Credit ratings under new conditions

Geopolitical tensions have made significant adjustments to the Russian rating market. This March, ratings assigned by international credit rating agencies (ICRAs) were downgraded several times and ultimately revoked. The adequacy of national credit ratings is now being tested for quality.

The rating actions performed by ICRAs in February and March 2022 do not reflect the real credit quality of Russian companies, and are instead a consequence of their ‘country ceiling/cap’ concept.

Prior to February 2022, ICRAs assessed the Russian economy as moderately stable, noted the effectiveness of the Bank of Russia’s measures to maintain an effective monetary policy and growth of international reserves that ensured the stability of the budget and the ruble exchange rate. The standing of Russian corporations was also assessed as stable.

In the concept applied by ICRAs, the sovereign rating in most cases is used as a ‘country ceiling’, i.e. it limits the credit ratings of the rated entities operating in the respective country. Starting from March 2022, ICRAs downgraded Russia’s rating, first from BBB to B, and then, prior to being revoked¹  it was set to pre-default (CC). Consequently, the creditworthiness of all Russian companies analyzed by ICRAs declined to pre-default in less than a complete month.

¹The following package of sanctions included a ban on the provision of rating services by ICRAs in Russia and requirements for the withdrawal of all existing ratings, including the sovereign rating.

The exit of ICRAs coupled with other sanctions has made it impossible for Russian issuers to access international financial markets.

ICRAs continued to operate in Russia until March 2022. Moody’s, S&P and Fitch assigned credit ratings on an international scale, and at the beginning of the year they collectively assessed about 260 Russian rated entities, of which less than 50 companies did not have national ratings in addition to international ones.

In the current environment, investors only retain access to information on the comparative creditworthiness of issuers from national credit rating agencies (NCRAs). In this regard, the quality of national ratings becomes critical.

NCRAs are generally reacting with restraint to the ongoing changes. In particular, ACRA generally is not lowering credit ratings, but instead assigning certain clients the status ‘Rating under revision’, which acts as a kind of short-term forecast of a possible change in the rating. In the current environment, it is useful for investors to monitor rating forecasts, and not just the ratings themselves.

In the national rating scale concept, the sovereign rating does not directly impact the ratings of companies operating in the country because the creditworthiness of the sovereign government is set at AAA(RU), based on which the credit quality of other rated entities is ranked.

According to statistics published by NCRAs, since the end of February 2022, about 100 rating actions have been taken on national scales, with the largest number of downgrades by Expert RA. ACRA generally assigns the ‘Rating under revision: developing’ status, which implies the possibility of different rating movements: the rating may stay unchanged, be upgraded or downgraded. (see Table 1).

Table 1. Rating actions taken by NCRAs since February 2022²

² On the national scale for the Russian Federation, excluding issue credit ratings.
Note: data is valid as of May 31, 2022.
Sources: ACRA, Expert RA, NCR, NRA

The amount of statistics available for ACRA and Expert RA allows us to compare the dynamics of the aggregate assessment of rated entities’ creditworthiness by agencies based on the rating actions index. The index presented in the figure below reflects the accumulated difference between the number of positive and negative rating actions in the total number of CRA ratings. The index is calculated monthly; the starting point for the calculations is the beginning of 2020.

Figure 1. Rating actions index for ACRA and Expert RA

Source: ACRA

ACRA takes a balanced approach to credit rating movements, given that the geopolitical situation affects rated entities in different ways. In the perception of external shocks, different sectors demonstrate different time lags and sensitivities.

To reflect ACRA’s expectations about the future creditworthiness of rated entities, the structure of the Agency’s rating analysis includes two mutually exclusive³  types of outlooks.

• A credit rating outlook: this is ACRA’s opinion on a probable change in the credit rating within a certain time interval (generally, 12 to 18 months). According to the statistics accumulated by ACRA, the ratings of 80% of rated entities with a Stable outlook assigned by the Agency remained unchanged, and about 70%/25% of rated entities with a Positive/Negative outlook were upgraded/downgraded within 18 months from the assignment date.

• The ‘Rating under revision’ status (aka ‘Watch’ in the international practice) is, in fact, a short-term outlook of a likely change in the rating on a 90–180-day horizon. This status is assigned based on short- or medium-term trends that can affect the creditworthiness of a rating entity. Unlike the outlook, the status does not have a ‘Stable’ category.

³ No credit rating outlook is determined if a rating status is assigned. For details, see the Key Concepts Used by the Analytical Credit Rating Agency Within the Scope of Its Rating Activities.