "interval of relative invariance of the credit rating." This results in users of credit ratings having no way of assessing whether a credit rating is timely at the time they make an economic decision.

The question arises: how to determine the duration of the "interval of relative invariance of the credit rating"?

As we have already determined, "interval of relative invariance of the credit rating" - this is the time interval during which the change in the value of the credit rating is not significant for the subject of economic relations - the user of the rating.

Based on the fact that credit ratings are information on the basis of which users of credit ratings draw conclusions about the creditworthiness of borrowers and make economic decisions about their lending, a significant change in the credit rating from the point of view of the user of the credit rating will be such a change in which the borrower from the class " creditworthy" borrowers will move to the class of "uncreditworthy".

Consequently, "the interval of relative stability of the credit rating" can be defined as the time interval during which the borrower will maintain its creditworthiness.

Obviously, it is difficult to determine the point in time when the borrower will no longer be creditworthy. At the same time, we have developed an approach that allows us to determine minimum forecasted critical period of maintaining the creditworthiness of the borrower . When determining this period, we proceed from the fact that even in the event of a critical situation, when the borrower will not be able to generate positive cash flows (SC-flows) in the normal course of business to meet its debt obligations, these obligations can be repaid through the sale those assets of the borrower, the termination of control over which does not lead to the loss of its value. Based on these assumptions, the minimum projected critical period for maintaining the borrower's creditworthiness is determined. This issue will be considered in more detail in subsequent publications.

The minimum projected critical period for maintaining the borrower's creditworthiness will be the "interval of relative invariance of the credit rating", since during this period the borrower's creditworthiness is maintained, and therefore, credit rating users make the right economic conclusions and make the right economic decisions.

In order to achieve the highest possible level of timeliness of credit ratings in the context of accelerating economic processes, rating agencies should:

1) ensure maximum timeliness of information for the formation of credit ratings;

2) minimize the duration of the procedure for assigning a credit rating;

3) speed up procedures for bringing information about credit ratings to its users;

In fairness, it should also be noted that the timeliness of credit ratings depends not only on the duration of actions and procedures carried out by rating agencies to determine a credit rating, but also on the time of adoption and implementation of economic decisions by users of credit ratings (Fig. 7).

Based on the above reasoning, it can be concluded that To date, credit ratings assigned by rating agencies do not always ensure the timeliness of the information contained in the credit rating, and the content and format of presentation of credit ratings do not allow users of credit ratings to assess their timeliness .

As we have repeatedly pointed out, a credit rating is information for making a decision by a subject of economic relations on lending to another subject of economic relations. Any decision on lending is impossible without assessing the creditworthiness of the borrower. Therefore, the credit rating should contain such information that would allow the user of the credit rating to answer the question: is the borrower creditworthy or not?

A number of publications by specialists of the COWPERWOOD consulting group were devoted to the issues of assessing the creditworthiness of the borrower, in which it was proposed methodology for assessing the creditworthiness of borrowers GMCA ( Galasyuk ’ s method of credit analysis ) . These publications showed that “the creditworthiness of a borrower characterizes the ratio of credit conditions and the ability of the borrower to generate cash flows (SC-flows)” (Fig. 8) .

Let's imagine such a situation. Borrower "X" wants to get a loan of 1 hryvnia. After a detailed analysis of its activities, the bank concludes that the borrower "X" is able to generate, in the normal course of business, the cash flows necessary to repay the loan debt. In other words, the borrower "X" is recognized as creditworthy.

Figure 8 Pyramid of the main factors of creditworthiness of the COWPERWOOD consulting group

Now imagine that the situation has changed dramatically and the borrower "X" wants to get a loan of not 1 hryvnia, but 1,000,000 hryvnia. After a detailed analysis of its activities, the bank concludes that the borrower "X" is not able to generate in the normal course of business the cash flows necessary to repay the loan debt. In other words, borrower "X" is declared insolvent.

A change in one of the lending conditions - the amount of the loan - has led to the fact that the same borrower is evaluated in a diametrically opposite way. Similar examples can be given for any other lending conditions - the amount of interest, the frequency of interest accrual, the lending period, the method of loan repayment, etc.

With a simple example, we have shown that it is incorrect to characterize the creditworthiness of the borrower, regardless of the specific conditions of borrowing.

That is, in order for the user of a credit rating of a debt obligation to be able to answer the question whether the borrower is creditworthy under this debt obligation or not, the rating should contain both information about the terms of borrowing and information about the ability of the borrower to generate cash flows exclusively to fulfill this debt obligation. obligations (Fig. 9).

The main borrowing conditions that it is advisable to fix in the process of assessing the borrower's creditworthiness are:
- the value of the loan;
- the amount of interest on the loan;
- borrowing period;
- interest calculation procedure;
- method of repayment of credit debt.

Figure 9. Information on the main factors of creditworthiness contained in the credit rating of the debt obligation of the borrower

Table 1

Information on borrowing conditions in short-term and long-term issue credit ratings of some of the leading rating agencies

Basic terms of borrowing	Availability of information on the terms of borrowing in the credit ratings of the issue of some of the leading rating agencies
	Standards & Poor's
The value of the loan
The amount of interest on a loan
Borrowing period
Interest calculation procedure
Debt repayment method

Thus, since the assessment of the borrower's creditworthiness for a specific debt obligation is impossible in isolation from the specific borrowing conditions, we can conclude that The credit ratings of the debt obligations of the borrower, assigned by the leading rating agencies, are not sufficiently informative from the point of view of the users of the credit rating and do not allow them to make effective economic decisions.

If we talk about the credit rating of the borrower, then it, apparently, should contain information about only one factor of the creditworthiness of the substitute - its ability to generate only cash flows (SCF), since this credit rating is assigned without regard to specific borrowing conditions (Fig. ten). However, in order for the user of the rating to be able, based on the information contained in the borrower's credit rating, to answer the question about the borrower's creditworthiness, this information must be presented in an information format that allows the user to independently assess the creditworthiness of the borrower based on the information he has on the terms of borrowing.

Figure 10. Information about the main factors of creditworthiness contained in the credit rating of the borrower

For example, Standard and Poor's has assigned a borrower an issuer credit rating of A. The information that will be available to the user of the credit rating is as follows: "A - High ability to meet financial obligations, but the issuer may be adversely affected by adverse economic conditions and changes in circumstances" . However, it is clear that depending on the amount borrowed, the borrower's ability to meet financial obligations may differ significantly. This fact was clearly demonstrated by us in the above example. If this borrower applies to the bank to obtain a loan on specific terms, then based on the information provided in this borrower's credit rating, the lender (bank) cannot assess the borrower's creditworthiness for this debt obligation.

The unambiguity of the interpretation of information is largely ensured by the format of its presentation. Most rating agencies present credit ratings in a format that relies solely on qualitative characteristics of the borrower's ability to meet its obligations. In our opinion, the use of such a credit rating format is unacceptable, since it does not allow users of credit ratings to give an unambiguous assessment of the borrower's ability to fulfill its obligations. Qualitative characteristics do not have an unambiguous economic interpretation and are not based on clearly defined quantitative criteria. Consider from this point of view the credit ratings of Moody's short-term debt obligations. For example, issuers of short-term "Category 1" debt have excellent debt repayment capacity, "Category 2" bonds have stable debt repayment capacity, and "Category 3" bonds have acceptable debt repayment capacity. However, it is not known to the user of the ratings what is the criterion by which the borrower's ability to meet its obligations is evaluated and what the value of this criterion should be for the borrower's ability to meet its obligations to be assessed as either “excellent”, or “stable”, or “acceptable” .

In this way, the presentation format of credit ratings, based solely on qualitative characteristics, does not allow for an unambiguous interpretation of credit ratings by their users.

It is difficult to disagree with the fact that the adoption of any economic decision is impossible without a comparison of alternative solutions. Therefore, from the point of view of the decision maker, only that information is of value that is comparable, that is, it can be used to compare alternative options for an economic decision.

Let's consider a common situation. An investor enters the stock market in order to invest his temporarily free cash in short-term debt securities. He needs to make a choice, for example, between two types of short-term debt securities X and Y that provide the same yield. To make this decision, he requests information about the ratings of these securities. Securities X are rated "Category 3" on the Moody's scale, and securities Y are rated "A-3" on the Standard & Poor's scale. But, despite the fact that, in addition to the ratings themselves, the investor will be provided with their characteristics, the information received does not allow the investor to give preference to any security, since ratings from different rating agencies are not comparable . Based on the data presented in the rating description, it is rather difficult to conclude which rating is higher: "Category 3" on the Moody's scale or "A-3" on the Standard & Poor's scale (Fig. 11).

Consequently , the presentation format of credit ratings, based solely on qualitative characteristics, does not allow for their comparability.

Figure 11. Incomparability of information contained in the credit ratings of various rating agencies

As we noted earlier, information useful from the point of view of making effective economic decisions when all the requirements for it are met. An analysis of the credit ratings currently assigned by rating agencies showed that information contained in credit ratings assigned by rating agencies is often not useful enough to make effective economic decisions (Fig. 12).

Figure 12. Conclusion on the usefulness of information contained in credit ratings assigned by rating agencies

Existing traditional credit ratings can lead to inadequate economic assessments and unreasonable economic decisions. This situation necessitates the formation of fundamentally new approaches to the construction of credit ratings. One of these approaches could be based on GMCA (www. galasyuk. com).

	Characteristics
	Excellent ability to repay debts. Guaranteed alternative sources of obtaining liquid resources. Leading position in a stable industry. High returns on capital employed. High return on equity. High level of interest coverage. Stable cash flow.
	Stable ability to repay debts. Sufficient alternative sources of obtaining liquid resources. Other characteristics are similar to those presented in category 1, but to a lesser extent. Large fluctuations in earnings growth and interest coverage ratios.
	Acceptable ability to repay debts. Sufficient alternative sources of obtaining liquid resources. Greater vulnerability to changes in the industry from market conditions. Income volatility can lead to a need for relatively high credit and a rising debt-to-equity ratio.

Issuers that do not fall into any of these categories are classified as non-categorical (non-prime) and have an increased credit (investment) risk.

	Characteristics
	Bonds of the highest quality. "Gold-cut" papers. The debt is secured. Interest payments are very well protected by large profits.
	High quality bonds
	The bonds have many attractive features and fall into the medium and superior quality categories. Adequate collateral for principal and interest.
	Medium quality bonds that are neither heavily protected nor weakly secured. Principal and interest are adequately secured for the time being, but there is some reliability going forward. There are some speculative features when assessed as an investment object.
	Bonds that, as investment objects, have speculative characteristics. Moderate interest and principal protection.
	Bonds that generally lack evidence of an attractive financial investment. Protection of interest and the amount of invested funds for a long period of time is not sufficiently guaranteed.
	Bonds with a bad reputation, giving rise to doubts about the security of payment of principal or interest. Some of these bonds may already be past due.
	Bonds that are highly speculative. Often unpaid.

	Characteristics
	High probability of paying interest and returning the principal amount of the debt. Only marginally (in terms of profitability) is weaker than the AAA category.
	High probability of paying interest and repayment of the principal amount of the debt, but with greater dependence on adverse changes in circumstances and the economic situation
	The probability of paying interest and repayment of the principal amount of the debt is normal, but this probability may decrease with adverse changes in the environment. Less debt coverage than other investment category ratings.
	Uncertainties in the environment of a general and prolonged nature or the impact of adverse external developments may lead to the inability to make timely payments of interest and repayment of the principal amount of the debt. (This rating is also applied to debt that is subordinate to debt that is rated BBB)
	Current ability to pay interest and repay principal, but much more likely to fail than with a BB rating. (This rating is also applied to debt that is subordinate to Tier 1 debt that is rated BBB or BB).
	It currently has a distinct propensity to default, and only favorable economic, business and financial conditions make it possible to avoid this insolvency. (This rating also applies to debt that is subordinate to debt that is rated BB or B).
	Debt that is subordinate to Tier 1 debt with a CCC rating.
	Debt that is subordinate to Tier 1 debt with a CCC rating. It also applies to the debt obligations of a company that has filed for bankruptcy but whose bonds are still in circulation.
	Income bonds that pay no interest.
	Payments are on hold or have filed for bankruptcy with the possibility of stopping payments.

	Characteristics
	Liabilities with the lowest probability of investment risk. The possibility of timely payment of interest and repayment of principal is so great that adverse changes in business, economic or financial conditions are unlikely to significantly increase investment risk.
	Liabilities that have a very low probability of investment risk. Significant opportunity for timely payment of principal and interest. Adverse changes in business, economic or financial conditions may increase investment risk, although not by much.
	Liabilities that have a low probability of investment risk. A stable ability to pay interest and repay the principal on time, although adverse changes in business, economic or financial conditions may lead to increased investment risk.
	Liabilities that currently have a low probability of investment risk. Normal possibility of paying interest and repaying principal, although adverse changes in business, economic or financial conditions may lead to an increase in investment risk more likely than in the case of bonds, which are in higher categories.
	Liabilities for which there is a possibility of increasing investment risk. The possibility of timely payment of interest and repayment of principal exists, but over time it is subject to adverse changes in business, economic or financial conditions.
	Liabilities with investment risk. Timely payments of interest and principal are not adequately protected from adverse changes in business, economic or financial conditions.
	Obligations for which there is a tangible continuing possibility of default. Timely payment of interest and repayment of principal is subject to favorable business, economic or financial conditions.
	Commitments with a high degree of speculation or with a high risk of default.
	Bonds that are not currently redeemable.
	Obligations with the highest probability of timely repayment.
	Liabilities that have a very high probability of being settled on time.
	Liabilities with a high probability of being settled on time, although this probability may be reduced due to the impact of adverse changes in business, economic or financial conditions.
	Liabilities that have a normal probability of being settled on time. This probability is more susceptible to negative changes in business, economic or financial conditions than it is for higher categories of obligations.
	Liabilities whose likelihood of timely settlement is highly dependent on adverse changes in business, economic or financial conditions.
	Liabilities with a low probability of timely repayment.
	Obligations that have a high maturity risk or can no longer be repaid at the present time.

	Characteristic
	The company's bonds have an exceptionally high level of reliability. Indicators of production and commercial activity, financial condition, as well as the level of corporate governance of the issuer during the period of circulation of bonds exceed the level necessary for the full and timely fulfillment of obligations stipulated by the parameters of the issue. The risk of complete or partial refusal of the issuer to fulfill obligations is minimal.
	The company's bonds have a high level of reliability. The indicators of production and commercial activity, financial condition, as well as the level of corporate governance of the issuer during the period of circulation of bonds correspond, and their significant part exceeds the level necessary for the full and timely fulfillment of obligations stipulated by the parameters of the issue. The risk of complete or partial refusal of the issuer to fulfill obligations is insignificant.
	The company's bonds have a fairly high level of reliability. Indicators of industrial and commercial activity, financial condition, as well as the level of corporate governance of the issuer during the period of circulation of bonds are adequate to the level necessary for the full and timely fulfillment of obligations stipulated by the parameters of the issue. The risk of complete or partial refusal of the issuer to fulfill obligations is low
	The company's bonds have reliability exceeding the average level in this rating class. The main indicators of production and commercial activities, financial condition, as well as the level of corporate governance of the issuer during the period of circulation of bonds as a whole do not prevent the fulfillment of obligations stipulated by the parameters of the issue. There are no serious problems in the main areas of the issuer's activity. The risk of complete or partial refusal of the issuer to fulfill obligations is relatively low.
	The company's bonds have a satisfactory level of reliability, generally corresponding to the average level in this rating class. Indicators of production and commercial activities, financial condition, as well as the level of corporate governance of the issuer during the period of circulation of bonds do not generally prevent the fulfillment of obligations stipulated by the main parameters of the issue. However, some of the factors negatively affect or may in the near future negatively affect the efficiency of the issuer's activities. The risk of complete or partial refusal of the issuer is assessed as moderate.
	The reliability of the bonds as a whole is assessed as satisfactory, although its level is somewhat inferior to the average for this rating class. An analysis of the indicators of production and commercial activities, financial condition, as well as the level of corporate governance of the issuer during the period of circulation of bonds indicates the presence of problems in certain areas of the issuer's business, which do not yet have a decisive influence on the issuer's ability to fulfill obligations stipulated by the issue parameters. The risk of complete or partial refusal of the issuer to fulfill its obligations is generally acceptable.
	The reliability of the bonds as a whole is assessed as low, but the issuer has the potential to improve it. Certain indicators of production and commercial activities, financial condition, as well as the level of corporate governance of the issuer do not fully comply with the obligations stipulated by the parameters of the issue. At the same time, the issuer has the opportunity to improve the situation during the circulation period of the bonds. The risk of complete or partial refusal of the issuer to fulfill obligations is quite high.
	Reliability of bonds as a whole is estimated as low. Indicators of production and commercial activity, financial condition, as well as the level of corporate governance of the issuer as a whole do not quite correspond to the obligations stipulated by the parameters of the issue. The risk of complete or partial refusal of the issuer to fulfill obligations is high.
	The reliability of bonds as a whole is estimated as very low. The indicators of production and commercial activities, financial condition, as well as the level of corporate governance of the issuer as a whole do not correspond to the obligations stipulated by the parameters of the issue. The risk of complete or partial refusal of the issuer to fulfill obligations is extremely high.
	The company's position does not fully correspond to the fulfillment of obligations stipulated by the issue parameters, or there is an extremely high probability of the company's failure to fulfill all obligations during the period of bonds circulation.

Aaa (rus)

Borrowers and borrowings in this category are characterized by exceptionally high creditworthiness relative to other Russian borrowers and borrowings.

Aa (rus)

Very high creditworthiness relative to other Russian borrowers/borrowings.

A (rus)

High creditworthiness relative to other Russian borrowers/borrowings, which may deteriorate under the influence of negative external conditions.

Baa (rus)

Sufficient level of creditworthiness in comparison with other Russian borrowers/borrowings. Borrowers are able to meet financial obligations under favorable conditions. However, their creditworthiness is more sensitive to negative changes in external conditions.

Ba (rus)

Insufficiently stable level of creditworthiness relative to other Russian borrowers/borrowings. Borrowers are able to meet financial obligations in favorable conditions, but in unfavorable conditions they may find it difficult to meet their obligations.

В (rus)

Unstable level of creditworthiness relative to other Russian borrowers/borrowings. Borrowers are significantly exposed to the risk of deterioration in creditworthiness in adverse conditions

Low creditworthiness relative to other Russian borrowers/borrowings, fully dependent on favorable external conditions. Under unfavorable conditions, it will be difficult for borrowers to meet their obligations.

Сa (rus)

Very low level of creditworthiness relative to other Russian borrowers/borrowings: there may be performance problems in favorable conditions and insurmountable difficulties in unfavorable conditions.

C (rus)

Extremely low creditworthiness relative to other Russian borrowers/borrowings. Even in favorable conditions, the borrower may refuse to fulfill obligations.

Exceptionally high short-term creditworthiness relative to other Russian borrowers/borrowings.

High creditworthiness relative to other Russian borrowers/borrowings.

Average creditworthiness among other Russian borrowers/borrowings. Changes in external conditions may lead to an increase in credit risks.

Below-average creditworthiness for Russian borrowers/borrowings

Table 8

Long-term investment grade liabilities
	A debt obligation rating of “uaAAA” means an EXCEPTIONALLY HIGH ability of the borrower to timely and fully pay interest and principal on this debt obligation in the conditions of the Ukrainian financial market. This is the highest credit rating on the Ukrainian national scale of the Credit-Rating company
	A debt obligation rating of "" means a VERY HIGH ability of the borrower to fulfill this debt obligation in the conditions of the Ukrainian financial market and differs slightly from obligations with the highest rating.
	A debt obligation rating of 'uaA' indicates a HIGH ability of the borrower to fulfill this debt obligation in the conditions of the Ukrainian financial market, although this debt obligation is more exposed to adverse changes in commercial, financial and economic conditions than debt obligations rated 'uaAA' and 'uaAAA'.
	The rating of the debt obligation «uaBBB» reflects the sufficient ability of the borrower to timely and fully fulfill this debt obligation in the conditions of the Ukrainian financial market. This debt is more sensitive to adverse changes in commercial, financial and economic conditions than higher rated debt.
Debt obligations of speculative level The ratings of the debt obligation 'uaBB', 'uaB', 'uaCCC', 'uaCC' and 'uaC' reflect the increased risk, which is due to the financial ability to meet these obligations, which is worse compared to investment grade debt. The 'uaBB' rating is assigned to liabilities with the lowest risk in this group, and the 'uaC' rating is assigned to those with the highest risk.
	Bonds rated 'uaBB' HAVE THE LEAST RISK OF NON-PAYMENT OF PRINCIPAL OR INTEREST IN THE speculative grade. However, it may be difficult for the borrower to timely and fully meet this debt obligation in the Ukrainian financial market in the event of unfavorable changes in commercial, financial and economic conditions, although the probability of default on this debt obligation is low in the near future.
	A debt obligation rating of 'uaB' means a higher probability of default on this obligation than that of the 'uaBB' category, although at present the borrower has the ability to fulfill it in the conditions of the Ukrainian financial market. This debt is more susceptible to adverse changes in commercial, financial and economic conditions than higher rated debt, which may impair the borrower's ability and intent to pay interest and principal on this obligation on time and in full.
	The rating of the debt obligation "uaCCC" means that at the moment, in the conditions of the Ukrainian financial market, there is a POSSIBILITY OF DEFAULT on this obligation. Timely payment of debt obligations is largely dependent on favorable commercial, financial and economic conditions.
	A debt obligation rating of “uaC” in the conditions of the Ukrainian financial market is assigned when the borrower is EXPECTED to FAILURE to fulfill this OBLIGATION in the near future (in particular, in the event of initiation of bankruptcy proceedings, a ban on the implementation of the main activity, the expected liquidation of the borrower, a court decision on the imposition of a penalty on property or in another similar case), but payments on this debt obligation have not been terminated at the moment.
	The assignment of this rating to a debt obligation means that PAYMENTS on this debt obligation are interrupted by the borrower without reaching an agreement on debt restructuring before the maturity date.

Table 9

Applies to debt obligations with an original maturity of less than one year.

Investment grade debt
	The uaK1 debt rating is the highest among short-term debt ratings. The issuer of such a debt obligation HAS A VERY HIGH CAPABILITY to repay this debt obligation and interest on it on time and in full. The cash flows and liquidity of such an issuer are more than sufficient to avert any risks that may arise in the foreseeable future.
	The rating of the debt obligation «uaK2» means the issuer's HIGH ABILITY to repay this debt obligation and interest on it on time and in full. The cash flows and liquidity of such an issuer are sufficient to prevent foreseeable risks in the foreseeable future.
	The rating of the debt obligation «uaK3» means the issuer's SUFFICIENT CAPABILITY to repay this debt obligation and interest on it on time and in full. The cash flows and access to liquid resources of such an issuer are sufficient to prevent foreseeable risks in the foreseeable future.
Debt obligations of speculative level
	The rating of the debt obligation "uaK4" means the issuer's DOUBTY ABILITY to repay this debt obligation and interest on it on time and in full. The cash flow and liquidity of such an issuer is likely to be insufficient to prevent foreseeable risks in the foreseeable future.
	The rating of the debt obligation "uaK5" means the PROBABLE FAILITY of the issuer to repay this debt obligation and interest on it on time and in full. The cash flows and liquidity of such an issuer are insufficient, or becoming insufficient, to avert foreseeable risks in the foreseeable future. Galasyuk V.V. Problems of adoption of the theory of economic decisions: Monograph.-Dnepropetrovsk: New ideology, 2002.-304 p. Galasyuk V., Soroka M., Galasyuk V. On the “shelf life” of financial ratios.// State information bulletin on privatization. - 2001 - No. 11. - P. 68-72. http://www.standardandpoors.ru/p.phtml/ratingprocess/ V. Galasyuk, A. Vishnevskaya-Galasyuk, V. Galasyuk. On the definition of the concept of "solvency" in the context of the CCF concept // www.galasyuk.dnepr.net Galasyuk V.V., Galasyuk V.V. Problems of assessing the creditworthiness of applicants//Visnik NBU.-2001.-№9.-p.54-57. Galasyuk V.V., Galasyuk V.V. Evaluation of the creditworthiness of applicants: what is assessed?// Bulletin of the NBU.-2001.-No. Galasyuk Valeriy, Galasyuk Viktor. Methodology for assessing the creditworthiness of applicants//Visnik NBU.-2002.-№2.-p.39-45. cash flows - predispose the movement of cash and cash equivalents