S&P unveils new ratings model

International rating agency Standard & Poor's is to introduce a new partial guarantee model to help companies seeking to upgrade their credit ratings. The model marks a move away from the weak-link rating approach currently being used, where corporations have to provide 100% guarantees to enhance the ratings of their existing obligations.

Under the partial guarantee model, a company seeking to improve its rating can have a higher rated guarantor provide partial credit guarantee on its unsecured debt. This will allow corporations to attain specific target ratings with only a fraction of the total debt service of a new issuance.

S&P argued that companies in Latin America and other emerging markets stand to benefit most from the new rating methodology, since it will be an inexpensive and easily attainable way of reaching an investment-grade level and reduce their cost of financing in local and international markets.

"As Latin America and other emerging markets brace for a global economic downturn, companies located in these regions will have to look for creative ways to meet their local and cross-border funding needs," said Rosario Buendia, managing director of S&P’s Latin America structured finance group. "[To] meet the current needs of our customers, we will continue to monitor market developments and create products and services to help our customers meet their financing goals."

The partial guarantee model does have stipulations that limit rating upgrades. The maximum rating elevation for a company using this method is three notches, and the credit rating on the issue can never be equal to the rating of the guarantor. The model does not apply to short-term obligations and the guarantee must be in a form that is highly liquid and has little volatility.