A Global Scoring Model Specializing in the Analysis of Unrated Firms and Low Default Scores
Credit risk assessment of low default asset classes is traditionally performed with the aid of scorecard models internally developed at financial institutions/large firms or via expert opinions of creditworthiness offered by traditional credit rating agencies. The former approach usually is quite time-consuming, because it requires retrieval of company financials, deep analysis and assessment of many risk dimensions, while the latter is restricted to the limited number of companies that are rated by major credit rating agencies.
S&P Global Market Intelligence has developed CreditModelTM Corporates 2.6 (CM2.6), a statistical model trained on credit ratings from S&P Global Ratings, which offers an automated solution to assess the credit risk of numerous counterparties, globally. In order to achieve global coverage, a tailored approach is applied, to account for the inherent differences between companies operating in developed, emerging and frontier markets. This results in credit scores across a universe of companies well beyond what is normally covered by major credit rating agencies.
Risk managers at banks, insurance companies, corporations and asset management firms can use CM2.6 to:
- Assess the credit risk of unrated and rated counterparties
- Benchmark internal credit ratings against a globally recognized metric
- Support transfer pricing, trade credit, and supply chain risk management
- Calculate capital for compliance purposes
- Provide all relevant inputs for limit setting of exposures to industries, countries or regions
- Incorporate fundamental credit risk in the investment idea generation process
- Perform stress testing and sensitivity analysis
CM2.6 embeds two key features to assess sovereign risk, transfer and convertibility risk, and country risk simultaneously. First is a sophisticated sovereign cap that goes beyond the industry-standard approach of using a sovereign’s foreign currency rating as a cap if it exists at all. Second, are newly developed country risk scores (CRS) to encapsulate the risk of doing business in a given country. In addition, various early warning signals were added as additional explanatory factors as well as higher order terms and cross-terms of explanatory factors whenever deemed appropriate. As a result, performance in CM2.6 has improved with respect to a number of measures.
Our most recent white paper explains the difference between the risks stated above, why they are relevant in analyzing credit risk, in particular in emerging markets, and how they are incorporated into CM2.6 via the sovereign cap and CRS features.