Publication: Determinants of the Distance between Sovereign Credit Ratings and Sub-Sovereign Bond Ratings: Evidence from Emerging Markets and Developing Economies
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Date
2017-07-05
ISSN
0003-6846
Published
2017-07-05
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This article explores factors that affect the distance between sovereign credit ratings and the ratings assigned to new foreign-currency bonds issued by sub-sovereign entities (such as private non-financial corporations, financial firms, and public sector enterprises) in 47 emerging markets and developing economies. Censored and double-hurdle regression models are used to estimate the relative contributions of bond-level, issuer-level, and macroeconomic factors that determine this distance, separately for those rated at or below the sovereign rating and those rated above. For the three quarters or more of sub-sovereign bond ratings that are constrained by the sovereign rating ceiling, a Tobit regression model shows a smaller distance – suggesting stronger sovereign–corporate linkages – for public sector enterprises and financial firms relative to other firms. Riskier global financial conditions are also associated with sub-sovereign bonds being rated closer to the sovereign rating. For the small number of sub-sovereign bonds rated higher than the sovereign rating, a double-hurdle model shows that certain debt features – such as bonds backed by future-flow receivables or other collateral or structured as Special Purpose Vehicles (SPV) – significantly raise the likelihood of piercing the sovereign rating ceiling and also increase the distance above the sovereign ceiling.
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Publication Impacts of Sovereign Rating on Sub-Sovereign Bond Ratings in Emerging and Developing Economies(World Bank, Washington, DC, 2016-03)This paper explores bond-level, issuer-level, and macro-level conditions that affect the distance between sovereign credit rating and sub-sovereign debt ratings. Over three-quarters of rated foreign-currency sub-sovereign bonds issued during 1990–2013 in 47 emerging and developing countries were rated at or below the corresponding sovereign rating, thus confirming the prevalence of a sovereign ceiling. For bonds rated below the sovereign ceiling, a Tobit regression shows strong sovereign-corporate links for financial firms, publicly-owned firms, and local government entities. International bonds tend to be rated closer to the sovereign rating during riskier global financial conditions. Well-developed domestic financial markets also tend to be related to a smaller distance, likely because of stronger macro-financial links for financial issuers. About 11 to 26 percent of the bonds had ratings higher than the sovereign rating, which was achieved mainly through securitization structures. This observation is confirmed using a double-hurdle estimation that accounts for bond and firm characteristics and macroeconomic conditions. The sovereign-corporate rating relationship became significantly stronger at the peak period of the 2008-09 global financial crisis, and appears to have weakened in the subsequent years.Publication Sovereign Credit Ratings, Relative Risk Ratings, and Private Capital Flows(World Bank, Washington, DC, 2020-09)This paper examines the influence of sovereign credit ratings and relative risk ratings on private capital flows to 26 emerging and frontier market economies, using quarterly data for 1998-2017. A dynamic panel regression model is used to estimate the relationship between ratings and capital flows after controlling for other factors that can influence capital flows, such as growth and interest rate differentials and global risk conditions. The analysis finds that while absolute ratings were an important determinant of net capital inflows prior to the global financial crisis in 2008, the influence of relative risk ratings increased in the post-crisis period, which was characterized by easy monetary policies and global liquidity, on the one hand, and greater caution and discretion on the part of investors on the other. The post-crisis effect of relative ratings appears to be driven mostly by portfolio flows. These findings imply that emerging and frontier markets need to pay greater attention to their relative economic performance and not just their sovereign ratings. Tracking changes in relative ratings could help predict macroeconomic disturbances resulting from volatile portfolio capital movements.Publication Shadow Sovereign Ratings(World Bank, Washington, DC, 2011-08)Sovereign ratings are a necessary condition for countries to fully access international capital. Even if the sovereign government is not issuing bonds, the sovereign rating often acts as a 'ceiling' for the private sector and can influence its international capital market access. However, 58 developing countries are still not rated by Standard and Poor's, Moody's, and Fitch, the three international credit rating agencies. This premise presents an exercise to predict 'shadow' sovereign ratings to estimate where unrated countries will lie on the credit spectrum if they were rated. Contrary to popular perception, unrated countries are not necessarily at the bottom of the rating spectrum.Publication Shadow Sovereign Ratings for Unrated Developing Countries(World Bank, Washington, DC, 2007-06)The authors attempt to predict sovereign ratings for developing countries that do not have risk ratings from agencies such as Fitch, Moody's, and Standard and Poor's. Ratings affect capital flows to developing countries through international bond, loan, and equity markets. Sovereign rating also acts as a ceiling for the foreign currency rating of sub-sovereign borrowers. As of the end of 2006, however, only 86 developing countries have been rated by the rating agencies. Of these, 15 countries have not been rated since 2004. Nearly 70 developing countries have never been rated. The results indicate that the unrated countries are not always at the bottom of the rating spectrum. Several unrated poor countries appear to have a "B" or higher rating, in a similar range as the emerging market economies with capital market access. Drawing on the literature, the analysis presents a stylized relationship between borrowing costs and the credit rating of sovereign bonds. The launch spread rises as the credit rating deteriorates, registering a sharp rise at the investment grade threshold. Based on these findings, a case can be made in favor of helping poor countries obtain credit ratings not only for sovereign borrowing, but for sub-sovereign entities' access to international debt and equity capital. The rating model, along with the stylized relationship between spreads and ratings can be useful for securitization and other financial structures, and for leveraging official aid for improving borrowing terms in poor countries.Publication Sovereign Ratings in the Post-Crisis World : An Analysis of Actual, Shadow and Relative Risk Ratings(World Bank, Washington, DC, 2013-10)This paper analyzes the evolution of sovereign credit ratings in the wake of the global financial crisis by studying changes in actual, shadow, and relative ratings between 2008 and 2012. For countries that do not have a rating from the major rating agencies, shadow ratings are estimated as a function of macroeconomic, structural, and governance variables. The shadow rating exercise confirms earlier findings in the literature that even after the financial crisis, many unrated countries appear to be more creditworthy than previously believed and can access international capital markets. The paper also develops a new rating scale called the "relative risk rating," which ranks countries according to their actual or shadow ratings after controlling for changes in the world weighted average rating. When relative ratings in 2012 are compared with the first half of 2008, the world average rating is found to be weaker because of the financial crisis. The relative rating improved in developing economies such as Azerbaijan, Ethiopia, Kazakhstan, Indonesia, and the Philippines, whereas it deteriorated in crisis-affected high-income countries such as Cyprus, Greece, Spain, Portugal, Ireland, and Egypt. Interestingly, India, Jordan, Poland, and the United Kingdom had their rating outlook downgraded by the rating agencies, but their relative rating actually improved as other countries suffered even worse downgrades. A regression model is used to analyze the relative contributions of different variables to rating changes during 2008-2012, a helpful feature for policy makers interested in improving sovereign ratings.
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