Credit Rating Agency Default Definition

From Open Risk Manual

Definition

The Credit Rating Agency Default Definition collects the Default Definition of European Credit Rating Agencies as explicitly disclosed at the ESMA website (indirect links are not included in the this table but may be available at ECAI websites).


Rating Agency Default Definition
A.M. Best (EU) Rating Services B.V. A.M. Best, along with credit markets in general, deems a non-insurer issuer default as having occurred when an issuer misses interest or principal payments on its obligations, restructures its debt in a way that is deleterious to investors, or files for bankruptcy.
ACRA Europe 1. Violation of continuity of financial and economic activities including a) termination of business activity without a universal legal succession of its rights and obligations to other business entities; b) positive ruling on bankruptcy in court; c) seizure of property by a third party, as a result of which the Rated Entity can no longer conduct business activities; d) performance of a bankruptcy procedure in line with the current legislation, if this procedure likely leads to one of the following situations.

2. The Rated Entity's current and/or future inability to service its financial obligations based on one or a combinations of the following credit events: a) unexecuted or delayed principal or interest payments in accordance with the Rated Entity's contractual obligations (excluding missed payments that fall within the contract-stipulated grace period); b) obligation acceleration provision due to accelerated provisions on any other similar obligation (cross-acceleration); c) obligation acceleration provision due to a declared default on any other similar obligation (cross-default); d) waiver or moratorium that prompts the counterparty to refuse a payment or dispute its legal obligations; e) debt restructuring that entails a unilateral withdrawal, deferment, or changes in the debt repayment schedule and/or interest rate that are viewed as less favorable by the creditors; f) asset substitution under the stress scenario, in which the following two conditions are met simultaneously: I. the Rated Entity offers its creditors new or restructured debt (in combination with other assets), whose discounted cash receipts are smaller than the discounted cash receipts on the original debt; II. said operation allows the Rated Entity to avoid bankruptcy or default on future payments; g) withdrawal or non-renewal of the Rated Entity's business operating license.

ARC Ratings, S.A. (previously Companhia Portuguesa de Rating, S.A) Lack of full and timely payment of capital or interest or of the occurrence of any event that explicitly indicates that the future full and timely payment of those commitments will not occur (e.g., in case of insolvency).
ASSEKURATA Assekuranz Rating-Agentur GmbH A default event for a certain enterprise, which is represented by D (Default), is given when at least one of the following has occured:

1.The enterprise has filed under any applicable bankruptcy, insolvency or winding up statute. 2.There is a failure to pay or satisfy an obligation in accordance with the underlying transaction documents and Assekurata believes that this default will subsequently be general in nature and include all obligations. 3.Independent of the issuer rating, securities described as a Distressed Exchange are downgraded to D. 4.Assekurata reserves the right to downgrade ratings to D, when it believes that a general default is imminent and unavoidable, although this is a less frequent and a more subjective decision.

AXESOR RISK MANAGEMENT An entity is considered to be in default if it has breached a financial obligation or if it is considered bound to do so. In this regard, all companies rated by axesor are classified in two categories: sound or in default. A company is considered to be in default when any of the following occurs:

a) The company has breached any of its financial obligations. b) The company is undergoing Insolvency Proceedings or in a situation involving similar protective measures. In the case of banks, we distinguish between failure and default in the sense that a failure is inability to continue with the activity in the absence of extraordinary support.

A securitization bond is considered to be defaulted if it has breached a payment of interest or principal as defined in the prospectus on each payment date. In regards to sovereign and sub-sovereign governments, the rating assigned by axesor measures the ability and willingness of sovereign (or sub-sovereign) issuer to fulfil its financial obligations with commercial creditors in full and on time. We consider that a sovereign government is in default if one of the following assumptions occurs: a) If upon expiration of any financial instrument (direct or issued by a sovereign, sub-sovereign and/or a decentralized body but guaranteed by the sovereign or sub-sovereign government) it does not pay the principal and / or interest / coupon payment accrued. b) If the refinancing / restructuring of any financial instrument occurred in worse conditions than the one maintained up to that moment.

BCRA-Credit Rating Agency AD FINANCIAL STRENGTH RATING OF BANKS - Inability of the Bank to meet its obligations, or such state is pending unless the Bank receives external aid.

CORPORATE RATING and LEASING COMPANY RATING - The Company is insolvent or in liquidation proceedings; it does not service its financial liabilities. RATING FOR THE CAPABILITY OF INSURANCE COMPANIES TO PAY CLAIMS - The competent authority took the decision to revoke the license. MUNICIPALITY RATING ? Occurrence of at least one of the following events: 1) there is a failure to make payment on principal or interest due or a delay thereby outside the stipulated grace period and beyond the materiality threshold; 2) there is a troubled restructuring of the obligation due to a material delay in payments, longer than 90 days, and the municipality is unable to continue servicing the debt; 3) the municipality is unambiguously unable to finance the activities and the services it normally provides. RATING OF PENSION INSURANCE COMPANY - The Company is insolvent and/or is in a procedure of being officially declared insolvent. SOVEREIGN RATING ? Occurrence of at least one of the following events: 1) there is a failure to make full payment on principal or interest due or a delay thereby outside the stipulated grace period. Missed, delayed, or partial payments are considered below the materiality threshold of this definition when those are due to a mere oversight and are corrected in a matter of days with full compensation for creditor losses; 2) there is a troubled restructuring of the obligation or a distressed debt exchange at conditions less favorable to the creditor, i.e., when the creditor suffers uncompensated losses due to a delay in repayment, interest forgiveness in part or in full, principal forgiveness in part, etc.; 3) there is a moratorium on debt service or another contingency which makes timely debt service impossible.

Capital Intelligence Ratings Ltd Capital Intelligence (CI) considers a default to have occurred when: (a) An issuer or obligor fails to pay a material sum of principal and/or interest on a financial obligation in accordance with its terms; (b) An issuer files for bankruptcy or similar protection from creditors ? unless there is reason to believe that debt service payments will continue to be made in a timely manner; (c) An issuer restructures, reschedules, exchanges or in some other way renegotiates a debt instrument and the following apply: (i) There is an adverse change to the terms of the original debt agreement; AND (ii) The renegotiation or exchange is considered by CI to be distressed or coercive. Adverse changes to the terms of the original debt agreement may include the following: ? A reduction in the principal amount or coupon/ interest rate. ? An extension of the maturity date or loan tenor. ? A reduction in seniority or a substantial weakening of covenants. ? A cash tender for less than par. ? A decrease in the frequency of payments (e.g. to bullet from amortising). ? Swapping debt for equity or hybrid instruments. A debt renegotiation or exchange is deemed to be distressed or coercive when one or more of the following apply: ? The issuer would, in CI?s opinion, be unable to honour its obligations under the original debt agreement due to its weak financial position. ? The issuer is unwilling to honour its obligations to those investors who choose not to participate in the renegotiations or exchange offer. ? The issuer threatens, explicitly or implicitly, to miss payments, weaken the governing indenture or to seek bankruptcy should the terms of its proposal or exchange offer not be accepted.
Cerved Rating Agency S.p.A. Default events include bankruptcy and similar proceedings, and certain unpaid financial obligations.
Creditreform Rating AG A default of a company or bond rating occurs if:

The company will probably not be able to fulfil its payment obligations to banks or other debts investors. Debtors or the company files for insolvency. A relevant obligation already is overdue for more than 90 days.

Indicators of imminent payment behaviour are: Debt investors/banks abandon a coupon payment (suspension of interest payment). Debt investors/banks have to sell their obligation with a loss (restructuring). The Creditreform database gives a strong indication for days overdue. A default of a structured financing occurs when an advised payment has not been paid.

CRIF Ratings S.R.L. CRIF Ratings records a default under its corporate methodology in the circumstances reported by the European Insolvency regulation and in case of missed payment affecting one or more specific debt instruments of an issuer. CRIF Ratings records a default under its SME methodology in the circumstances of public events of default (cases defined by the European Insolvency regulation).
Dagong Europe Credit Rating Srl (Dagong Europe) Issuer ratings:

Situations when Dagong would consider the issuer to be in a state of default include bankruptcy, liquidation, receivership or other winding-up process of the issuer. This is Dagong's opinion of default and it may differ from the definition of default in the documentation of the issuer's debt obligations or typically accepted local practice.

For debt instrument ratings default is typically defined as one of the following:

  • Failure to make payments (principal/interest) in accordance with the contractual terms of the rated instrument;
  • Bankruptcy, liquidation, receivership or other winding-up process of the issuer;
  • The issuer's creditors are forced to accept a distressed exchange of the instrument with a new security or package of securities that leads to a less valuable financial obligation (such as debt/equity swap or debt with a lower coupon or face value, lower seniority or with longer maturity) or the exchange seems aimed at avoiding the default of the issuer
Egan-Jones Ratings Co. (EJR) The payments on an obligation are not made on the date due even if the applicable grace period has not expired
Euler Hermes Rating GmbH A default of a rated entity generally occurs in one of the following cases:

1) a bankruptcy filing or legal receivership that will likely cause a miss or delay in future contractually obligated debt service payments; or

2) a missed or delayed disbursement of contractually obligated debt service payments, excluding missed payments cured within a contractually allowed grace period; or

3) a distressed exchange whereby an issuer offers creditors new or restructured debt instruments that amount to a diminished value relative to the debt obligations original promise; or

4) the rated entity is subject to material regulatory monitoring that will likely cause a miss or delay in future contractually obligated debt service payments.

A rated entity is in selective default if it fails to meet some or all of its payment obligations on a certain financial obligation or a certain class of obligations but continues to meet (some of) its payment obligations on other financial obligations or classes of obligations in a timely manner.

The default definition does not include (1) so-called technical defaults if any payment obligations that may arise here-under can be met or (2) payments owed on obligations that are missed due to technical or administrative errors as long as there is no doubt about the general ability and willingness to pay the obligations. EHR decides whether a default has occurred on a case-by-case basis depending on the concrete terms of the contracts and other fundamental conditions.

EuroRating Sp. z o.o. EuroRating considers a rated entity as defaulted where any of the following type of event has occurred:

a) a bankruptcy filing or legal receivership that will likely cause a miss or delay in future contractually required debt service payments; b) a missed or delayed disbursement of a contractually required interest or principal payment in respect to debt or debt-like obligations, unless payments are made within a contractually allowed grace period or are missed due to purely technical or administrative errors, which are not related to the ability or willingness to make the payments and are cured in a very short time; c) a distressed exchange of debt if the offer implies the investor will receive less value than the promise of the original securities; d) the rated entity enters under a significant form of regulatory supervision owing to its financial situation (this applies only to banks).

Feri EuroRating Services AG FERI's definition of default is applicable only to debt or debt-like obligations.The following events constitute a debt default under FERI's definition and will be marked with a Default. 'D' ratings indicate an issuer that in FERI's opinion

(i) will probably not be able to fulfill its payment obligations to banks or other debts investors or (ii) missed or delayed disbursements of a contractually ?obligated interest or principal payment (excluding missed payments cured within a contractually allowed grace period) or (iii) has entered into a distressed exchange or (iv) has entered into bankruptcy, filings, administration, receivership, liquidation or other formal winding-up procedure, or which has otherwise ceased business.

In addition, with respect to structured finance ratings, ratings in the 'CC' category and below are considered by FERI to be materially impaired. All such ratings are therefore also captured within CEREP default statistics in accordance with CEREP reporting requirements.A default of a sovereign marked as ?default? is defined as a situation when a principal or interest payment is missed on the due date (or within the specified grace period). A default occurs as well in the case of a distressed exchange, when the exchange serves to help the sovereign avoid missed interest or principal payments.

Fitch Ratings Limited Fitch's current definitions of default are the same for corporate Issuer Default Ratings and public and structured finance obligations' ratings and are as follows.

RD: Restricted Default.?RD? ratings indicate an issuer that in Fitch Ratings? opinion has experienced an uncured payment default on a bond, loan or other material financial obligation but which has not entered into bankruptcy filings, administration, receivership, liquidation or other formal winding-up procedure, and which has not otherwise ceased business. This would include: a. the selective payment default on a specific class or currency of debt; b. the uncured expiry of any applicable grace period, cure period or default forbearance period following a payment default on a bank loan, capital markets security or other material financial obligation; c. the extension of multiple waivers or forbearance periods upon a payment default on one or more material financial obligations, either in series or in parallel; or d. execution of a coercive debt exchange on one or more material financial obligations.

D: Default. ratings indicate an issuer that in Fitch Ratings? opinion has entered into bankruptcy filings, administration, receivership, liquidation or other formal winding-up procedure, or which has otherwise ceased business. In addition, with respect to structured finance ratings, ratings in the 'CC' category and below are considered by Fitch to be materially impaired. All such ratings are therefore also captured within CEREP default statistics in accordance with CEREP reporting requirements.

Prior to 01/01/2006 Fitch's rating scale was slightly different. The effective definition of default has not changed but the rating RD was introduced after 01/01/2006. Recovery values were reflected in the D rating category before 01/01/2006. After this date recovery values have been reflected in the individual ratings of securities and not in the Issuer Default Rating.

GBB-Rating Gesellschaft fuer Bonitatsbeurteilung mbH The default definition is the legal definition, i.e. a default occurs in case of moratorium respectively bankruptcy and missed payments for financial facilities as far it is not fixed as an option in the contract. A voluntary renunciation of payments from investor's side is not a default. GBB-Rating also reports a default if there is a missed payment of the coupon of a debt issue as far the missed payment is not covered by contractual terms of the legal agreement or investors voluntarily renouncing their right of payment.
HR Ratings de Mexico, S.A. de C.V. (HR Ratings) Default is a failure to meet these obligations on a timely basis and in the manner to which the parties had agreed. Default includes those cases in which creditors are forced (as determined by the Analysis Committee) to restructure debt as a result of the debtor's distressed financial circumstances.
ICAP Group SA According to ICAP's default definition

1. A corporate is considered to be in default: a) when it declared bankruptcy or is undergoing bankruptcy proceedings, b) upon the occurrence of events that indicate the inability of the corporate to fulfill its payment obligations.

2. A Corporate debt instrument is considered to be defaulted if at least one of the following applies: (a) the issuer is not able to pay its credit obligations, (b) the instrument-specific default clauses are enforced

Inbonis S.A It is considered that a company is in default when one of the following occurs:
  • The company is in default with respect to any financial obligation whose economic impact is of a significant amount.
  • The company has been declared insolvent or in a similar situation.

Inbonis monitors default information from public registers and credit bureaus.

INC Rating Sp. z o.o. INC Rating treated rated entity as defaulted in the case of any of the following events:
  • failure by the timely repayment of principal and / or interest due financial liabilities;
  • submission by the rated entity of an application for bankruptcy, receivership, liquidation or other form of cessation of activity by the entity;
  • an unfavorable from the perspective of creditors conversion of financial liabilities of the rated entity (a situation where creditors obtain a value lower than the value specified in the original terms of existing financial liabilities);
  • a remedial program of local government unit is approved by its supervisory authority.
Japan Credit Rating Agency Ltd "Default" means a state in which principal and/or interest payments of financial obligations cannot be made as initially agreed. This includes the state where JCR judges it is impossible that principal and interest payments of the financial obligations can be made as agreed due to filing of a petition for legal proceedings such as Bankruptcy, Corporate Reorganization, Civil Rehabilitation, or Special Liquidation proceedings.
Kroll Bond Rating Agency KBRA defines default as occurring if:

1) There is a missed interest or principal payment on a rated obligation under the contractual terms of the rated obligation, which is deemed to be highly unlikely to be recovered. 2) The rated entity files for protection from creditors, is placed into receivership or is closed by regulators such that a missed payment is likely to result. 3) The rated entity seeks and completes a distressed exchange, where existing rated obligations are replaced by new obligations with a diminished economic value. 4) An insurance operating company fails to meet its policyholder obligations.

modeFinance S.r.l. Company for which missed payments on a financial obligation are officially recorded, or under administration, or under liquidation status or under bankruptcy.
Moody's Investors Service Ltd Moody's definition of default is applicable only to debt or debt-like obligations. Four events constitute a debt default under Moody's definition:

a) a missed or delayed disbursement of a contractually obligated interest or principal payment (excluding missed payments cured within a contractually allowed grace period), as defined in credit agreements and indentures; b) a bankruptcy filing or legal receivership by the debt issuer or obligor that will likely cause a miss or delay in future contractually-obligated debt service payments; c) a distressed exchange whereby 1) an obligor offers creditors a new or restructured debt, or a new package of securities, cash or assets that amount to a diminished financial obligation relative to the original obligation and 2) the exchange has the effect of allowing the obligor to avoid a bankruptcy or payment default in the future; or d) a change in the payment terms of a credit agreement or indenture imposed by the sovereign that results in a diminished financial obligation, such as a forced currency re-denomination (imposed by the debtor, himself, or his sovereign) or a forced change in some other aspect of the original promise, such as indexation or maturity.

Moody's definition of default does not include so-called "technical defaults", such as maximum leverage or minimum debt coverage violations, unless the obligor fails to cure the violation and fails to honor the resulting debt acceleration which may be required. Also excluded are payments owed on long-term debt obligations which are missed due to purely technical or administrative errors which are 1) not related to the ability or willingness to make the payments and 2) are cured in very short order (typically, 1-2 business days).

Moody's also maintains a definition for "impairment" that includes all events constituting a default as well as a downgrade to Ca or C.

Nordic Credit Rating AS Following the failure to make principal or interest payments in accordance with the contractual terms of a rated financial instrument (after a contractual grace period, if applicable); upon bankruptcy filing or similar action; and upon completion of a distressed exchange, whereby existing debt obligations are replaced with a new obligation that is less than the original commitment (such as a swap of debt with lower coupon or face value, lower seniority, or with longer maturity) or the exchange is carried out in order to avoid a near-term default of the issuer.
Rating-Agentur Expert RA GmbH The non-fulfillment of any type of financial liabilities (for all types of entity) or insurance liabilities (for insurance companies) on time and in a full amount by the rated entity.
Spread Research SAS Spread Research defines a default as either

(i) a missed payment (post-grace period) on a coupon or the debt principal; (ii) an in-court restructuring (e.g. filing for bankruptcy; Chapter 11; in-court restructuring resulting in a debt-for-equity swap; etc.); or (iii) a liquidation.

Standard & Poor's Credit Market Services Europe Limited S&P Global Ratings generally record a default on the first occurrence of a payment default on any financial obligation, rated or unrated, other than a financial obligation subject to a bona fide commercial dispute.

With respect to S&P Issuer credit ratings, an obligor rated 'SD' (selective default) or 'D' is in default on one or more of its financial obligations including rated and unrated financial obligations but excluding hybrid instruments classified as regulatory capital or in non-payment according to terms. An obligor is considered in default unless Standard & Poor's believes that such payments will be made within five business days of the due date in the absence of a stated grace period, or within the earlier of the stated grace period or 30 calendar days. A 'D' rating is assigned when Standard & Poor's believes that the default will be a general default and that the obligor will fail to pay all or substantially all of its obligations as they come due. An 'SD' rating is assigned when Standard & Poor's believes that the obligor has selectively defaulted on a specific issue or class of obligations but it will continue to meet its payment obligations on other issues or classes of obligations in a timely manner. An obligor's rating is lowered to 'D' or 'SD' if it is conducting a distressed exchange offer. (For our similar default definitions for issue credit ratings and short term credit ratings, see Ratings Definitions, Feb 1, 2016).

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