CRITERIA FOR RATING

CORPORATE ENTITIES

CRITERIA FOR RATING CORPORATE ENTITIES  May 2024 1

Table of Contents

Table of Contents 2
Scope of the Criteria 3
Summary of the Criteria Changes 3
An Overview of the Ratings Framework 3
Component 1: Operating Environment 5
Component 1, Factor A: Country Risk Score ........................................................................................................... 5
Component 1, Factor B: Corporate Sector Risk Score ........................................................................................... 5
Component 1, Factor B1: Cyclicality ........................................................................................................................ 6
Component 1, Factor B2: Country Business Environment and Effectiveness ....................................................... 7
Component 1, Factor B3: Industry dynamics .......................................................................................................... 7
Component 1, Factor B4: Sustainability Considerations ......................................................................................... 8
Component 2: Business Profile 9
Component 2, Factor A: Competitive position ....................................................................................................... 9
Competitive advantage............................................................................................................................................ 9
Franchise strength and brand value ...................................................................................................................... 10
Business line, customer and geographic diversification....................................................................................... 10
Environment and Social Considerations ................................................................................................................ 10
Other tangible competitive (dis)advantages ....................................................................................................... 11
Component 2, Factor B: Sustainability Assessment ............................................................................................... 12
Component 3: Financial Profile 12
Component 3 Factor A: Earnings profile ................................................................................................................ 12
Component 3, Factor B: Cash Flow, Leverage and Capital Structure ............................................................... 13
Capital structure assessment................................................................................................................................... 16
Component 3, Factor C: Liquidity ........................................................................................................................... 17
Component 4: Comparative profile ....................................................................................................................... 20
Component 4, Factor A: External Support for a Corporate Entity ...................................................................... 20
Group Support ........................................................................................................................................................... 20
Sovereign Support..................................................................................................................................................... 20
Component 4, Factor B: Peer Analysis ................................................................................................................... 20
Final Rating Adjustment Factors 20
Rating Adjustment Factor 1: Corporate Specific Structural Factors ................................................................... 20

CRITERIA FOR RATING CORPORATE ENTITIES  May 2024 2

 Scope of the Criteria
1. The criteria titled ‘Criteria for Rating Corporate Entities’ (‘Corporate Criteria’), applies to a wide array of
non-financial corporate issuer credit ratings. The criteria are written to encompass the vast differences in
capital structure, as well as diverse drivers of income and expenditure that are evident within corporate
entities. For instance, both mature, heavy industry companies with substantial fixed asset bases and
rapidly growing ICT companies which rely on intangible intellectual property are catered for under the
methodology.

2. Real Estate Investment Trusts (‘REITs’) and most other property companies are out of scope of this criteria
although some of the principles outlined will be drawn on when rating REITs. However, property
development companies, that predominantly develop for sale, may be included. These criteria will be
used to assess utility companies and other government owned entities, albeit with the overlay of a more
comprehensive government support assessment (See the related FAQ). Investment holding companies
and conglomerates are also out of the scope, but the criteria may be used to analyse group members.

Summary of the Criteria Changes

3. The criteria have been updated to include elements of sustainability, within the sector risk, competitive
position, and earnings. For an overview on our thoughts regarding how ESG has been applied
throughout the GCR Ratings Framework see the article titled ‘How GCR Integrates Environmental, Social
and Governance (ESG) into Issue(r) Credit Ratings’.

An Overview of the Ratings Framework

4. To improve the comparability and transparency of the ratings, GCR have adopted a framework (see
below) with publicly available scoring for the major rating components. The goal is to allow each
stakeholder (issuer, investor, regulator, counterparty etc.) to know in detail, each of the major rating
drivers and ultimately what factors may change the ratings in the future.

5. To achieve this, GCR has adopted four major rating components (operating environment, business
profile, financial profile and comparative profile), which are all broken down into two or three major
factors and sub-factors, with a public positive or negative score assigned to each. The summation of the
scores determines the GCR Risk Score, which is translated using the GCR Anchor Credit Evaluator into
the Anchor Credit Evaluation, and then using final rating adjustment factors into issue(r) credit ratings. It
is important to note that there are no fixed weightings for the components, factors, or sub-factors.

6. The accumulation of the component scores will generate the GCR Risk Score. Typically, this score will
range between zero (0: weakest) and forty (40: strongest). The lower the score, the weaker the
assessment. Importantly, GCR can use decimal scoring (example 0,25, 0,50 or 0,75) to improve
differentiation and rating relativities.

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7. To understand the following criteria, GCR recommends that it is read in conjunction with the ‘GCR Ratings
Framework’ and the GCR Rating Scales, Symbols & Definitions and the Anchor Credit Evaluator, which is
published on the GCR Website and will help translate the GCR Risk Score to the international and national
scale ratings.

8. The way the key rating concepts interact with each other and result in an issue(r) credit rating is best
illustrated in Error! Reference source not found., below.

Figure 1: GCR Ratings Framework Diagram for Corporate Entities

Component Factor Sub-score

Country risk (0 to 15)

Operating environment
Sector risk (0 to 13)

Competitive position (-8 to 5)

Business profile
Sustainability (-5 to 0)
GCR Risk Score

Earnings profile (-5 to 3)

Financial profile Leverage and cash flow (-5 to 5)

Liquidity (-10 to 2)

Peer comparison (-2 to 2)

Comparative profile
External support

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 Component 1: Operating Environment

9. The core of the rating framework is based on GCR’s opinion that an entity’s operating environment
frames its creditworthiness. As a result, the operating environment analysis contributes the largest
component of the underlying risk score for the GCR rating methodology. Essentially, GCR combines
elements of country risk and sectoral analysis, sometimes weighted across countries, to anchor the
corporate entity to its current operating conditions.

10. Whilst the direct link to sovereign strengths and macro trends may not be as obvious for corporate entities

as it is for financial institutions (for example), GCR is of the view that the wealth of households and the
political/business environment are essential considerations to consider their creditworthiness. This is
because studies demonstrate that the performance of most companies within a country is highly
correlated with that country’s GDP performance and other financial indicators. Furthermore, corporate
entities will still be exposed to factors such as the domestic credit environment, regulatory pressures, and
the funding dynamics within a given geography.

Component 1, Factor A: Country Risk Score

11. GCR’s country risk scores are determined by a country risk panel in line with the ‘Country Risk Score’

methodology as highlighted in the ‘Country Risk Criteria’ and are published on the GCR website. A
corporate that is domiciled and operates in a single country will receive that country’s risk score.
However, where a corporate is exposed to a number of countries, either through direct investments or
through sales, the score will reflect the weighted average of the country risk scores to which it is exposed.
The GCR rating committee will determine the most appropriate metric by which to weight country risk,
with common metrics being revenue, EBITDA or the asset base. Typically, another country must
contribute materially towards the weighted average operating income or asset base to be included in
the blended country risk score. In some cases, GCR may dislocate the operational risks, from demand
side risks, to determine a blended risk score. This is typically the case where products are sold into the
global market, or pricing is determined by commodity markets, such as for mining and oil and gas
companies. See the global Country Risk Criteria published here.

Component 1, Factor B: Corporate Sector Risk Score

12. It is GCR’s opinion that the overall conditions of any particular industry will be one of the key drivers of

creditworthiness for each rated entity. However, each sector or industry may have vastly different
exposures and correlations to particular economic trends. Some of these trends may be inherent to the
particular industry, while others are factors of the economic environment within any given jurisdiction.
Finally, the performance of a particular industry in a particular jurisdiction may be subject to distinctive
exogenous factors.

13. In an attempt to properly identify the impact of these factors, GCR considers the Corporate Sector Score

in terms of 1) industry cyclicality 2) effectiveness of the business environment within a jurisdiction and 3)
industry dynamics. The first two factors provide a ranking of risk that is applicable across all industries or

CRITERIA FOR RATING CORPORATE ENTITIES  May 2024 5

 countries. All things equal, within the same country a higher overall score will be given to companies in
less cyclical industries. Similarly, within the same sector, higher scoring could be applicable to more stable
countries (as explained below in greater detail). The scoring is between 0 (weakest) and +13 (strongest).
An overall negative score is not applicable because companies would not operate in countries or sectors
that are wholly punitive. When a rated entity operates across industries or geographies, GCR may choose
to blend the scoring based on an appropriate weighting scale.

Component 1, Factor B1: Cyclicality

14. The cyclicality of an industry refers to the sensitivity of the industry’s performance (or lack thereof) to

broad economic factors (although cyclicality may also be a factor of sector specific trends). It is
considered to be an inherent operating condition and will generally not change, or will only change
gradually, over the long term. The cyclicality of an industry is also considered to be relatively consistent
across the world, irrespective of whether the economy is developed or developing, and thus the same
cyclicality assessment will be used for a common industry in different jurisdictions.

15. Corporate entities are said to be highly cyclical when financial performance fluctuates significantly

because of changes in the economic environment. The greater the positive performance in periods of
economic expansion, or declines in periods of economic downturn and contraction, the more cyclical
an industry is said to be (an industry can also be countercyclical, showing strength in periods of economic
weakness). Conversely, industries are considered to be non-cyclical when financial performance is not
impacted to a noticeable extent by changes in the economic environment. In general, primary industries
and those dependent on commodity price markets, or where demand is highly discretionary tend to be
more cyclical, while industries providing essential goods and services are the least cyclical.

16. Table 1: Cyclicality

17. Score description 18. Examples of industries that tend to fall into this category

Mining, Agricultural production, Construction, Steel, Property development;

Highly cyclical
primary manufacturing, Industrial services, oil & gas upstream

Secondary manufacturing, Automotive sales; Discretionary goods

Average/Above average cyclicality
manufacturing, Discretionary retail; Hospitality; Logistics

FMCG manufacturing; FMCG retail; Property investment company’s and REITS;

Average/Below average cyclicality
Transport; ICT equipment, security; oil & gas downstream

Low cyclicality Education, Healthcare, Electricity, Water, Telecoms

19. GCR considers industries that evidence greater cyclicality to be riskier, this is because financial

performance will tend to fluctuate to a greater extent between the peak and trough of the cycle. As a
first step to determining a sector risk score, GCR will categorize industries into one of four cyclicality
buckets. More cyclical industries are associated with lower scoring whereas less cyclical (and thus most
stable) industries will imply a higher score.

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 Component 1, Factor B2: Country Business Environment and Effectiveness

20. Whilst similar industries will tend to exhibit similar cyclicality trends across the globe, GCR recognises that

the risk related to an industry is highly dependent on the jurisdiction wherein the corporate is
headquartered or conducts its operations. Countries or jurisdictions characterised by a stable operating
environment, with strong capital markets and a transparent legislative/regulatory environment tend to
be supportive of efficient business processes and growth. Thus, corporates domiciled in such countries
are typically more creditworthy than those operating in jurisdictions with large bureaucracies, weak
financial markets and unpredictable legal systems, all else being equal. By way of example, a mining
company in a well-developed stable economy will reflect lower risk factors than a similar company in an
underdeveloped market with an unstable political environment.

21. To rank the effectiveness of a particular country’s business environment, GCR considers a host of factors

related to the jurisdiction including, inter alia; the financial system, the legal environment, quality of
infrastructure, ICT adoption, macro-economic stability, and the labour market. On a practical level this
would include common tasks such as registering a business, dealing with construction permits, getting
electricity, connecting to high-speed internet, registering property, access to credit, negotiating wages,
protecting minority investors, paying taxes and claiming rebates, trading across borders, enforcing
contracts and resolving insolvency.

22. Positive scoring will be dependent on a country receiving relatively high rankings for the various factors

in GCR’s analysis, while countries with poor rankings will be penalised. Scoring considerations may be
modified by an assessment of progress/ deterioration relative to previous years.

Component 1, Factor B3: Industry dynamics

23. The industry dynamics sub-factor narrows the focus of the credit rating from the broad industry and

country factors discussed above to the specific factors impacting each individual industry within each
different jurisdiction. It is critical to understand the dynamics of the specific jurisdiction wherein the entity
is domiciled/operates as such factors will tend to vary. These dynamics can fluctuate over a fairly short
space of time and need to be monitored on an ongoing basis.

24. The dynamics sub-factor is designed to focus on the presence (or absence) of factors that have the

potential to support broad industry performance. In GCR’s opinion industry dynamics can be condensed
into two categories of considerations, as below.

25. Industry specific characteristics relate to factors such as barriers to entry, technology and disruption, and

the profitability of the industry. In general, GCR considers an industry to be more stable and thus have a
higher risk score where barriers to entry are high, the susceptibility to disruption is fairly low and strong
profitability is maintained by all major participants on an ongoing basis. While some of these factors may
be applicable to an industry across multiple jurisdictions, in GCR’s experience there can also be large
differences in impact. Thus, whereas an industry could be experiencing significant technological
disruption in a specific developed market, this may not be the case across the globe. To the extent that

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 this trend will likely catch up with entities in the other markets over time, this will be reflected in changes
to the industry dynamics score. Similarly, profit margins and overall profitability can vary greatly between
different jurisdictions. Taking cognisance that different industries inherently report different earning
margins, GCR will consider the margin trend as an indicator of shifts in the industry’s operating
environment.

Component 1, Factor B4: Sector-Wide Sustainability Considerations

26. Environmental, Social and Governance concerns can also have a substantial impact on the sector risk

score.

27. Transition Risks: For GCR, transition risks refer to how a sector could benefit or suffer from periods of

change. This change could be technological, regulatory, legislative, or an evolving business model. This
involves examining factors such as market volatility, regulatory compliance, complexities of adopting
new business lines, customer retention, and workforce adjustments. Furthermore, GCR would include
Environmental or Social transitions, referring to the challenges and opportunities which arise from the shift
towards sustainable and responsible business practices.

28. Physical & Social Risks: GCR will examine exposure to potential environmental or social risk exposures

that can cause harm, damage, or disruption to working sites, distribution channels or the product/
materials. Such exposures could be long-term risk such as climatic changes that increase sea-levels or
cause global heating. Furthermore, it could be short-term climatic events such as wildfires and flooding.
Examples could include tourism or agriculture in low lying coastal areas, which could be impacted by
the above. Or the impact of shrinking populations, poor education, poor health care or failing
infrastructure on industry.

29. Environmental & Social Impacts: GCR could reflect negative or positive environmental or social impacts

within the Sector Risk Score, if we believe it raises reputation, regulation or transition risks going forward.
Take for example the environmental impact of fossil-fuel power generation versus renewable energy
power generation. We can opine that a renewable energy sector will typically be positive for the credit
profile relative to non-renewable sector, all else being equal. However, in our core markets, power
security and unemployment arguably present an equally pressing challenge as the global climatic crisis.
This means a fossil fuel power could be a force of short-term social good, especially as the African
continent is home to less than 5% of global emissions and is yet to fully industrialize. Therefore, in more
developed jurisdictions we would aim to reflect the use of fossil fuel powered generation more
egregiously, than developing economies.

30. Regulations, legislation, and politics. An industry’s ability to adapt to both a changing legislative

environment and to shifting social norms is an important factor in the risk assessment. By their nature,
these factors are specific to a jurisdiction and can greatly influence the operating environment.
Moreover, each factor can have a beneficial or detrimental impact on an industry. Thus, corporate

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 entities may benefit from significant regulations where such regulations create barriers to entry or
demand a higher quality product. Conversely, complying with the same regulations can create
significant red tape that hampers the entity’s operational flexibility. Domestic politics may also have a
significant impact on an industry’s outlook, whether it be through policy certainty, legislation, social
activism or labour groups. Generally, those industries exposed to a volatile or uncertain political
environment may struggle to find investment or be exposed to higher exogenous risk.

Component 2: Business Profile

31. The company profile assessment is based on a series of qualitative factors meant to ascertain the

robustness of a corporate entity’s business model, diversity, franchise, and competitive advantage
against the complexity of operations and quality of management/governance relative to peers
operating in the same or similar markets.

Component 2, Factor A: Competitive position

32. Competitive position is the first entity specific score based on a scale, from ‘very weak’ (-8) to ‘very

strong’ (+5) using the four (4) sub factors below as guidance. Each should be benchmarked to peers in
a similar industry, both locally and globally. No one of the below factors are meant to be more important
than the other and not all factors will be applicable to each industry. Rather the competitive position is
an overall assessment reflecting GCR’s opinion of those factors (or lack thereof) that would likely
contribute to the corporate entity’s business stability through economic cycles or through periods of
changing industry dynamics and competition.

Competitive advantage

33. To be considered as having a competitive advantage, corporate entities must demonstrate an ability to

outperform its peers, in both local and global markets, on a sustained basis. Factors that could contribute
to competitive advantages include the size of the entity, greater diversity of product or service
capabilities, pricing power of the entity, demonstrated track record of superior service delivery or
product development, expansive and efficient logistics chains, and significant intellectual property
(whether in terms of products/services or processes).

34. For entities to be accorded very strong competitive position scores, they must be able to demonstrate

competitive advantages on a global basis over several business lines. An entity that has a leading
position and other advantages in a particular market can achieve a ‘high’ competitive position score.
On the other hand, negative competitive positioning scores (down to -8) will be assigned to entities that
are very small, are largely price takers in an industry, are highly reliant on other corporates (or even
competitors) for key inputs and are consistently facing considerable competition and low barriers to
entry.

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 Franchise strength and brand value

35. Corporate entities typically invest substantially in developing strong brand recognition and customer

loyalty. Leading brands are generally associated with superior pricing power and more stable earnings
through the cycle due to customer loyalty. Brand value is not applicable to all industries (such as mining,
or utilities), but it is critical in almost all client facing industries (FMCG, retail, hospitality, consumer
products). Corporate entities that are assigned ‘very high’ competitive position scores will need to have
globally dominant brands or franchises that unambiguously translate into robust business volumes and
superior pricing power. A ‘high’ score may also be accorded to entities that demonstrate similar
characteristics but in a limited geographic region.

Business line, customer and geographic diversification

36. In general, GCR views diversification to be a ratings strength as operating conditions in different countries

and industries will not be exactly correlated, while diversification will inherently reduce customer/supplier
and other concentration risks. In certain cases, however, expansion into business areas or geographies
may be of high risk and thus negate the diversification benefit. Diversification will typically be measured
by the division of revenue or profits, but other measures such as asset split may be employed where this
is deemed most appropriate. To achieve a ‘strong’ to ‘very strong’ score, regardless of other competitive
advantages, the entity should have sufficient geographic and product diversification that no one
sovereign jurisdiction or business line contributes more than 33% of EBITDA. Similarly, a wider customer
base is considered a ratings strength, while negative scoring may be applied to entity’s with high
concentrations.

Environment and Social Considerations

37. ESG factors play an increasingly important role in the strength and sustainability of a company. Like with

all the Competitive Position factors we view such considerations for the rated entity against its operating
environment. Specifically, we will look at the following:

38. Transition Risks: GCR will look at the contribution of green/ social or less sustainable products and services

of the rated entity, against the broader market. Entities that are well placed to benefit from such change,
especially when they have a publicly reported mandate and/ or specific expertise, which has
measurable environmental or social benefits, could see a positive ratings impact. Conversely, the rating
impact for entities that are exposed to higher environmental or transition risks, to a greater extent than
sector peers, could be negative.

39. Physical / Social Risks: GCR will examine the entity’s exposure to, and preparedness for/ management

of, potential environmental or social risk exposures that can cause harm, damage or disruption to
distribution channels. Furthermore, GCR will reflect any legal, regulatory, or reputational risks associated
with weak environmental or social practices.

40. Environmental or Social Impact: We will assess the impact of the entity against other rated peers. If we

believe the impact could raise reputation, regulation or transition risks going forward or its significant

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 underperforms the peer group we could lower the assessment. Conversely, if the entity is mandated
towards Environmental or Social practices or business lines we could positively impact the score.

Other tangible competitive (dis)advantages

41. GCR recognises that there are numerous factors that can add to a corporate entity’s relative strength

and market position. Some of the more common factors include technological or product advantages,
vertical/horizontal integration, regulatory preferences or reputational biases. Key competitive factors for
each entity need to be identified and their impact on the relative competitive position assessed and
explained in the rating report. In many cases, a factor that is considered a positive for one entity could
become a constraint for a different entity. Advantages may also be exogenous, such as for utilities, which
may enjoy the benefit of supportive legislation or restricted government concessions.

42. A company with a key policy role, that is a monopoly or near monopoly, could get a ‘high’ business

profile risk score even if other strengths are not present.

Table 2: Business profile

Score description Score Competitive Position (typical descriptors)

Global industry leader, recognised superior brand and franchise value across the globe that
allows for substantial pricing power, best in class technologies and intellectual property,
exceptionally high and stable profit and cash generation, control over its supply chains in
Highest 4 to 5
numerous countries, as well as distribution channels. Material business line diversification with no
single product or market accounting for more than 33% of EBITDA. Could be a positive
Environmental or Social outlier.

Industry leader in its key markets but with some global diversification. Recognised superior brand
and franchise value in key markets, globally competitive products, best in class technologies and
intellectual property. Strong sustained profit and cash generation, control over its supply chains in
High 2 to 3 key countries as well as distribution channels, material business line diversification in key jurisdiction
supported by some global diversification. Government arm or State-Owned Enterprise, with
significant importance to the social or physical infrastructure. ESG risks are well controlled and
impact limited against the market.
Mid-sized to strong position in its key markets/products, some diversification of business line,
confirmed proprietary technology, recognised strengths in terms of supply and distribution
Intermediate -1 to 1 channels. Fairly stable revenue and cash flows across the cycle. Government arm or State-Owned
Enterprise with some importance to social or physical infrastructure. ESG considerations in line with
the market.
Mid-sized to small industry player with little proprietary technology, often using price as its key
advantage. Limited diversification by jurisdiction or product, limited control over supply chains
Low -2 to -4
and distribution. May have a history of revenue instability. ESG considerations are moderate to
weak.

Small to very small industry player facing significant competition, no real diversification benefits,
Lowest -5 to -8 and/or weak earnings. The lowest scores will typically be associated with long term weak earnings
and/or failed or close to failing. ESG considerations are likely to be lacking.
*the above highlights typical characteristics of a highest, high, intermediate, low and lowest assessments. It is likely that an entity could have one or more characteristics,
which lie across the ranges. GCR allows analytical decision making to decide what the most pertinent factors for each rated entity are. However, to achieve a stronger
score, the entity is likely to have several cumulative strengths. Conversely, any one risk can bring the score down to the lowest levels. GCR can use decimal scoring
(example 0,25, 0,50 or 0,75) to improve differentiation and relative credit ranking.

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 Component 2, Factor B: Sustainability Assessment
43. Scored between 0 to -5. Please see the universal Criteria for the GCR Ratings Framework criteria.

Component 3: Financial Profile

44. For corporate entities, GCR considers the greater risk to relate to the creation and maintenance of stable

cash flows to support debt serviceability and liquidity. This is due to the fact that, while most industries are
subject to some regulation, corporate entities do not have to comply with regulatory driven capital and
liquidity measures. Similarly, in most cases they would also not receive the same type of financial support
if the businesses were to fall into distress. Thus, the resilience of a corporate entity is solely a factor of
internal performance and distinct access to funding.

45. GCR assesses three components, using a mixture of quantitative benchmarks that lead to qualitative

assessments. These comprise, 1) earnings profile, 2) cash flow, leverage and capital structure and 3)
liquidity. Each component is assigned a risk score from very weak to very strong. Where the component
is comprised of several metrics, the various metrics will be balanced to derive the most appropriate factor
score.

Component 3 Factor A: Earnings profile

46. In assessing financial performance for a corporate entity, GCR will consider the historic trend of revenue

consistency, concentrating on the absolute returns and the stability of sources of revenue. The quality of
earnings is assessed by considering the stability of inflows, at both the consolidated and
subsidiary/division level, over the review period. Lines of revenue that are underpinned by long term
recurring annuity type income are more stable versus those exposed to short term sales like income. GCR
will also consider the presence of any revenue concentrations, whether towards a specific tenant,
product line or a specific project and may make a negative adjustment to the risk score when it considers
there to be high revenue concentration, even if the business is currently performing.

47. Typically, GCR will use the ratio of EBITDA (core operating earnings before interest tax, depreciation and

amortisation) to revenue as the primary measure of earnings resilience, but in certain cases utilising the
ratio of operating profit (core operating earnings post depreciation and amortisation) to revenue may
be more descriptive. Adjustments may be made to profitability for residual value risk/gains or other
expected gains and/or losses. Given the substantial variance in earnings margins between different
industries within the broad corporate sector, it is necessary to consider the absolute earnings ratio relative
to industry peers and to internal historical trends. For a corporate to be accorded a positive assessment,
the entity should exhibit an EBITDA margin consistently above the sector norm, and at the same time
report a stable or widening trend relative to historical levels.

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48. Within this factor GCR will also analyse operating efficiency. The cost structure should be flexible enough

to support efficiency and profitability, even when revenues drop. Accordingly, entities with high fixed
costs or large labor forces are considered to be riskier, as they will be unable to reduce expenditure
timeously during economic downturns. Other factors that may (generally) negatively affect the earnings
quality assessment include:
i. large exposure to fluctuations in exchange rates;
ii. persistence of exceptional items and restatements;
iii. presence of non-cash items such as fair value movements and impairments;
iv. high dependence on revenues from environmental or socially unsustainable products.

Table 3: Earnings performance

Score description Score Earnings generation (typical descriptors)

High EBITDA margins and/or consistent earnings growth, comparing better than peers operating
in the same or similar markets. Earnings are of a high quality, underpinned by annuity like income.
Highest 2 to 3 Proven earnings stability through the cycle. Flexible cost structure with strong ability to manage
costs through the cycle. No material risk related to currency, residual value and other non-cash
items.

EBITDA margins and/or earnings growth broadly in line with peers operating in the same or similar
markets. Proven ability to remain profitable through the cycle, albeit with some margin variability.
Intermediate -1 to 1 Earnings quality broadly in line with the market. Good flexibility in cost structure with some ability
to manage costs through the cycle. Limited risk related to currency, residual value and other non-
cash items.

EBITDA margin below peers operating in the same or similar markets. Inconsistent earnings
trajectory with periodic declines. Unproven or volatile earnings through the cycle. Some concerns
Low -2 to -4
regarding earnings quality. Little flexibility in the cost structure, with variable margins through the
cycle. High earnings fluctuations due to currency, residual value and other non-cash items

Lowest -5 to -8 Strong concerns regarding the ability to operate profitably.

*the above highlights typical characteristics of a highest, high, intermediate, low and lowest assessments. It is likely that an entity could have one or more characteristics,
which lie across the ranges. GCR allows analytical decision making to decide what the most pertinent factors for each rated entity are. However, to achieve a stronger
score, the entity is likely to have several cumulative strengths. Conversely, any one risk can bring the score down to the lowest levels. GCR can use decimal scoring
(example 0,25, 0,50 or 0,75) to improve differentiation and relative credit ranking.

Component 3, Factor B: Cash Flow, Leverage and Capital Structure

49. GCR’s assessment of cash flow, leverage and capital structure utilises a mix of quantitative debt service

and cash flow metrics, combined with a more subjective assessment of the appropriateness of the
capital structure. No single leverage metric (or band) can be said to be appropriate for all corporate
entities. Corporate entities tend to exhibit substantial differences in gearing levels depending on the
industries in which they operate. Corporates operating in less cyclical and more mature industries can
absorb higher gearing levels without much increase in the risk profile. Conversely, corporates in more

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 cyclical industries are subject to volatile earnings and cash flows and thus should exhibit lower gearing
for the same level of risk tolerance. To account for these differences, GCR has assigned different
gearing/leverage brackets based on the cyclicality of the industry in which a corporate operates (as
determined in the operating environment assessment).

50. GCR may consider all instruments that can broadly be defined as having debt like features in calculating

the debt balance. These may include instruments such as convertible debt, subordinated debt,
redeemable and perpetual preference shares, off balance sheet funding structures, as well as
contingent or unfunded liabilities (where there is a good chance some of these may materialise) and
operating lease obligations (equipment or property rentals). Where the debt has features that may
mitigate the risk of default an adjustment to the leverage score may be made.

51. Financial reporting standards in most jurisdictions now require that rental agreements and other

operating leases be accounted for as long-term debt, with a corresponding right of use asset included
in long term assets. As a corollary, the income statement no longer considers rentals to be an operating
expense, but the payment is rather reflected as a combination of amortization and interest. This has had
the impact raising the level of debt, increasing the interest charge, whilst at the same time strengthening
EBITDA and earnings margins. While GCR views this as the more conservative gearing position, and thus
utilises the new standard for our primary gearing calculations, it does distort historical comparatives and
is often in opposition to how debt funding covenants are calculated (which only consider interest
bearing debt and leases). Where applicable, GCR will thus consider debt levels and gearing metrics
under both standards.

52. GCR’s quantitative assessment of gearing focusses mainly on debt and debt service coverage metrics.

Traditional equity based gearing ratios are less relevant due to the subjectivity involved in determining
the equity valuation, albeit that the debt-to-equity metric may be useful for certain entities. Historical
debt coverage and service trends are extrapolated, along with expected cash flows, to determine two-
year forecasted ratios (where possible). In general, GCR will utilise net debt (gross debt plus lease liabilities
minus cash and unpledged liquid assets) to calculate gearing metrics, but in cases where the cash is
earmarked for investment or there are concerns as to the accessibility of cash, gross gearing metrics may
be more appropriate.

53. There are three main metrics that are utilised when assessing debt, with the typical scoring bands (from

a minimum of -5 to a maximum score of +5) detailed in Table 4. Entities are only able to achieve the
higher scores of +4 and +5 if they can demonstrate the ability to raise diverse sources of funding on
international markets, from a wide range of counterparties, on an ongoing basis. Such sources of funding
include any number of direct bank loans, syndicated facilities, debt capital market instruments,
guarantees and derivative instruments. A demonstrated ability to raise equity funding from diverse
investor groupings, across international markets in a timely and ongoing fashion would also support an
uplift to the rating score.

CRITERIA FOR RATING CORPORATE ENTITIES  May 2024 14

54. Net debt to EBITDA is a measure of the extent to which ongoing operations could meet principal

obligations. The key benefit of this metric is that it incorporates all core profits that are legally obligated
to the company, providing a clearer picture of operating performance. GCR may make some
adjustments to the reported EBITDA for items that are deemed to be non-core, non-cash or non-recurring,
as well as differences in accounting treatment.

55. Operating cash flow (“OCF”) coverage of gross debt measures the entity’s ability to repay its debt using

the cash flow from core operations. The advantage of this measure is that it measures the real cash
available for debt servicing, but it could be temporarily skewed by working capital movements. For
entities that might be exposed to significant capital expenditure (for example purchasing equipment for
leasing) we would more likely use discretionary cash flow coverage of total debt as it would consider
ongoing asset replacement costs. GCR may also look at additional adjustments to discretionary cash
flows if there appears to be a steady stream of cash leaving the business through dividends or
investments.

56. EBITDA to net interest coverage examines the ability of the corporate entity to honour its main recurring

debt service obligations being interest payments. Typically, GCR will offset interest income against the
interest charge, but non-cash interest income and other interest risk mitigants such as hedging
instruments and capitalised interest on development funding may be excluded from the calculation. An
alternative calculation is free cash flow coverage of interest, which is calculated by dividing cash flow
from operations (calculated before the net interest payment) by net interest, and may be considered
where appropriate, such as for companies that accrue fair value gains but have little cash flow.

Table 4: Leverage, Cash Flow Coverage

Net Debt/EBITDA (x) OCF to Gross Debt (%) EBITDA/Interest (x)

Cyclicality
bucket Average/ Average/ Average/ Average/ Average/ Average/
High Above Below Low High Above Below Low High Above Below Low
ave. ave. ave. ave. ave. ave.

Corporate entities that demonstrate ongoing access to diverse international equity and debt capital markets may receive an
4 to 5 uplift to the score implied by the credit protection ratio of up to two notches. Accordingly, entities that achieve the highest
leverage and cash flow coverage scores may receive further uplift to a credit risk of 4 or 5.

2 to 3 <1.5x <1.75x <2x 2.5x >60% >55% >50% >40% >15x >14.5x >14x >13x

4.75x
1.5x to 1.75x 2x to 2.5x to 30% to 28% to 25% to 20% to 5x 4.5x to 4x to
-1 to 1 to
3x to 3.3x 3.5x 4x 60% 55% 50% 40% to15x 14x 13x
14.5x

3x to 3.3x to 3.5x to 4x to 17.5% 15% to 12.5% 10% to 2.25x 2x to 1.75x 1.5x

-2 to -3
5x 5.3x 5.5x 6x to 30% 28% to 25% 20% to 5x 4.75x to 4,5x to 4x

-4 to -5 >5x >5.3x >5.5x >6x <17.5% <15% <12.5% <10% <2.25x <2x <1.75x <1.5x

The lowest risk scores are applicable in instances where an entity has high gearing, but does not have clear refinancing
-6 to -8
arrangements in place, or where GCR is of the opinion that lines of credit will not be made available.

*the above highlights typical characteristics of a highest, high, intermediate, low and lowest assessments. It is likely that an entity could have one or more characteristics,
which lie across the ranges. GCR allows analytical decision making to decide what the most pertinent factors for each rated entity are. However, to achieve a stronger
score, the entity is likely to have several cumulative strengths. Conversely, any one risk can bring the score down to the lowest levels. GCR can use decimal scoring
(example 0,25, 0,50 or 0,75) to improve differentiation and relative credit ranking.

CRITERIA FOR RATING CORPORATE ENTITIES  May 2024 15

 Capital structure assessment.

57. Capital structure considerations may be used to adjust the quantitative leverage score by one or more

notches. Typically, these will be negative adjustments although there are instances where additional
credit could be given. More often, particularly strong characteristics will enhance a corporate entity’s
access to capital and thus be positively considered as part of the liquidity assessment. Situations where
adjustments could be made include:

i. If there is negative tangible equity (reported equity less intangible assets) or the nominal size of equity
is small, a corporate entity could be more vulnerable to event losses even if the ratios appear
adequate. Typically, GCR caps the capital score at the maximum within the average category.
However, this is a qualitative judgement call and needs to consider the size and diversity of the business
as well as the quality of its treasury and overall balance sheet management.

ii. Currency risk arises when entities borrow in a currency other than its revenue of operations. This position
can materially change the leverage position of the entity (in the event of currency movements) if the
company has not put a financial or natural hedge in place or cannot pass the costs through to its
customers reliably. If foreign currency debt is greater than 30% of total debt and is not covered by
foreign income or currency hedges, GCR may make a negative adjustment to the score. The level of
adjustment will depend on the amount of leverage and the foreign currency exposure/volatility.

iii. If the debt is concentrated, GCR may make a negative adjustment(s). Broadly we would view funding
to be concentrated when it comes from one source, i.e., if it is almost entirely funded by the banking
sector, or if one counterparty contributes more than 33% of funds.

iv. Strong emphasis is placed on the maturity profile of the capital structure. GCR could make an
adjustment if there are material refinancing risks at any stage or if the weighted-average-maturity of
funds is under two years in developed markets and 18 months in emerging markets.

v. If debt is growing very quickly, possibly due to the rapid capital expenditure needs, we can also bring
down the initial leverage score depending on the nature of the growth.

vi. Adverse shareholder rights/actions. If the quality of capital is potentially threatened by options held by
the shareholder to force repayment, or if there are any other debt-like characteristics. If GCR expects
significant dividend payouts, or share buybacks, either from over leveraged and/or aggressive
shareholders, we may make a negative adjustment to the initial score.

vii. Weak or strong operating subsidiaries/investments. If the group has a subsidiary (consolidated or
unconsolidated) that is underperforming or is over leveraged, is dependent on funding/liquidity from
the group, or is close to covenant breach, we could deduct the shortfall from group capital even if
there are no explicit guarantees from the parent. Conversely, if the entity has exit-able and strong
investments or subsidiaries which would not harm the core operations of the entity, we can make a

CRITERIA FOR RATING CORPORATE ENTITIES  May 2024 16

 positive adjustment to the leverage score. We may also bring down the score if a large percentage of
cash flow or liquidity is pledged or trapped within a group member and not available for debt service
across the group.

viii. GCR views reported debt that is not subject to an event of default or other time bound risks typically
associated with commercial debt (such as interest payments) more leniently. Such debt includes rental
and lease liabilities, or similar ongoing contractual liabilities. While this category of debt will still be
considered when calculating financial ratios, GCR will typically utilise the more favourable risk score
within a category, or where the ratio is on the border between categories.

ix. The presence of loss bearing instruments, which take losses long before senior unsecured instruments,
could improve the assessment. Typically, such debt instruments will use trigger points that cause
permanent write down/conversion fully at management’s discretion and GCR views management’s
incentive to use them as strong. Additionally, from time to time, GCR may include permanent group,
concessionary, or government funding, which could be converted to capital should there be stress,
although management control and incentive to use would be necessary to provide any credit. GCR
will reflect and cap the benefit of such instruments to 25% (a one-notch positive adjustment) and 50%
(a two-notch positive adjustment) of total debt, assuming it doesn’t reach the highest score (5) already
and cash flow is generally supportive.

x. Sustainability linked funding: Sustainability-linked funding provides a unique opportunity to consider

environmental, social, and governance (ESG) factors alongside traditional financial metrics. By
incorporating sustainability targets and performance indicators into the funding structure, companies
can demonstrate their commitment to responsible business practices and long-term sustainability.
Furthermore, by integrating sustainability into their business strategies, corporates can achieve greater
funding stability and access funding at lower costs. Evidence of these advantages could support the
assessment.

Component 3, Factor C: Liquidity

58. GCR applies a zero-tolerance approach to a lack of liquidity. This is because a company with the

healthiest balance sheet and strongest competitive position can still fail if it doesn’t have appropriate
levels of, and control over, its liquidity. As a result, our assessment of weak liquidity can bring the ratings
down to the lowest levels should there be concerns.

59. Our analytical approach is based on a simple view of the entity’s ability to meet its liquidity requirements

over a rolling one to two-year period. GCR will include the following in sources where applicable:

i. GCR calculates non-pledged, non-restricted cash that hasn’t been earmarked for future capex.
Transfer and convertibility risk will also be considered regarding foreign currency cash holdings.

CRITERIA FOR RATING CORPORATE ENTITIES  May 2024 17

 ii. GCR includes all anticipated funds from core operations (which may be haircut if GCR believes it could
reduce from the historic observations or if there is high residual value risk or low reserve coverage) and
positive working capital changes, if reliable.
iii. GCR will include the undrawn and available portion of committed facilities, both short term and those
maturing after 12 months. GCR may also include a percentage of non-committed facilities if the
provider of lines has a stronger risk score than the borrower and there is no joint default risk between
the two parties. In regard to both committed and uncommitted lines, GCR will limit the amount of credit
available, up to any covenant breach (but not beyond).
iv. GCR may also include liquidity from contracted asset or investment sales or from external support
should the sources be reliable. Listed equity may also be included for liquidity purposes, with an
appropriate haircut applied. The extent of the haircut will depend on the liquidity of the equity counter
and the size of the shareholding, with less liquidity and greater percentage shareholding requiring a
larger haircut.
v. GCR may include a portion of inventories (typically haircut by 40% or more), where the inventory
comprises readily tradeable commodity type products or fast-moving consumer goods, and the cash
conversion cycle if no longer than 90 days. However, inventory will generally only be considered to
mitigate an increase in related short-term debt, such as when trade facilities rise to fund greater raw
material inventories during times of supply disruptions.

60. When examining uses GCR considers the following sources of liquidity pressure:

i. GCR will first look at debt maturities over a one-year and two-year period, presuming they will not
have access to refinancing those funds.
ii. GCR includes all committed capital expenditure and investment requirements over the two-year
period. GCR generally expects there to be definite funding plans in place for all major capex
projects before they begin.
iii. Expected negative changes in working capital, any contracted extraordinary purchases and other
discretionary elements of cash outflows. GCR will also consider any other expected group liquidity
needs or requirements.

61. Several other liquidity considerations are overlaid onto the uses versus sources analysis.

62. Covenants: The presence and proximity to covenants is an important factor when assessing the uses of

liquidity. Typically, corporate debt facilities are granted subject to various financial and non-financial
covenants. Where these covenants can lead to an acceleration of debt repayment or event of default,
this will significantly increase risk for the corporate entity and constrain financial flexibility. The risk
becomes more acute the closer an entity’s metrics come to the covenant levels and the liquidity score
should be penalised. GCR also views rating-based triggers highly negatively. For all covenants, the extent
of the negative adjustment would be dependent on the severity of the breach and the resolutions that
are contractually available to both debtors and creditors. Most punitive would be an automatic
acceleration of debt, whilst in many cases there is a ratcheting up of the interest rate, which would likely
result in a less severe penalization.

CRITERIA FOR RATING CORPORATE ENTITIES  May 2024 18

63. Where a covenant breach can be foreseen, GCR would expect the entity to receive written waivers

from funders ahead of the breach. In such instances GCR will consider the reasons for the breach,
whether they are due to internal or exogenous factors, or reflect short term or more sustained disruptions,
in considering the severity of the necessary rating action. GCR will also consider any timeframe that is
contractually provided to remedy the covenant breach, and the perceived ability of the entity to
comply with such remedies.

64. Refinancing: GCR expects corporate entities to maintain sufficient unutilised committed funding facilities

to cover all outstanding commercial paper and maturing term facilities of six months or less, as well as
having clear plans to redeem or refinance all debt maturities of less than twelve months.

65. Encumbrances: GCR takes a negative view of significant levels of asset encumbrance. This is because

unencumbered assets can more easily be used to obtain additional facilities in times of need. In
addition, encumbrances can divert cash flows away from the servicing of general unsecured debt and
can subordinate senior unsecured claims in liquidation. Consequently, as asset encumbrance increases,
the issuer credit rating comes down.

Table 5: Liquidity

Score description Score Description

If the entity has sources of liquidity that cover more than 2x its uses over a one-year period and 1.5x
over a 2-year period. Furthermore, there is significant headroom in its debt covenants above
Highest 2
acceleration of its longer-term funding or event of defaults. Funding relationships with banks of
good creditworthiness are strong and stable. There is no asset encumbrance.

If the entity has sources of liquidity that cover between 1.25 x and 2x its uses over a one-year period.
For a positive score, the coverage should be over 1x for 18 months. GCR is comfortable with the
Intermediate 1, 0, -1
covenant headroom. Funding relationships are strong and stable. Asset encumbrance is less than
30% of total assets.

If the entity has sources of liquidity that cover between 1x-1.25 x its uses over a one-year period. Or
there is limited covenant headroom, which could cause a material acceleration or event of default
Low -2 to -4
should the performance of the company deteriorate. Funding relationships may be questionable,
particularly in times of stress. Asset encumbrance is less than 50% of total assets.

If the entity has sources of liquidity that are insufficient to cover one years’ use. If covenant breach
-5 to -10 is material, significant and plausible. If funding partners are refusing to provide access to funds.
Lowest Asset encumbrance is more than 50% of total assets.

*the above highlights typical characteristics of a highest, high, intermediate, low and lowest assessments. It is likely that an entity could have one or more characteristics,
which lie across the ranges. GCR allows analytical decision making to decide what the most pertinent factors for each rated entity are. However, to achieve a stronger
score, the entity is likely to have several cumulative strengths. Conversely, any one risk can bring the score down to the lowest levels. GCR can use decimal scoring
(example 0,25, 0,50 or 0,75) to improve differentiation and relative credit ranking.

CRITERIA FOR RATING CORPORATE ENTITIES  May 2024 19

 Component 4: Comparative profile

66. The last risk score factor allows GCR to make a series of qualitative changes based on external or

idiosyncratic factors, the most common one being ongoing group or extraordinary sovereign support.

Component 4, Factor A: External Support for a Corporate Entity

67. Support comes from shareholders/affiliates and/or governments. However, if both elements of support

apply, GCR only takes the higher of the two support options to avoid double counting.

Group Support
68. For details on group support please see the universal group support criteria.

Sovereign Support
69. This factor is generally not applicable to corporate entities, albeit that it can play an important role in the

consideration of utility companies or other highly regulated industries. Where applicable, details on
government support are outlined in the country risk criteria.

Component 4, Factor B: Peer Analysis

70. GCR allows two positive or negative risk score changes to create greater credit differentiation. Typically,

these notches should be used when an entity is a generally better or worse performing company than its
peer group across a number of fields, but no one factor has created a ratings differential.

Final Rating Adjustment Factors

71. Once the risk score and the ACE has been established, on either/both the national or international scale

we can then create the formal ratings on different legal entities. For most property funds the ACE will be
equivalent to the rated entity, being the group. Where this is not the case, we move off the risk scoring
framework and start adjusting the national/international ratings because we are trying to establish the
most applicable credit ratings hierarchy within a consolidated group.

Rating Adjustment Factor 1: Corporate Specific Structural Factors

72. As stated above, GCR will typically base the credit scoring on the financial and business characteristics

of the immediate group (when there is one) around that legal entity. This is because there is tangible
likelihood of risk transfer either up from subsidiaries, across from sister companies or down from a holding
company/ parent. It is in this section that GCR addresses these risks, to home in on the correct rating for
that legal entity.

73. The Group Classification and Support Criteria in the GCR Ratings Framework is the predominant guide

for this decision-making process. These are the principles of the first adjustments:

i. There should be no adjustment from the risk score for the major operating entity or parent, of the

analysed analytical object. An example of this is the major operating entity within a group, which

CRITERIA FOR RATING CORPORATE ENTITIES  May 2024 20

 usually has above 50% of total group assets or capital. However, it could be smaller and still be material
to the group.

ii. Minor group Subsidiary/Affiliates are analysed on a standalone basis and then allocated support

uplift, if necessary, in line with the methodology.

iii. Non-operating holding companies (NOHC): Due to the fact that corporate entities are not regulated

in the same manner as Financial Institutions, GCR does automatically notch down the ratings on
NOHC, although an assessment will be made to establish if there are any structural or legal
impediments to cash flow.

iv. Operating holding companies typically will be treated like NOHC.

v. Intermediate non-operating holding companies typically will be treated like NOHC. However, if the

group benefits from parent or government support and that support has to flow through the INOHC,
then the ratings don’t need to notch down.

74. The notching from the legal entity rating will depend on the nature of the instrument, whilst always

respecting the credit hierarchy.

Table 6: Instruments
Debt Rating
Notching Typical Characteristics
Types
+1 or more See Structurally Enhanced Corporate Bonds Rating Criteria.
Secured Liabilities
notches
Reflects the relevant legal entity rating on the company issuing the debt, including the
Senior
0
Unsecured government support uplift (if applicable).
Contractually subordinated non-perpetual and cumulative debt, withoutany discretionary/
mandatory/ statutory nonpayment or write down clauses and cannot delay coupon.
Senior
-1
Subordinated Typically, would take losses at the same time but at a deep haircut than senior unsecured
debt.
Contractually subordinated debt, typically non-perpetual and cumulative, but likely to have
Junior a discretionary/ mandatory/ statutory nonpayment or write down clauses. Should be able to
-2, -3
Subordinated
take losses before senior unsecured and senior subordinated debt.
Contractually subordinated debt, typically an additional tier one capital instrument. The
instrument will typically be perpetual, even if potentially callable by management after 5
years, or with a residual maturity of over 10years. The notes will have discretionary (and
possibly mandatory/ statutory) non-payment of coupon, on non-cumulative and non-
penalized basis. Lastly, the notes will require conversion or write-down clauses with trigger
Hybrids (a) -4
points that mean the instrument will take losses as the financial institution remains a going
concern*. GCR would typically notch down according to the proximity of the trigger, whilst
respecting the credit hierarchy. GCR may choose to exclude the impact of sovereign or
group support notches to the starting point, if support is not expected to be forthcoming
before losses on the instrument.
All of Hybrids (a) but also with the presence of capital / liquidity or rating triggers that would
default the instrument as the entity remains firmly a going concern entity, i.e. before senior
Hybrids (b) -5 or more
unsecured losses or other types of default. Notch down according to the proximity of the
trigger, whilst respecting the credit hierarchy.

CRITERIA FOR RATING CORPORATE ENTITIES  May 2024 21

GLOSSARY OF TERMS/ACRONYMS USED IN THIS DOCUMENT AS PER GCR’S GLOSSARY
Bond A long term debt instrument issued by either a company, institution or the government to raise funds.

A provision that allows an Issuer the right, not the obligation, to repurchase a security before its maturity at an agreed price.
Callable
The seller has the obligation to sell the security if the call option holder exercises the option.

Capital
Expenditure on long-term assets such as plant, equipment or land, which will form the productive assets of a company.
Expenditure

The part of a financial system concerned with raising capital by dealing in shares, bonds, and other long-term debt
Capital Markets
securities.

Commercial
Commercial paper is a negotiable instrument with a maturity of less than one year.
Paper

Raw materials used in manufacturing industries or in the production of foodstuffs. These include metals, oil, grains
Commodity
and cereals, soft commodities such as sugar, cocoa, coffee and tea, as well as vegetable oils.

The range of risks emerging from the political, legal, economic and social conditions of a country that have adverse
Country Risk consequences affecting investors and creditors with exposure to the country, and may also include negative effects on
financial institutions and borrowers in the country.

A provision that is indicative of performance. Covenants are either positive or negative. Positive covenants are activities that
Covenant the borrower commits to, typically in its normal course of business. Negative covenants are certain limits and restrictions on
the borrowers' activities.

An opinion regarding the creditworthiness of an entity, a security or financial instrument, or an issuer of securities or financial
Credit Rating
instruments, using an established and defined ranking system of rating categories.

The possibility that a bond issuer or any other borrowers (including debtors/creditors) will default and fail to pay
Credit Risk
the principal and interest when due.

An undertaking in writing by one person (the guarantor) given to another, usually a bank (the creditor) to be answerable for
Guarantee
the debt of a third person (the debtor) to the creditor, upon default of the debtor.

The percentage by which the market value of an asset is reduced. The size of the haircut reflects the expected ease of
Haircut
selling the asset and the likely reduction necessary to realised value relative to the fair value.

A form of risk management aimed at mitigating financial loss or other adverse circumstances. May include taking an
Hedge
offsetting position in addition to an existing position. The correlation between the existing and offsetting position is negative.

International
An opinion of creditworthiness relative to a global pool of issuers and issues.
Scale Rating.

Issuer The party indebted or the person making repayments for its borrowings.

A long term rating reflects an issuer’s ability to meet its financial obligations over the following three to five year period,
Long-Term
including interest payments and debt redemptions. This encompasses an evaluation of the organisation’s current financial
Rating
position, as well as how the position may change in the future with regard to meeting longer term financial obligations.

National Scale
National scale ratings measure creditworthiness relative to issuers and issues within one country.
Rating

Notching A movement in ratings.

Ranking A priority applied to obligations in order of seniority.

Real Estate A REIT is a company that owns or finances income-producing real estate. REITs are subject to special tax considerations
Investment Trust and generally pay out all of their taxable income as distributions to shareholders.

Senior A security that has a higher repayment priority than junior securities.

Subordinated
Debt that in the event of a default is repaid only after senior obligations have been repaid. It is higher risk than senior debt.
Debt

Unsecured Claim Debt securities that have no collateral.

CRITERIA FOR RATING CORPORATE ENTITIES  May 2024 22

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employees, agents, representatives, licensors or suppliers, arising from or in connection with the information contained herein or
the use of or inability to use any such information.

NO WARRANTY, EXPRESS OR IMPLIED, AS TO THE ACCURACY, TIMELINESS, COMPLETENESS, MERCHANTABILITY OR FITNESS FOR ANY
PARTICULAR PURPOSE OF ANY CREDIT RATING, ASSESSMENT OTHER OPINION OR INFORMATION IS GIVEN OR MADE BY GCR IN ANY
FORM OR MANNER WHATSOEVER.

GCR hereby discloses that most issuers of debt securities (including corporate and municipal bonds, debentures, notes and
commercial paper) rated by GCR have, prior to assignment of any credit rating, agreed to compensate GCR for the provision of
those credit ratings opinions and services rendered by it. GCR also maintains policies and procedures to address the
independence of GCR’s credit ratings and credit rating processes.

CRITERIA FOR RATING CORPORATE ENTITIES  May 2024 23