Nordic Credit Rating (NCR) today published its final methodology for local and regional governments. The methodology defines NCR's approach to analysing the institutional framework and entity-specific factors for local and regional government entities that determine issuer ratings.
Methodology summary
NCR's Local and Regional Government Methodology:
- defines our approach to rating primarily Nordic local and regional government entities, as well as debt issued by rated entities;
- defines our approach to the institutional framework and entity-specific factors considered in our indicative credit assessment;
- defines the weighting and guidelines for scoring the institutional framework, including sovereign creditworthiness and local and regional government institutions;
- defines the weighting and guidelines for scoring entity-specific factors associated with demographics, budget performance, and debt burden and liquidity; and
- defines adjustment factors considered to capture features not fully reflected in our indicative credit assessment, such as sustainability concerns, contingent liabilities, guarantees, or other exceptional factors.
We have also published our final sovereign credit assessment methodology, eliminating our reliance on external credit ratings.
Changes following the request for comments
NCR did not receive any official comments on its proposal, but, during our external presentations of the proposed methodology, we received informal feedback from market participants with experience in analysing local and regional governments. These comments led to some minor refinements in the final methodology.
The final criteria differ from the published proposal as follows:
- The weights used for average income and population growth have been adjusted from 40% and 20%, respectively, to 30% for both. Although this has a modest impact, it applies more weight to future population growth as an indicator of economic vibrancy. We also note that the average income measure, which serves as a proxy for local productivity, already includes an element of income redistribution.
- We have added the ability to adjust the final rating for exceptional factors in addition to contingent liabilities, guarantees and sustainability factors.
- We have added long-term lease liabilities as a calibration for the debt burden & liquidity assessment. This allows for variations in reporting standards for lease liabilities and associated expenditures.
- We have combined refinancing risk and liquidity management into a single calibration for the debt burden & liquidity assessment.
- We have specified that, while calibrations are typically for one-point adjustments, larger calibrations to the entity-specific factors may be necessary when initial scoring fails to capture extreme factors.
Impact on existing methodologies
The newly published local and regional government and sovereign credit assessment methodologies result in necessary revisions to four existing methodologies to reflect local and regional government ratings and sovereign credit assessments. We have also added a section on guaranteed debt instruments to our Group and Government Support Methodology. The other changes to existing methodologies are minor edits.
All final criteria documents are available at:
https://nordiccreditrating.com/governance/methodologies.
Impact on published ratings
The local and regional government methodology increases the scope of potential ratings but does not affect any published ratings. Changes to existing methodologies do not impact existing ratings.
Contacts:
Sean Cotten, chief rating officer, +46735600337,
sean.cotten@nordiccreditrating.com
Anine Gulbrandsen, analyst, +4797501657,
anine.gulbrandsen@nordiccreditrating.com