Rating Process and Definitions
Australia Ratings assigns ratings to differentiate the degree of creditworthiness of organisations and fixed income products available to investors in the Australian financial market. Credit ratings are assigned on a long-term and short-term rating scale.
A long-term rating is assigned where the investment term or financial exposure is greater than 12 months e.g. a 3 year corporate bond or hybrid security. A short-term rating is assigned where the period of the financial exposure or term of the debt security is less than 12 months e.g. a promissory note or debenture.
Australia Ratings' proprietary Product Complexity Indicator (PCI) is often indicated next to a credit rating to help differentiate debt securities which may have similar credit attributes. The colour coded PCI helps to provide investors with some insight into a security's terms and conditions that could potentially impact such an investment's return.
Credit Rating Process
Ratings and product complexity assessments will be assigned according to published objective methodology. The rating process will follow the following 10 step process:
- data gathering and preliminary research
- meeting with management
- preparation of a research report
- formulation of a rating and suitability recommendation
- presentation of recommendation and report to the rating committee
- communication of the outcome of the rating committee to the client
- publication of the rating and research report via the website
- on-going surveillance of the rating begins with clients providing Australia Ratings with updated information as agreed
Credit Rating Definitions
An Australia Ratings organisation credit rating is an opinion on the overall financial capacity of an organisation to pay its financial obligations (its creditworthiness). The rating considers the organisation's capacity to meet financial commitments as they fall due.
An Australia Ratings product credit rating is an opinion about the creditworthiness of a specific debt security. It takes into account the creditworthiness of the organisation and any guarantees or other forms of credit enhancement on the obligation.
Credit ratings can be either long term or short term. Short-term ratings relate to obligations with an original maturity of 365 days or less—including commercial paper. Long term ratings – relate to financial obligations with a term of more than one year.
The long-term rating generally addresses the period out to three to five years.
Note: Plus (+) and minus (-) signs may be added to long term ratings from ‘AA’ to ‘C’ to indicate their relative standing within each category.
Short Term Ratings - assigned to debt securities and financial obligations with a term of up to 12 months
The categories of long and short term ratings in the tables above can in turn be grouped into the following broad classifications of creditworthiness.
Note: Both long term and short term ratings may be placed ‘On Review’ at the discretion of Australia Ratings in the case where the rating is being reviewed for a possible rating change.
This could occur when events or situations which were unanticipated (such as a merger or divestment) occur. The designations of ‘Positive’, ‘Evolving’ and ‘Negative’ will be used to indicate the potential direction in which the rating may transition. The designation of ‘Evolving’ implies the rating may improve, decline or remain the same.
Product Complexity Indicator
A Product Complexity Indicator may be assigned to certain debt securities or fixed income managed funds to augment the credit rating in order to highlight to potential investors the nature of the investment in terms of complexity or non-standard features of the investment product.
Contact us to find out more about our credit ratings and product complexity indicators (PCIs).