A Comparative Analysis of Internal and External Credit Ratings

Table of Content

List of Abbreviations

List of Figures and Tables

1 Introduction
1.1 Problem Definition and Objectives
1.2 Course of the Investigation

2 Credit Ratings
2.1 Definition of Credit Ratings
2.2 Function of Credit Ratings
2.3 Development of Credit Ratings

3 External Credit Ratings
3.1 Producer of External Credit Ratings - Credit Rating Agencies
3.2 Regulations of External Credit Ratings
3.3 General Credit Rating Process
3.4 Credit Rating Process for a Mid-Market Company at Standard & Poor´s
3.4.1 Methodology of Mid-Market Company Evaluation
3.4.2 Modifier of the Mid-Market Evaluation
3.5 User of External Credit Ratings
3.6 Criticism of External Credit Ratings

4 Internal Credit Ratings
4.1 Producer of Internal Credit Ratings - Financial Institutions
4.2 Regulations for Financial Institutions
4.2.1 Basel I
4.2.2 Basel II
4.2.3 Basel III
4.3 Rating Process of Internal Credit Ratings of Mid-Market Companies
4.3.1 Analysis of Quantitative Factors
4.3.2 Analysis of Qualitative Factors
4.3.3 Other Influencing Factors
4.3.4 Adjustment of Internal Credit Ratings
4.4 Use of Internal Credit Ratings
4.4.1 Credit Decision
4.4.2 Costs of Debt
4.5 Problems of Internal Credit Ratings and Their Assessment

5 A Comparative Analysis of Internal and External Credit Ratings
5.1 Motivation of Credit Ratings
5.2 Use, Risks, and Transparency of Credit Ratings
5.3 Cost of Credit Ratings
5.4 Assessment of Credit Ratings
5.5 Accuracy of Credit Rating Assessment

6 Impact of Credit Ratings for Mid-Market Companies in Germany
6.1 Definition and Situation of Mid-Market Companies in Germany
6.2 Necessity of External Financing for Mid-Market Companies in Germany
6.3 Risks of External Credit Ratings for Mid-Market Companies in Germany
6.4 Opportunities of External Credit Ratings for Mid-Market Companies in Germany
6.5 Requirements for Positive Credit Ratings for Mid-Market Companies in Germany

7 Conclusion
7.1 Key Differences and Similarities of Internal and External Credit Ratings for Mid-Market Companies
7.2 Key Factors for Mid-Market Companies in Germany
7.3 Further Scientific Research

Reference List

Appendix

List of Abbreviations

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List of Figures and Tables

Figure 1. Information Intermediation by Credit Rating Agencies

Figure 2. Symbols of the Principal Rating Agencies in 1929

Figure 3. A Comparison of Credit Ratings for Long-term Debt Issuer Scales by the Three Largest Rating Agencies

Figure 4. CRA’s market share in the EU (based on 2013 turnover generated)

Figure 5. The Mid-Market Evaluation Rating Scale of Standard & Poor´s

Figure 6. The Mid-Market Evaluation Rating Process of Standard & Poor´s

Figure 7. Determining The CICRA

Figure 8. Determining The Business Credit Profile

Figure 9. Combining The Business And Financial Credit Profiles To Determine The Anchor of “mm1” to “mm6”

Figure 10. Financial Policy: Impact on Anchor

Figure 11. Liquidity: Impact on Anchor

Figure 12. Standard Approach for Corporation

Figure 13. Mid-Market Funding for Investments in Germany

1 Introduction

1.1 Problem Definition and Objectives

In 2012, mid-market companies (KMU) based in Germany generated revenues of 2,149.0 billion Euros. They are responsible for 35,3% of all revenues generated in Germany. These mid-market companies employed 15.97 million people, a workforce of 59,6% of all employees in Germany (IFM Bonn, 2014). Clearly, mid-market companies are elementary for the German economy. To continue to be a primary motor of the economy, they need sufficient funding. Nevertheless, financing for mid-market companies in Germany will become more difficult. Standard & Poor’s Ratings Services (2015, pp. 2-3) estimated that European mid-market companies are going to have difficulties to meet their financing needs, as banks reduce their lending to the mid-market sector as consequence of stricter regulations. Especially, smaller mid-market companies face problems to access credit loans (Standard & Poor's Financial Services LLC, 2014, p. 3). The reason for these difficulties is the implementation of Basel III. Financial institutions have to deleverage their business during the next years (Zainzinger, 2013). The problem is that mid-market companies traditionally relied on bank funding. Especially German mid-market companies relied on credit loans from financial institutions (Huber & Simmert, 2007, p. 167-196). The new regulations for deleveraging create a “scarcity of finance for European companies”; it will generate an acute financing problem for mid-market companies (Dimitrijevic & Wade, 2014, pp. 1-2). In 2013, the German mid-market financing gap already amounted to 38,9 billion Euros (KfW, 2014, p. 7). Therefore, these companies have to find new funding sources. They have to find solutions to improve the access to external financing. Credit ratings provide an opportunity to help in this process.

The existence of credit ratings is widely known. They often appear in several newspapers, and magazines (Handelsblatt, 2014). Nevertheless, various mid-market companies cannot estimate the impact and importance of credit ratings. Specifically, differences between internal credit and external ratings are often unclear. This study compares internal and external credit ratings in order to see their importance, and why they provide the opportunity to improve the individual financial situation of mid-market companies. Even further, this study shows the relevant differences and similarities of internal and external credit ratings, and explains, why external credit ratings can help German mid-market companies in financing process. Financing is a fundamental factor in the success of a company. Without sufficient liquidity a company cannot invest, and without investments a company cannot grow. German mid-market companies need to ensure their financing in order to have sustainable success.

1.2 Course of the Investigation

The study explains the similarities and differences between internal and external credit ratings, and shows the impact and opportunities of credit ratings for mid-market companies in Germany. For this reason, this paper follows a clear structure. The paper starts with an introduction explaining the meaning, the function, and the development of credit ratings. Specifically, the overall concept of credit ratings needs to be understood. In the following chapters, external and internal credit ratings are presented. The paper focuses on two different rating procedures, which are applied to determine a credit rating for mid-market companies. Given the opportunities that external ratings provide to mid-market companies, the external credit ratings are explained in detail. The paper uses a mid-market evaluation from Standard & Poor´s to elaborate on the credit rating assessment. This evaluation shows the significant factors for a mid-market company. In addition, the study explains the purpose of internal ratings and elaborates the procedures within the banks. In this context, it is important that external and internal credit ratings are both regulated. Especially, internal credit ratings are heavily affected by the regulations of the Basel Committee. These regulations determine, how financial institutions should approach their credit rating assessment (Basel Committee on Banking Supervision, 2010). In order to understand, the internal rating approach it is critical to understand the development of Basel I, II, and III. The paper will therefore focus on these regulations. After the explanation of internal and external credit ratings, both ratings will be analyzed and compared. Specifically, the paper shows the relevant differences and similarities. It demonstrates, what mid-market companies and market participants should know about external and internal credit ratings, why certain aspects are important. The paper uses the explained information in order to demonstrate the impact, risks, and opportunities of credit ratings for mid-market companies in Germany. For this reason, the study will demonstrate the actual financial situation of mid-market companies in Germany, and will show that there is a need for new external financing sources. The paper will also show mid-market companies, how to receive a good credit rating, and how to improve their credit rating.

It is critical to understand that this study neither raises the claim to include all information available nor appears feasible to integrate the entire complexity of external and internal credit ratings. The study rather combines and summarizes the most relevant information in order to give an overview about credit ratings and their impact. Therefore, the paper is based on relevant literature and selectively includes empirical data. The study uses various sources from the Basel Committee, the most important rating agencies (Standard & Poor´s, Moody´s), the European Commission, and the European Security and Market Authority, and the “Initiative Finanzstandort Deutschland” (Today: “Dialogforum Finanzstandort Deutschland“). In addition, existing studies and academic literature help to explain certain phenomena in the area of credit ratings. Overall, the paper serves as a primer on internal and external credit ratings for mid-market companies and enables them to understand chances and challenges associated with the rating procedures.

2 Credit Ratings

2.1 Definition of Credit Ratings

A ‘rating’ can be defined as an evaluation of quality by a certain “score of assessment” (CollinsDictionary, 2015). As a logical consequence, there has to be somebody, who judges certain objects or individuals. This judgment needs to be based on certain criteria. A rating of objects or individuals, however, is not similar in every circumstance. The rating can vary through different criteria. As a consequence, ratings are established based on opinions, and, hence, are subjective. In addition, every rating needs to have a certain scale, which makes it comparable. In order to evaluate these objectives, there has to be a rating system. This means that an appropriate rating can be expressed as rather good or bad. Credit rating agencies usually use a rating system from AAA (prime) to D (default) for long-term debt issuer and a rating system from A-1 to D for short-term debt issuer (Standard & Poor’s Financial Services LLC, 2014).

A ‘credit rating’ can be defined as “an opinion about credit risk” (Standard & Poor’s Financial Services LLC, 2014a). This opinion is based on certain criteria. Credit risk in that sense means, whether any issuer is able to meet her or his financial obligation in accordance to the negotiated terms. A credit rating is an “ordinal ranking” for a certain credit quality of a borrower (Deb, Manning, Murphy, Penalver, & Toth, 2011, p. 4). Nevertheless, ratings are only opinions about the likelihood that certain issuer may default. They should not be seen as exact measures. Credit ratings show the relative level of credit risk. Overall, ratings are analyzed based on the provided internal information of the company, and external information of the market (Standard & Poor's Financial Services LLC, 2012). Therefore, a credit rating is an analysis of the credit risks associated with a financial instrument or a financial entity (The Economic Times, 2015). Credit ratings can be assigned to any entity that seeks to borrow capital, and has an obligation to repay this amount of capital, and cost of debt. These entities are evaluated by ratings agencies. Nevertheless, also financial institutions use credit ratings to measure the creditworthiness. Credit ratings help banks to decide whether to grant a loan and to which condition (Standard & Poor’s Financial Services LLC, 2015).

In general, credit ratings express a subjective opinion about the willingness and the ability of a borrower to repay its financial obligations in a specific time and in full amount. These ratings give an estimation of the relative likelihood to which an issuer may default, and show therefore the individual credit quality of an issuer (Standard & Poor’s Financial Services LLC, 2015). Importantly, credit ratings are entirely forward-looking, showing an evaluation of a range of qualitative and quantitative indicators (Deb et al., 2011, p. 4).

2.2 Function of Credit Ratings

Credit ratings are used to provide information for equity and debt investors, and help an issuer to raise debt. Moody´s defines the purpose of credit ratings as a task:

“to provide investors with a simple system of gradation by which future relative creditworthiness of securities may be gauged” (Moody's Investors Service, 2015). Credit ratings solve an informational problem. In financial markets, there is a lack of information between borrowers (issuers) and lenders (investors) (Deb et al., 2011, p. 4). The aim of credit ratings is to close this gap of knowledge, and therefore the gap of trust. Trust is essential for a financial transaction between two parties, in this context borrowers and lenders (Klein, 1997, pp. 29-45). Without the essential information of creditworthiness, there is no possibility that trust can be built, and that a financial transaction can occur. Hence, the problem is that creditworthiness is not observable. In order to estimate the creditworthiness, an investor would need to process a lot of quantitative and qualitative information. However, not all of these information are publicly available. Without the relevant information the investor could not elaborate on the creditworthiness. And even with all information, the process would be costly, and time-consuming. The alternative would be the usage of credit ratings from a credit rating agency (Adelson, 2012). Credit ratings are forward-looking and subjective information, which help the investor in his investment decision (Deb et al, 2011, p. 4). Overall, credit ratings reduce the cost of gathering information about an issuer (Adelson, 2012). In addition to the information intermediation, credit ratings help in the monitoring process (Figure 1). Credit ratings are not fixed; they have the opportunity to change over time. This also increases the informational value for investors. They can control their investment in a certain way, because they see the credit rating development (Deb et al, 2011, p. 5). In addition to their informational and monitoring role, credit ratings can be seen as ‘licenses’ for issuers that they are allowed to implement a financial transaction. Certain issuers would have problem to receive credit loans without credit ratings (Dittrich, 2007, pp 9-11).

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Figure 1. Information Intermediation by Credit Rating Agencies (Dittrich, 2007, p. 10).

Rating agencies are not the only ones, who use credit ratings. Also, financial institutions use credit ratings to determine the creditworthiness of borrowers. The major difference is the motivation for credit rating assessments. In the case of external credit ratings, agencies are hired by the respective issuer to evaluate the creditworthiness by analyzing the qualitative and quantitative information of the issuer. External credit ratings are used to increase the market transparency and decrease informational asymmetries between the issuers and potential investors. In the case of internal credit ratings, financial institutions rate the issuer in order to decide whether to grant a loan or not, and to which conditions. Both credit ratings mirror the likelihood of a full payment of an issuer in a certain time frame. Credit ratings do not reflect an absolute default probability, because it is not possible. All ratings only show a relative risk of default. Furthermore, as the relative risk can vary over time, credit ratings can also change due to changing external and internal factors (Dittrich, 2007, pp 9-15).

Apart from the informational role of credit ratings, they are used for ‘certification’ purposes. Credit ratings help “to distinguish between securities with different risk characteristics and to specify terms and conditions in financial contracts” (Deb et al, 2011, p. 5). Credit ratings can help to solve the moral hazard problem between an individual investor and a fund manager, because the credit ratings can be used to decide on an investment policy by limiting investments below a certain rating level (Deb et al, 2011, p. 6).

2.3 Development of Credit Ratings

The beginning of credit ratings can be traced back to the seventeenth century, where trading was a common business. Colonial importers tried to sell their objectives to the respective customers. Payments were often late, and the seller had to extend the credit up to one year (Klein, 1997, pp. 29-45). Gathering credible information about the buyer was not possible, because various reference documents were forged, and other detailed information were not available. As a consequence, the process of trading was full of risks. During the eighteenth and nineteenth century, where the trading market expanded, the need for credit information increased. In times of crisis, the need for information about creditworthiness is high, because all creditors are scared, whether they receive their invested capital. Lewis Tappan and his brother operated a silk business in the year of 1837, when a major crisis happened. As the silk industry collapsed, they held various detailed credit information from major companies. This information was so valuable that Lewis Tappan founded “The Mercantile Agency”, the first credit agency for mercantile, in 1841 (Partnoy, 1999, pp. 630-636). In the following years, the idea of credit ratings received attention. In 1860, Henry Varnum Poor published “History of the Railroads and Canals of the United States”. This publication was the first attempt to present detailed financial and operational information for investment purposes. It was seen as the first credit rating (Standard & Poor’s Financial Services LLC, 2015a). Shortly after, various American companies published analytical information about investment objectives, mostly bonds. In the following years, publications developed continually. The publications consisted of detail operating and financial information (Partnoy, 1999, pp. 637-640). In 1909, John Moody published his first manual “Analysis of Railroad Investments”. By 1924, the Moody´s ratings nearly covered 100% of the bonds market of the United States (Moody's Investors Service, 2015a). At the same time, three additional major rating companies tried to attack the US market, Fitch Publishing Company, Standard Statistics Company, and Poor´s Publishing Company. From that moment on, credit rating agencies acted as an information intermediary. The symbols of the ratings of 1929 remained nearly unchanged to the credit ratings today (Figure 2/3) (Partnoy, 1999, pp. 639-642).

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Figure 2. Symbols of the Principal Rating Agencies in 1929 (Partnoy, 1999, p. 642).

Shortly after 1929, some financial institutions relied on the external credit ratings. For example, large banks in New York used the ratings to compare them with their own ratings. Smaller banks could not afford the establishment of own ratings, and used agencies’ ratings exclusively as an authoritative guide to estimate the credit risk. All financial institutions used credit ratings to decide, whether they should emit a credit loan to a certain borrower. Until the 1970s, the credit ratings had some reputational problems, due to the fact that their ratings were not as accurate as the investor demanded it. The credit rating agencies had to fight for their position in the market. From the mid-1970s until 1999, credit rating agencies expanded heavily (Partnoy, 1999, pp. 644-649). Credit ratings nowadays have a high influence on the financial markets. Some market participants even think that their impact is too high (Kley, 2004, pp. 271-289)

During the latest financial crisis, credit ratings were seen as a threat to the financial markets, because large financial institutions trusted the credit ratings of the major rating agencies. The three biggest credit rating agencies (Standard & Poor´s, Fitch, and Moody´s) rated several collateralized debt obligations as “AAA” (prime), even if most of them were not prime investments. Many of them defaulted, or lost heavily in value. This leads to the fact that financial institutions lost tremendous amounts of capital (Acemoglu, Rogoff, & Woodford, 2010, pp. 161-207). Nevertheless, nowadays credit ratings play a major role in the financial markets. Investors believe in the rating agencies regardless of the type of the investment object (European Securities and Market Authority, 2015, pp. 8-9). Market participants trust in the opinion of credit ratings. Some of them only invest in investment objectives with an “investment grade”, meaning a rating from “AAA” to “BBB-“(Figure 3) (Standard & Poor's Financial Services LLC, 2015b).

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Figure 3. A Comparison of Credit Ratings for Long-term Debt Issuer Scales by the Three Largest Rating Agencies (Castiglioni, 2015).

3 External Credit Ratings

3.1 Producer of External Credit Ratings - Credit Rating Agencies

Credit rating agencies predict the default probabilities and estimate the credit quality for all debt issuers (Dittrich, 2007, p. 9). They provide credit ratings for the investors to reduce information asymmetries, and increase the level of trust, from which borrowers and lenders benefit. In the European Union, 23 credit agencies are certified and registered to rate debt issuer in accordance to the Regulation (EC) No 1060/2009 of the European Parliament and of the Council of 16 September 2009 on credit rating agencies (European Securities and Markets Authority, 2015a). In 2013, Moody´s, Fitch, and Standard & Poor´s had a revenue market share of about 90,44% in the European Union (Figure 4) (European Securities and Markets Authority, 2014, p.6). The market is therefore highly concentrated to these three credit rating agencies. Smaller credit ratings agencies are often concentrated in local areas, and focus their business on smaller companies, for example Creditreform Rating AG, Euler Hermes Rating GmbH and Scope Credit Rating GmbH. These rating agencies mainly evaluate mid-market companies in Germany (Handelsblatt, 2014).

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Figure 4. CRA’s market share in the EU (based on 2013 turnover generated) (European Securities and Markets Authority, 2014, p.6).

In general, credit rating agencies are private companies. They do not operate for any institution. In Europe, Standard & Poor´s is the biggest credit rating agency. Their goal is to help their clients, investors and all other market participants to have better information for their business judgments, and investment and financial decisions (Standard & Poor's Financial Services LLC, 2015b). This shows that the credit agencies see themselves as a support for financial markets; they want to “help” the market participants. In order, to support the participants, the highest interest is to predict the default risk as accurate as possible. Nevertheless, credit ratings are only relative measures of default risk.

3.2 Regulations of External Credit Ratings

During the financial crisis in 2007 and 2008, credit rating agencies were seen as a massive threat to the financial system as some prime-rated financial instruments were speculative investments. Various people thought that credit rating agencies were responsible to a certain extent of the financial crisis (FrankfurterRundschau, 2010). As one consequence, the European Parliament and the Council of Credit Ratings introduced a regulation (No 1060/2009) to restore market confidence, and to increase the protection of investors (European Commission, 2011). This regulation was revised in 2011 and in 2013 with the aim to introduce certain registration, disclosure, and authorization requirements for credit rating agencies, and to establish rules for higher transparency, and less conflict of interests. In addition, the European Parliament installed the European Security and Market Authority (ESMA) in order to regulate and control the external rating market (European Commission, 2014, p.2).

Today, external credit agencies are heavily regulated in the European Union. All registered credit ratings agencies have to submit their pricing policy for registration, and supervision, their rules of procedure, and their rating criteria (European Commission, 2014, pp. 2-5). The ESMA aims to strengthen the regulation even further in order to control the credit agencies. The organization requires that all rating reports, data, and outlooks of an issuer have to be submitted to the ESMA and the issuer. This submission has to be handed in at least twelve hours before the individual rating is published (European Commission, 2015, pp. 1-5). This process ensures that an issuer has the possibility to check the rating for possible mistakes, and inaccurcies (European Commission, 2015, pp. 4-5). All of these regulations aim to make ratings more objective and limit a potential issuer’s influence on a rating. Overall, the regulations try to increase the transparency of rating. The European Union recognizes the importance of credit ratings for the financial system. Nevertheless, the market power of credit ratings is so high that an own supervisor is needed; this function is fulfilled by the ESMA (European Commission, 2014, pp. 2-5).

3.3 General Credit Rating Process

The credit rating process is similar in all credit ratings agencies (Dittrich, 2007, pp. 9-15). Standard & Poor's structures the rating process in a strict way. Every issuer, including corporations, financial institutions, and governments, has to follow certain steps. There might be some differences with respect to structured finance instruments, as they require a more complex analysis with different rating criteria (Standard & Poor's Financial Services LLC, 2015c).

The first step of a rating process is the request by an issuer. After a contract has been negotiated and signed, the rating agency assigns an analyst team to review private and public information. On a continuous process, all information will be evaluated. The analyst team analyses every business component. During the process, the analysts meet with the management team to review and discuss information. After the analysis is completed, the team presents a first rating proposal to the rating committee. The rating committee evaluates the proposal, and decides on the credit rating. If the committee agrees with the proposal, the issuer will be informed by the credit rating agency. The issuer has the opportunity to check whether the facts are correct and presented in an accurate and precise manner. Finally, the rating will be published on the official website of the rating agency. The credit rating will be re-evaluated and adjusted on a regularly one-year basis for companies (Standard & Poor's Financial Services LLC, 2015c).

3.4 Credit Rating Process for a Mid-Market Company at Standard & Poor´s

A mid-market company evaluation is defined as a “forward-looking opinion about the creditworthiness of a mid-market company relative to other mid-market companies” (Standard & Poor’s Financial Services LLC, 2014a). It measures the capability of an issuer to meet its financial obligation. Standard & Poor´s (2014a) uses a customized analysis in order to assess the credit ratings for mid-market companies. The rating company uses a specific rating scale for mid-market ratings; it ranges from “MM1” (highest possible) to “MM8” (lowest possible) and “MMD” (default). These ratings only apply to a tenor of 365 days or longer. All of these ratings can contain a ‘+’ or a ‘-‘ symbol. These symbols indicate the outlook of the credit ratings (Standard & Poor’s Financial Services LLC, 2014a).

Standard & Poor´s (2014a) defines a mid-market company, if their respective revenue is below 1.5 billion Euros and their amount of debt is below 500 million Euros. In the case of companies, which are held by financial sponsors, the criteria are slightly different. The purpose of a mid-market company evaluation is to rate company entities, which want to issue public bonds or private debt. If a company exceeds the criteria and issues new debt, the global rating scale would be applied (Standard & Poor’s Financial Services LLC, 2014a). In the table below, all mid-market ratings at Standard & Poor´s are shown, and explained (Figure 5).

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Figure 5. The Mid-Market Evaluation Rating Scale of Standard & Poor´s (2014a).

3.4.1 Methodology of Mid-Market Company Evaluation

The methodology of a mid-market company evaluation follows certain steps (Figure 6). In order to determine a credit rating of a company, a business credit profile and a financial credit profile will be rated individually and then combined. The business credit profile includes the country risk (regulation, tax, political stability), the industry risk (growth, trends, new technology), and the competitive environment. The financial credit profile includes the level of debt to equity, and the cash flows analysis. Both profiles will result in an “Anchor”, a pre-rating for the mid-market company. This “Anchor” can be adjusted by four additional factors: capital structure, management/governance, financial policy, and liquidity. After the adjustment, the mid-market company will receive a final credit rating (Standard & Poor’s Financial Services LLC, 2014a). In order to provide an example of an evaluation, a prototype mid-market evaluation has been attached in the appendix (Figure I). This should clarify the complex process.

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Figure 6. The Mid-Market Evaluation Rating Process of Standard & Poor´s (2014a).

3.4.1.1 Business Credit Profile

The country risk affects the mid-market company as an external factor to meet its financial obligation. It varies from country to country. A country with fewer regulations and higher political stability is considered less risky than a country with stricter regulations and high corruption. Standard & Poor´s (2013) evaluates a country with regard to the economic situation, the political stability, the financial system, the effectiveness of institutions, and the culture of payments. The industry risk affects the mid-market company in a similar manner whereby industry-specific risk can vary significantly between the different industries. According to Standard & Poor´s (2013), industry risk is measured in terms of two aspects, first competitive risk and growth, and second cyclicality. The credit rating agency analyses the entry barriers to the specific industry, any market trends and the actual level of profitability, the risk of new products or services, and the risk of new technologies. After the analysis, the respective industry and market risk will be evaluated with a rating, ranging from “1” to “6”. In the case that a mid-market company operates in multiple industries or countries, a weighted-average is applied. In addition to both risks, certain key credit factors are included in order to identify the competitive position and debt situation of a company within the specific industry (Standard & Poor’s Financial Services LLC, 2013). Afterwards, the country risk and the industry risk are combined in the “Corporate Industry and Country Risk Assessment (CICRA)” (Standard & Poor’s Financial Services LLC, 2014a). The company receives a CIRCA rating based on the individual assessments of the country and industry risk (Figure 7).

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Figure 7 . Determining The CICRA (Standard & Poor’s Financial Services LLC, 2014a).

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