The risk category of an investor is determined by EGAP on the basis of financial and non-financial indicators, available security instruments and other material submitted with an application for insurance. Each risk category of a buyer complies with the requirements of OECD Consensus and keeps to the rating classifications of 3 biggest rating agencies.
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SOV - Sovereign
Sovereign obligors/guarantors are entities that are explicitly legally mandated to enter into a debt payment obligation on the behalf of the Sovereign State, typically Ministry of Finance or Central bank.
A risk designated as sovereign is one where:
- the obligor/guarantor is legally mandated to enter into a debt payment obligation on behalf of the Sovereign and thereby commits the full faith and credit of the sovereign; and
- in the event of rescheduling of sovereign risk, the debt in question would be included in the rescheduling and payment obligations acquired by the sovereign by virtue of the rescheduling.
CC0 - Equivalent to the Sovereign: Exceptionally Good Credit Quality
The “equivalent to sovereign” category embraces two basic types of obligors/guarantors:
- Public entities where due diligence reveals that either the buyer has the implicit full faith and credit/support of the sovereign or that the likelihood of sovereign liquidity and solvency support is very high, both in relation to recovery prospects as well as default risk. Non-sovereign public entities equivalent to the sovereign would also include companies owned by the government with a monopoly or near monopoly on operations in a sector (e.g. power, oil, gas).
- Corporate entities with an exceptionally strong credit profile, displaying features in terms of both default and recovery prospects which indicate that the risk could be seen as being equivalent to sovereign. Candidates could include strong blue chip corporates or very important banks for which the likelihood of sovereign liquidity and solvency support is high. Exceptionally good credit quality implies that the risk of payment interruption is expected to be negligible and that the entity has an exceptionally strong capacity for repayment and this capacity is not likely to be affected by foreseeable events.
The credit quality is typically manifested in a combination of some, if not all, of the following characteristics of the entity’s business and financial profile:
- exceptionally good to very good cash and income generation
- exceptionally good to very good liquidity levels
- exceptionally low to very low leverage
- excellent to very strong business profile with proven and very strong management abilities
The entity is also characterised by a high quality of financial and ownership disclosure, unless there is a very high likelihood of support from a parent (or sovereign) with a buyer risk classification that is equal to or better than what corresponds to this buyer risk category.
Depending on the classification of the country in which the obligor/guarantor is domiciled, it is likely that an obligor/guarantor classified in buyer risk category CC0 would be rated between AAA (Country Category 1) and B (Country Category 7) by accredited CRAs.
CC1 - Very Good Credit Quality
The risk of payment interruption is expected to be low or very low. The obligor/guarantor has a very strong capacity for repayment and this capacity is not likely to be affected by foreseeable events. The obligor/guarantor has a limited or very limited susceptibility to adverse effects of changes in circumstances and economic conditions.
The credit quality is typically manifested in a combination of some, if not all, of the following characteristics of the business and financial profile:
- very good to good cash and income generation
- very good to good liquidity levels
- very low to low leverage
- very strong business profile with proven management abilities and very strong business profile
The entity is also characterised by a high quality of financial and ownership disclosure, unless there is a very high likelihood of support from a parent (or sovereign) with a buyer risk classification that is equal to or better than what corresponds to this buyer risk category.
Depending on the classification of the country in which the obligor/guarantor is domiciled, it is likely that an obligor/guarantor classified in buyer risk category CC1 would be rated between AAA (Country Category 1) and B (Country Category 7) by accredited CRAs.
CC2 - Good to Moderately Good Credit Quality, Above Average
The risk of payment interruption is expected to be low. The obligor/guarantor has a good to moderately good capacity for repayment and this capacity is not likely to be affected by foreseeable events. The obligor/guarantor has a limited susceptibility to adverse effects of changes in circumstances and economic conditions.
The credit quality is typically manifested in a combination of some, if not all, of the following characteristics of the business and financial profile:
- good to moderately good cash and income generation
- good to moderately good liquidity levels
- low to moderately low leverage
- moderately strong business profile with proven management abilities and very strong business profile
The entity is also characterised by a high quality of financial and ownership disclosure, unless there is a very high likelihood of support from a parent (or sovereign) with a buyer risk classification that is equal to or better than what corresponds to this buyer risk category.
Depending on the classification of the country in which the obligor/guarantor is domiciled, it is likely that an obligor/guarantor classified in buyer risk category CC2 would be rated between A+ (Country Category 1) and B- or worse (Country Category 7) by accredited CRAs.
CC3 - Moderate Credit Quality, Average
The risk of payment interruption is expected to be moderate or moderately low. The obligor/guarantor has a moderate or moderately good capacity for repayment. There is a possibility of credit risk developing as the obligor/guarantor faces major ongoing uncertainties or exposure to adverse business, financial or economic conditions which could lead to inadequate capacity to meet timely payments. However, business or financial alternatives may be available to allow financial commitments to be met.
The credit quality is typically manifested in a combination of some, if not all, of the following characteristics of the business and financial profile:
- moderately good to moderate cash and income generation
- moderately good to moderate liquidity levels
- moderately low to moderate leverage
- moderate business profile with proven management abilities
The entity is also characterised by an adequate quality of financial and ownership disclosure, unless there is a very high likelihood of support from a parent (or sovereign) with a buyer risk classification that is equal to or better than what corresponds to this buyer risk category.
Depending on the classification of the country in which the obligor/guarantor is domiciled, it is likely that an obligor/guarantor classified in buyer risk category CC3 would be rated between BBB+ (Country Category 1) and B- or worse (Country Category 6) by accredited CRAs.
CC4 - Moderately Weak Credit Quality, Below Average
The risk of payment interruption is expected to be moderately weak. The obligor/guarantor has a moderate to moderately weak capacity for repayment. There is a possibility of credit risk developing as the obligor/guarantor faces major ongoing uncertainties or exposure to adverse business, financial or economic conditions which could lead to inadequate capacity to meet timely payments. However, business or financial alternatives may be available to allow financial commitments to be met.
The credit quality is typically manifested in a combination of some, if not all, of the following characteristics of the business and financial profile:
- moderate to moderately weak cash and income generation
- moderate to moderately weak liquidity levels
- moderate to moderately high leverage
- moderately weak business profile with limited track record of management abilities
The entity is also characterised by an adequate quality of financial and ownership disclosure, unless there is a very high likelihood of support from a parent (or sovereign) with a buyer risk classification that is equal to or better than what corresponds to this buyer risk category.
Depending on the classification of the country in which the obligor/guarantor is domiciled, it is likely that an obligor/guarantor classified in buyer risk category CC4 would be rated between BB+ (Country Category 1) and B- or worse (Country Category 5) by accredited CRAs.
CC5 - Weak Credit Quality
The risk of payment interruption is expected to be high to very high. The obligor/guarantor has a moderately weak to weak capacity for repayment. The obligor/guarantor currently has the capacity to meet repayments but a limited margin of safety remains. However, there is a likelihood of developing payment problems as the capacity for continued payment is contingent upon a sustained, favorable business and economic environment. Adverse business, financial, or economic conditions will likely impair capacity or willingness to repay.
The credit quality is typically manifested in a combination of some, if not all, of the following characteristics of the business and financial profile:
- moderately weak to weak to very weak cash and income generation
- moderately weak to weak liquidity levels
- moderately high to high leverage
- weak business profile with limited or no track record of management abilities
The entity is also characterised by a poor quality of financial and ownership disclosure, unless there is a very high likelihood of support from a parent (or sovereign) with a buyer risk classification that is equal to or better than what corresponds to this buyer risk category.
Depending on the classification of the country in which the obligor/guarantor is domiciled, it is likely that an obligor/guarantor classified in buyer risk category CC5 would be rated between BB- (Country Category 1) and B- or worse (Country Category 4) by accredited CRAs.
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