Average Credit Rating Calculation Guide
S O LU T I O N S
Average Credit Rating Calculation Guide Clearwater Analytics contracts with three major Nationally Recognized Statistical Rating Organizations (NRSRO) in the U.S. to provide credit rating information on client holdings: Standard and Poor’s, Moody’s, and Fitch. Additionally, Clearwater receives credit rating data from Dominion Bond Rating Service (DBRS) for major Canadian Credit Rating Agencies. Clearwater also aggregates available data to provide security and portfolio ratings, monitor investment policy limits, determine credit rating exposure, as well as provide clients with access to credit events (upgrades, downgrades, and watch and outlook changes). Clearwater offers a number of settings to use when calculating average credit ratings and determining which ratings to use in the event of a split-rating. This user guide explains each option and how they impact your portfolio.
CREDIT RATING ACCOUNT SETTINGS Clearwater supports different options around the calculation of a portfolio average credit rating:
1. Simple or complex scale for weighted average credit rating calculations
2. Choice of Rating Agencies to include in the average rating calculation: S&P, Moody’s, Fitch, DBRS only; lowest or highest rating of any of rating agency ratings selected; middle of (second lowest) rating from the three NRSROs, etc.
3. Number of ratings required: clients can choose how to treat unrated securities and the effect of the lack of rating on the portfolio weighted average rating.
All these options are chosen by the client and can be accessed under the Rating portion of the Account Settings report (under settings > account settings on the Clearwater website).
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S O LU T I O N S
accounting. compliance. performance. risk.
www.clearwateranalytics.com
S O LU T I O N S
SIMPLE vs COMPLEX WEIGHTED AVERAGE METHODOLOGY Depending on the client’s choice, Clearwater can calculate portfolio weighted average credit rating using a simple or complex weight scale. The default weighted average calculation is a total market value weighted average (calculated using market value + accrued interest). The option to use a different basis for weighted average calculation could include (but is not limited to): units, book value, clean market value, or original cost.
Clearwater uses the following weighting scales for the average rating calculations. SHORT TERM RATINGS Generic ST Rating
S&P
MOODY’S
FITCH
DBRS
Simple Weight
Complex Weight
A-1+
A-1+
P-1
F1+
R-1 (high)
1
1
A-1
A-1
F1
R-1 (middle), R-1 (low)
5
70
A-2
A-2
P-2
F2
R-2 (high), R-2 (middle), R-2 (low)
7
180
A-3
A-3
P-3
F3
R-3
9
360
B
R-4
23
10000
C
R-5
23
10000
D
D
23
10000
23
10000
RD
23
10000
PIF
23
10000
23
10000
23
10000
NAV
23
10000
TWR
23
10000
B C D
D
NP
SD R SG
MIG4 VMIG4 WR
Withdrawn
NR
NR
NR
NR
Discontinued
23
10000
NA
NA
NA
NA
NA
23
10000
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S O LU T I O N S
LONG TERM RATINGS Generic LT Ratings
S&P
Moody's
Fitch
DBRS
Simple Weight
Complex Weight
AAA
AAA
Aaa
AAA
AAA
1
1
AA+
AA+
Aa1
AA+
AA(high)
2
10
AA
AA
Aa2
AA
AA
3
20
AA-
AA-
Aa3
AA-
AA(low)
4
40
A+
A+
A1
A+
A(high)
5
70
A
A
A2
A
A
6
120
A-
A-
A3
A-
A(low)
7
180
BBB+
BBB+
Baa1
BBB+
BBB(high)
8
260
BBB
BBB
Baa2
BBB
BBB
9
360
BBB-
BBB-
Baa3
BBB-
BBB(low)
10
610
BB+
BB+
Ba1
BB+
BB(high)
11
940
BB
BB
Ba2
BB
BB
12
1350
BB-
BB-
Ba3
BB-
BB(low)
13
1780
B+
B+
B1
B+
B(high)
14
2220
B
B
B2
B
B
15
2720
B-
B-
B3
B-
B(low)
16
3490
CCC+
CCC+
Caa1
CCC+
CCC(high)
17
4770
CCC
CCC
Caa2
CCC
CCC
18
6500
CCC-
CCC-
Caa3
CCC-
CCC(low)
19
8070
CC
CC
Ca
CC
CC(high)
20
10000
CC
20
10000
CC(low)
20
10000
C(high)
21
10000
C
21
10000
C(low)
21
10000
D
22
10000
22
10000
C
D
C
C
C
D
D
SD
RD
Dm
22
10000
PIF
23
10000
Withdrawn
23
10000
NAV
23
10000
TWR
23
10000
R WR
NR
NR
NR
NR
Discontinued
23
10000
NA
NA
NA
NA
NA
23
10000
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S O LU T I O N S
As an example, suppose an account holds three bonds, rated AAA, BBB, and CCC respectively. Asset
Rating
Market Value
Bond 1
AAA
$1,000
1
1
Bond 2
BBB
$1,000
9
360
Bond 3
CCC
$1,000
18
6500
9.33
2287
BBB
B+
Average Rating
Simple Weight
Complex weight
While assigning the rating for the values that fall between the values on the scale, Clearwater rounds to the closest rating scale value. For example, if you calculate the simple weight of 9.33, Clearwater would round it to 9, and therefore assign the average rating of BBB. Similarly, for complex rating we calculated the value of 2287, which lies between 2220 (B+) and 2720 (B); therefore the weight can be rounded to 2220 and the average rating of B+.
RATING AGENCY CHOICES Clearwater provides clients with the option to select which rating agencies’ data is used for the weighted average rating calculation, as well as which rating is selected. Clearwater currently supports: • • • • • • • • • • • •
S&P Only Moody’s Only Fitch Only DBRS Only Middle of (second lowest) of S&P, Moody’s, and Fitch Higher of S&P and Moody’s Lower of S&P and Moody’s Higher of S&P, Moody’s, and Fitch Lower of S&P, Moody’s, and Fitch Higher of DBRS and S&P Higher of S&P, Moody’s, DBRS and Fitch Lower of S&P, Moody’s, DBRS and Fitch
NUMBER OF RATINGS REQUIRED SETTINGS The Number of Ratings Required settings allow clients to determine the effect of non-rated securities on the average credit rating of the portfolio. Because there are various reasons why certain securities might not be rated by one or more NRSROs, clients can control the number of ratings required for the weighted average rating calculation. The following options are available: • 0 Ratings required: This option allows clients to exclude non-rates issues from the weighted average rating calculation effective applying the weight of 0. • 1 Rating required: The security is required to be rated by at least one of the rating agencies. Therefore if none of the agencies have a rating, the security will contribute to the weighted average rating with the weight of 23 under simple and 1,000 under complex methodology. The ratings of Withdrawn (WR), Terminated without Rating (TWR), Discontinued, or not available (NA) are some of the ratings that are considered not rated and carry the same weight.
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S O LU T I O N S
• 2 Ratings required: Similar to 1 Rating required, but security will receive the non-rated weight if less than 2 agency credit ratings are available. • 3 Ratings required: Similar to 2 Ratings required, but security will receive the non-rated weight if less than 3 agency credit ratings are available. The example below demonstrates the effect of 1 rating required and 0 ratings required settings: When the account is set to use 1 rating required, both the rating weight and market value of non-rated securities are included in the calculation of the weighted average credit rating of the portfolio. Number of Ratings Required=1 Asset
Rating
Market Value
Simple Weight
Bond 1
AAA
$1,000
1
1
Bond 2
BBB
$1,000
9
360
Bond 3
WR
$1,000
23
1,000
$3,000
11.00 BBB
Average Rating
Complex weight
453.667 B+
When the account is set to use 0 ratings required, both the rating weight and market value of non-rated securities are excluded from the calculation of the weighted average credit rating of the portfolio. Number of Ratings Required=0 Asset
Rating
Bond 1
AAA
Market Value $1,000
Simple Weight 1
1
Bond 2
BBB
$1,000
9
360
Bond 3
WR
excluded from the calculation $2,000
Average rating
Complex weight
5 A
180.50 A+
For more information, please contact your Clearwater account manager.
accounting. compliance. performance. risk.
www.clearwateranalytics.com
Average Credit Rating Calculation Guide Clearwater Analytics contracts with three major Nationally Recognized Statistical Rating Organizations (NRSRO) in the U.S. to provide credit rating information on client holdings: Standard and Poor’s, Moody’s, and Fitch. Additionally, Clearwater receives credit rating data from Dominion Bond Rating Service (DBRS) for major Canadian Credit Rating Agencies. Clearwater also aggregates available data to provide security and portfolio ratings, monitor investment policy limits, determine credit rating exposure, as well as provide clients with access to credit events (upgrades, downgrades, and watch and outlook changes). Clearwater offers a number of settings to use when calculating average credit ratings and determining which ratings to use in the event of a split-rating. This user guide explains each option and how they impact your portfolio.
CREDIT RATING ACCOUNT SETTINGS Clearwater supports different options around the calculation of a portfolio average credit rating:
1. Simple or complex scale for weighted average credit rating calculations
2. Choice of Rating Agencies to include in the average rating calculation: S&P, Moody’s, Fitch, DBRS only; lowest or highest rating of any of rating agency ratings selected; middle of (second lowest) rating from the three NRSROs, etc.
3. Number of ratings required: clients can choose how to treat unrated securities and the effect of the lack of rating on the portfolio weighted average rating.
All these options are chosen by the client and can be accessed under the Rating portion of the Account Settings report (under settings > account settings on the Clearwater website).
accounting. compliance. performance. risk.
www.clearwateranalytics.com
S O LU T I O N S
accounting. compliance. performance. risk.
www.clearwateranalytics.com
S O LU T I O N S
SIMPLE vs COMPLEX WEIGHTED AVERAGE METHODOLOGY Depending on the client’s choice, Clearwater can calculate portfolio weighted average credit rating using a simple or complex weight scale. The default weighted average calculation is a total market value weighted average (calculated using market value + accrued interest). The option to use a different basis for weighted average calculation could include (but is not limited to): units, book value, clean market value, or original cost.
Clearwater uses the following weighting scales for the average rating calculations. SHORT TERM RATINGS Generic ST Rating
S&P
MOODY’S
FITCH
DBRS
Simple Weight
Complex Weight
A-1+
A-1+
P-1
F1+
R-1 (high)
1
1
A-1
A-1
F1
R-1 (middle), R-1 (low)
5
70
A-2
A-2
P-2
F2
R-2 (high), R-2 (middle), R-2 (low)
7
180
A-3
A-3
P-3
F3
R-3
9
360
B
R-4
23
10000
C
R-5
23
10000
D
D
23
10000
23
10000
RD
23
10000
PIF
23
10000
23
10000
23
10000
NAV
23
10000
TWR
23
10000
B C D
D
NP
SD R SG
MIG4 VMIG4 WR
Withdrawn
NR
NR
NR
NR
Discontinued
23
10000
NA
NA
NA
NA
NA
23
10000
accounting. compliance. performance. risk.
www.clearwateranalytics.com
S O LU T I O N S
LONG TERM RATINGS Generic LT Ratings
S&P
Moody's
Fitch
DBRS
Simple Weight
Complex Weight
AAA
AAA
Aaa
AAA
AAA
1
1
AA+
AA+
Aa1
AA+
AA(high)
2
10
AA
AA
Aa2
AA
AA
3
20
AA-
AA-
Aa3
AA-
AA(low)
4
40
A+
A+
A1
A+
A(high)
5
70
A
A
A2
A
A
6
120
A-
A-
A3
A-
A(low)
7
180
BBB+
BBB+
Baa1
BBB+
BBB(high)
8
260
BBB
BBB
Baa2
BBB
BBB
9
360
BBB-
BBB-
Baa3
BBB-
BBB(low)
10
610
BB+
BB+
Ba1
BB+
BB(high)
11
940
BB
BB
Ba2
BB
BB
12
1350
BB-
BB-
Ba3
BB-
BB(low)
13
1780
B+
B+
B1
B+
B(high)
14
2220
B
B
B2
B
B
15
2720
B-
B-
B3
B-
B(low)
16
3490
CCC+
CCC+
Caa1
CCC+
CCC(high)
17
4770
CCC
CCC
Caa2
CCC
CCC
18
6500
CCC-
CCC-
Caa3
CCC-
CCC(low)
19
8070
CC
CC
Ca
CC
CC(high)
20
10000
CC
20
10000
CC(low)
20
10000
C(high)
21
10000
C
21
10000
C(low)
21
10000
D
22
10000
22
10000
C
D
C
C
C
D
D
SD
RD
Dm
22
10000
PIF
23
10000
Withdrawn
23
10000
NAV
23
10000
TWR
23
10000
R WR
NR
NR
NR
NR
Discontinued
23
10000
NA
NA
NA
NA
NA
23
10000
accounting. compliance. performance. risk.
www.clearwateranalytics.com
S O LU T I O N S
As an example, suppose an account holds three bonds, rated AAA, BBB, and CCC respectively. Asset
Rating
Market Value
Bond 1
AAA
$1,000
1
1
Bond 2
BBB
$1,000
9
360
Bond 3
CCC
$1,000
18
6500
9.33
2287
BBB
B+
Average Rating
Simple Weight
Complex weight
While assigning the rating for the values that fall between the values on the scale, Clearwater rounds to the closest rating scale value. For example, if you calculate the simple weight of 9.33, Clearwater would round it to 9, and therefore assign the average rating of BBB. Similarly, for complex rating we calculated the value of 2287, which lies between 2220 (B+) and 2720 (B); therefore the weight can be rounded to 2220 and the average rating of B+.
RATING AGENCY CHOICES Clearwater provides clients with the option to select which rating agencies’ data is used for the weighted average rating calculation, as well as which rating is selected. Clearwater currently supports: • • • • • • • • • • • •
S&P Only Moody’s Only Fitch Only DBRS Only Middle of (second lowest) of S&P, Moody’s, and Fitch Higher of S&P and Moody’s Lower of S&P and Moody’s Higher of S&P, Moody’s, and Fitch Lower of S&P, Moody’s, and Fitch Higher of DBRS and S&P Higher of S&P, Moody’s, DBRS and Fitch Lower of S&P, Moody’s, DBRS and Fitch
NUMBER OF RATINGS REQUIRED SETTINGS The Number of Ratings Required settings allow clients to determine the effect of non-rated securities on the average credit rating of the portfolio. Because there are various reasons why certain securities might not be rated by one or more NRSROs, clients can control the number of ratings required for the weighted average rating calculation. The following options are available: • 0 Ratings required: This option allows clients to exclude non-rates issues from the weighted average rating calculation effective applying the weight of 0. • 1 Rating required: The security is required to be rated by at least one of the rating agencies. Therefore if none of the agencies have a rating, the security will contribute to the weighted average rating with the weight of 23 under simple and 1,000 under complex methodology. The ratings of Withdrawn (WR), Terminated without Rating (TWR), Discontinued, or not available (NA) are some of the ratings that are considered not rated and carry the same weight.
accounting. compliance. performance. risk.
www.clearwateranalytics.com
S O LU T I O N S
• 2 Ratings required: Similar to 1 Rating required, but security will receive the non-rated weight if less than 2 agency credit ratings are available. • 3 Ratings required: Similar to 2 Ratings required, but security will receive the non-rated weight if less than 3 agency credit ratings are available. The example below demonstrates the effect of 1 rating required and 0 ratings required settings: When the account is set to use 1 rating required, both the rating weight and market value of non-rated securities are included in the calculation of the weighted average credit rating of the portfolio. Number of Ratings Required=1 Asset
Rating
Market Value
Simple Weight
Bond 1
AAA
$1,000
1
1
Bond 2
BBB
$1,000
9
360
Bond 3
WR
$1,000
23
1,000
$3,000
11.00 BBB
Average Rating
Complex weight
453.667 B+
When the account is set to use 0 ratings required, both the rating weight and market value of non-rated securities are excluded from the calculation of the weighted average credit rating of the portfolio. Number of Ratings Required=0 Asset
Rating
Bond 1
AAA
Market Value $1,000
Simple Weight 1
1
Bond 2
BBB
$1,000
9
360
Bond 3
WR
excluded from the calculation $2,000
Average rating
Complex weight
5 A
180.50 A+
For more information, please contact your Clearwater account manager.
accounting. compliance. performance. risk.
www.clearwateranalytics.com
