Understanding "Issue Rating" Applicability: A Simplified Guide

Imagine you're a bank assessing the risk of a loan you've made. Credit rating agencies can help by assigning ratings to the
borrower (issuer) or specific issues (bonds). This guide explains how those ratings apply to your unrated claims.

Key factors:

 Issue rating: Applies to a specific debt instrument (e.g., a particular bond).

 Issuer rating: Applies to the borrower's overall creditworthiness, typically for senior unsecured claims.
 Pari passu: Claims rank equally in repayment priority.
 Subordinated: Claims rank lower in repayment priority than other claims.

Scenarios:

1. Bank invests in a rated issue: Use the issue rating for your risk weight calculation.
2. Bank holds an unrated claim, and borrower has a rated issue:
o Claim ranks pari passu or senior to rated issue: If the issue rating's risk weight is lower, use it for your claim. Both
issues must mature by the same date or earlier.
o Claim ranks lower than rated issue: Use the unrated claim risk weight.
3. Bank holds an unrated claim, and borrower has an issuer rating:
o Claim is senior unsecured: Use the issuer rating if it's high quality. Otherwise, use the unrated claim risk weight.
o Claim is not senior unsecured: Use the unrated claim risk weight, even if the issuer rating is high quality.
4. Applying a rating to multiple claims: Apply the chosen rating to ALL your credit exposure (principal and interest) with the
same counterparty if it meets the criteria.
 5. Double counting: Don't consider credit enhancement techniques already reflected in the chosen rating agency's rating.
6. Foreign currency ratings: Use them only for foreign currency exposures.

Picture/Table Example:

Scenario Claim Rank Issuer Rating Issue Rating Risk Weight

Issue rating risk

Invest in rated issue N/A N/A Issue rating
weight

Unrated claim, pari passu to High Low risk

Pari passu Low risk weight
rated issue quality weight

Unrated claim, pari passu to Low Unrated claim risk

Pari passu N/A
rated issue quality weight

High High quality issuer

Unrated senior claim Senior N/A
quality risk weight

High Unrated claim risk

Unrated subordinated claim Subordinated N/A
quality weight

drive_spreadsheetExport to Sheets

Remember: This is a simplified explanation. Always consult the full regulations and seek professional advice for complex situations.
EXAMPLE-2-Applicability of Issue Rating to Issuer/Other Claims: Simplified
Explanation
Imagine you're a bank and you're lending money to different companies (borrowers). You want to know how risky
each loan is so you can manage your money wisely. Credit rating agencies help with this by assigning ratings like
"A" (good) or "C" (bad) to borrowers and their specific debt issuances.

This section of the regulation tells you how to use these ratings to assess the risk of your loans:

1. Specific Issue Rating:

 If you invest in a specific debt issue that has a rating, use that rating for your risk assessment.
 If your loan isn't for that specific issue, but the borrower has a rating for another debt, you can use that
rating only if:
o Your loan ranks equally or higher (pari passu) than the rated debt.
o Your loan matures before or at the same time as the rated debt (except for short-term debt).

2. Issuer Rating:

 An issuer rating usually applies to senior unsecured loans to that company.

 So, only senior unsecured loans benefit from a high issuer rating.
 Other unrated loans to a highly rated issuer are still treated as unrated.
 If either the issuer or a specific issue has a low rating, any unrated loan to the same company gets the same
low rating.
3. Extending Ratings to Other Loans:

 If you use a specific issue or issuer rating for one loan, you should apply it to all your loans to that company,
for both principal and interest.

4. Avoiding Double Counting:

 Don't consider credit enhancements (like collateral) if they're already reflected in the rating.

5. Using Ratings for Similar Loans:

 If you don't have a rating for a specific loan, you can use the rating of a similar loan to that borrower, but only
in the same currency.

Visuals:

Here's a table summarizing the key points:

Use Issue
Scenario Use Issuer Rating?
Rating?

Specific issue investment Yes No

Unrated loan, same maturity, pari passu or

Yes No
senior
 Unrated loan, different maturity or
No No
subordinate

Senior unsecured loan No Yes

No, unless issuer/issue has low

Other unrated loan No
rating

Example:

 Company A has an issuer rating of "A" and a specific debt issue (Debt 1) rated "B".
 You invest in Debt 1, so your loan's risk is based on the "B" rating.
 You also have a senior unsecured loan to Company A. You can use the issuer rating ("A") for this loan.
 You have another loan to Company A that's not senior unsecured and matures later than Debt 1. You can't use
either the issuer or specific issue rating for this loan, so it's treated as unrated.

Remember, this is a simplified explanation. The actual regulation has more details and nuances. If you have any
specific questions, it's best to consult a financial professional.
EXAMPLE-3- Applicability of Issue Rating to Issuer/Other Claims: Simplified
Explanation
Imagine a bank lending money to a company. The bank wants to know the risk of not getting its money back. This risk is called
credit risk.

Issue Rating:

 Sometimes, the company's specific debt (called an "issue") has a credit rating from an agency like Moody's or S&P. This
rating gives an idea of the risk of not getting THAT specific debt repaid.

Applying Issue Rating to Other Claims:

 The bank's loan may not be for the same specific debt as the one with a rating. So, how do we use the rating to assess the
risk of the bank's loan? Here are the general rules:

1. Pari Passu or Senior Claims:

 If the bank's loan ranks equally (pari passu) or higher than the rated debt, and matures before or at the same time, then the
bank can use the issue rating for its loan.
 Think of it like a queue. If the bank is at the front of the line, and the rated debt is behind it, then the bank gets paid first,
even if the company defaults.

2. Issuer Assessment:

 If the company has a general credit rating (issuer assessment), it only applies to senior unsecured claims.
  Think of it like different types of seats on an airplane. First class gets priority, but economy class still gets paid before the
baggage handlers.

3. Low Quality Assessment:

 If either the issuer or a specific issue has a low rating, any other unrated loan to the same company gets the same low
rating, regardless of its seniority.
 Think of it like a red flag. If the airline is known to be risky, even the first-class passengers might not get their money back.

4. Double Counting:

 If the credit rating already considers things like collateral, you can't count them again when assessing the bank's loan.
 Think of it like insurance. You don't need two fire alarms in your house.

5. Foreign Currency Ratings:

 Use foreign currency ratings only for loans in that currency.

 Think of it like speaking different languages. A Spanish rating doesn't tell you anything about the risk of a loan in dollars.

Examples:

 Company A has a rated bond and a bank loan. The loan ranks equally with the bond and matures before it. The bank can
use the bond rating for the loan.
 Company B has a high issuer rating and a bank loan that is not senior. The bank loan gets the unrated claim risk weight.
 Company C has a low issuer rating and a bank loan. The bank loan gets the same low risk weight as the issuer rating.