The DBRS® short-term debt rating scale is meant to give an indication of the risk that a borrower will not fulfill its near-term debt obligations in a timely manner. Every DBRS rating is based on quantitative and qualitative considerations relevant to the borrowing entity.
Short-term debt rated R-1 (high) is of the highest credit quality, and indicates an entity possessing unquestioned ability to repay current liabilities as they fall due. Entities rated in this category normally maintain strong liquidity positions, conservative debt levels, and profitability that is both stable and above average. Companies achieving an R-1 (high) rating are normally leaders in structurally sound industry segments with proven track records, sustainable positive future results, and no substantial qualifying negative factors. Given the extremely tough definition DBRS has established for an R-1 (high), few entities are strong enough to achieve this rating.
Short-term debt rated R-1 (middle) is of superior credit quality and, in most cases, ratings in this category differ from R-1 (high) credits by only a small degree. Given the extremely tough definition DBRS has established for the R-1 (high) category, entities rated R-1 (middle) are also considered strong credits, and typically exemplify above average strength in key areas of consideration for the timely repayment of short-term liabilities.
Short-term debt rated R-1 (low) is of satisfactory credit quality. The overall strength and outlook for key liquidity, debt, and profitability ratios is not normally as favourable as with higher rating categories, but these considerations are still respectable. Any qualifying negative factors that exist are considered manageable, and the entity is normally of sufficient size to have some influence in its industry.
Short-term debt rated R-2 (high) is considered to be at the upper end of adequate credit quality. The ability to repay obligations as they mature remains acceptable, although the overall strength and outlook for key liquidity, debt and profitability ratios is not as strong as credits rated in the R-1 (low) category. Relative to the latter category, other shortcomings often include areas such as stability, financial flexibility, and the relative size and market position of the entity within its industry.
Short-term debt rated R-2 (middle) is considered to be of adequate credit quality. Relative to the R-2 (high) category, entities rated R-2 (middle) typically have some combination of higher volatility, weaker debt or liquidity positions, lower future cash flow capabilities, or are negatively impacted by a weaker industry. Ratings in this category would be more vulnerable to adverse changes in financial and economic conditions.
Short-term debt rated R-2 (low) is considered to be at the lower end of adequate credit quality, typically having some combination of challenges that are not acceptable for an R-2 (middle) credit. However, R-2 (low) ratings still display a level of credit strength that allows for a higher rating than the R-3 category, with this distinction often reflecting the issuer's liquidity profile.
Short-term debt rated R-3 is considered to be at the lowest end of adequate credit quality, one step up from being speculative. While not yet defined as speculative, the R-3 category signifies that although repayment is still expected, the certainty of repayment could be impacted by a variety of possible adverse developments, many of which would be outside of the issuer's control. Entities in this area often have limited access to capital markets and may also have limitations in securing alternative sources of liquidity, particularly during periods of weak economic conditions.
Short-term debt rated R-4 is speculative. R-4 credits tend to have weak liquidity and debt ratios, and the future trend of these ratios is also unclear. Due to its speculative nature, companies with R-4 ratings would normally have very limited access to alternative sources of liquidity. Earnings and cash flow would typically be very unstable, and the level of overall profitability of the entity is also likely to be low. The industry environment may be weak, and strong negative qualifying factors are also likely to be present.
Short-term debt rated R-5 is highly speculative. There is a reasonably high level of uncertainty as to the ability of the entity to repay the obligations on a continuing basis in the future, especially in periods of economic recession or industry adversity. In some cases, short term debt rated R-5 may have challenges that if not corrected, could lead to default.
A security rated D implies the issuer has either not met a scheduled payment or the issuer has made it clear that it will be missing such a payment in the near future. In some cases, DBRS may not assign a D rating under a bankruptcy announcement scenario, as allowances for grace periods may exist in the underlying legal documentation. Once assigned, the D rating will continue as long as the missed payment continues to be in arrears, and until such time as the rating is discontinued or reinstated by DBRS.
† R-1, R-2, R-3, R-4, R-5 and D are certification marks of DBRS Limited
The DBRS® long-term rating scale is meant to give an indication of the risk that a borrower will not fulfill its full obligations in a timely manner, with respect to both interest and principal commitments. Every DBRS rating is based on quantitative and qualitative considerations relevant to the borrowing entity. Each rating category is denoted by the subcategories "high" and "low". The absence of either a "high" or "low" designation indicates the rating is in the "middle" of the category. The AAA and D categories do not utilize "high", "middle", and "low" as differential grades. This scale is also used for preferred and hybrid instruments. References to interest throughout reflect dividend commitments, where applicable, for a preferred instrument. Within Canada, certain securities use the DBRS® Preferred Share Rating Scale.
Long-term debt rated AAA is of the highest credit quality, with exceptionally strong protection for the timely repayment of principal and interest. Earnings are considered stable, the structure of the industry in which the entity operates is strong, and the outlook for future profitability is favourable. There are few qualifying factors present that would detract from the performance of the entity. The strength of liquidity and coverage ratios is unquestioned and the entity has established a credible track record of superior performance. Given the extremely high standard that DBRS has set for this category, few entities are able to achieve a AAA rating.
Long-term debt rated AA is of superior credit quality, and protection of interest and principal is considered high. In many cases they differ from long-term debt rated AAA only to a small degree. Given the extremely restrictive definition DBRS has for the AAA category, entities rated AA are also considered to be strong credits, typically exemplifying above-average strength in key areas of consideration and unlikely to be significantly affected by reasonably foreseeable events.
Long-term debt rated "A" is of satisfactory credit quality. Protection of interest and principal is still substantial, but the degree of strength is less than that of AA rated entities. While "A" is a respectable rating, entities in this category are considered to be more susceptible to adverse economic conditions and have greater cyclical tendencies than higher-rated securities.
Long-term debt rated BBB is of adequate credit quality. Protection of interest and principal is considered acceptable, but the entity is fairly susceptible to adverse changes in financial and economic conditions, or there may be other adverse conditions present which reduce the strength of the entity and its rated securities.
Long-term debt rated BB is defined to be speculative and non-investment grade, where the degree of protection afforded interest and principal is uncertain, particularly during periods of economic recession. Entities in the BB range typically have limited access to capital markets and additional liquidity support. In many cases, deficiencies in critical mass, diversification, and competitive strength are additional negative considerations.
Long-term debt rated B is considered highly speculative and there is a reasonably high level of uncertainty as to the ability of the entity to pay interest and principal on a continuing basis in the future, especially in periods of economic recession or industry adversity.
Long-term debt rated in any of these categories is very highly speculative and is in danger of default of interest and principal. The degree of adverse elements present is more severe than long-term debt rated B. Long-term debt rated below B often have features which, if not remedied, may lead to default. In practice, there is little difference between these three categories, with CC and C normally used for lower ranking debt of companies for which the senior debt is rated in the CCC to B range.
A security rated D implies the issuer has not met a scheduled payment of interest or principal, the issuer has made it clear that it will miss such a payment in the near future, or in certain cases, that there has been a distressed exchange. In some cases, DBRS may not assign a D rating under a bankruptcy announcement scenario, as allowances for grace periods may exist in the underlying legal documentation. Once assigned, the D rating will continue as long as the missed payment continues to be in arrears, and until such time as the rating is discontinued or reinstated by DBRS. Where this scale is used for preferred securities, the non payment of a dividend will only be considered as a D if the missed payment constitutes default per the legal documents.
* Formerly referred to as "Bond and Long Term Debt"
The DBRS® preferred share rating scale is used in the Canadian securities market and is meant to give an indication of the risk that a borrower will not fulfill its full obligations in a timely manner, with respect to both dividend and principal commitments. Every DBRS rating is based on quantitative and qualitative considerations relevant to the borrowing entity. Each rating category is denoted by the subcategories "high" and "low". The absence of either a "high" or "low" designation indicates the rating is in the middle of the category. This scale may also apply to certain hybrid securities, in which case references to dividend throughout will reflect interest commitments of the hybrid security.
Preferred shares rated Pfd-1 are of superior credit quality, and are supported by entities with strong earnings and balance sheet characteristics. Pfd-1 securities generally correspond with companies whose senior bonds are rated in the AAA or AA categories. As is the case with all rating categories, the relationship between senior debt ratings and preferred share ratings should be understood as one where the senior debt rating effectively sets a ceiling for the preferred shares issued by the entity. However, there are cases where the preferred share rating could be lower than the normal relationship with the issuer's senior debt rating.
Preferred shares rated Pfd-2 are of satisfactory credit quality. Protection of dividends and principal is still substantial, but earnings, the balance sheet, and coverage ratios are not as strong as Pfd-1 rated companies. Generally, Pfd-2 ratings correspond with companies whose senior bonds are rated in the "A" category.
Preferred shares rated Pfd-3 are of adequate credit quality. While protection of dividends and principal is still considered acceptable, the issuing entity is more susceptible to adverse changes in financial and economic conditions, and there may be other adverse conditions present which detract from debt protection. Pfd-3 ratings generally correspond with companies whose senior bonds are rated in the higher end of the BBB category.
Preferred shares rated Pfd-4 are speculative, where the degree of protection afforded to dividends and principal is uncertain, particularly during periods of economic adversity. Companies with preferred shares rated Pfd-4 generally coincide with entities that have senior bond ratings ranging from the lower end of the BBB category through the BB category.
Preferred shares rated Pfd-5 are highly speculative and the ability of the entity to maintain timely dividend and principal payments in the future is highly uncertain. Entities with a Pfd-5 rating generally have senior bond ratings of B or lower. Preferred shares rated Pfd-5 often have characteristics that, if not remedied, may lead to default.
A security rated D implies the dividend or principal payment is in default per the legal documents, the issuer has made it clear that this will be the case in the near future or in certain cases, that there has been a distressed exchange. As such, the non payment of a dividend does not necessarily give rise to the assignment of a D rating. In some cases, DBRS may not assign a D rating under a bankruptcy announcement scenario, as allowances for grace periods may exist in the underlying legal documentation. Once assigned, the D rating will continue until such time as the rating is discontinued or reinstated by DBRS.
The DBRS® claims paying ability rating scale gives an indication of the risk that a borrower will not fulfill its full obligations in a timely manner. Claims paying ratings measure the capacity of an insurance company to pay its policyholder claims as they fall due. The rating for claims paying ability is the highest rating for an insurance company, since claims paying ability ranks ahead of all debt.
A claims paying rating of IC-1 represents superior credit quality. Companies attaining this rating category typically have above average strength in the key areas of asset quality, core profitability, and the balance sheet. The entities would also normally be characterized as companies with critical mass and some degree of market leadership in their core products.
A claims paying rating of IC-2 represents satisfactory credit quality. Companies in this category usually have no major long-term structural problems and are normally of sufficient size to have an influence in their key markets. Core profitability may be a weakness, but overall, IC-2 credits are considered to have the strength to work through any short-term negative factors that may exist.
A claims paying rating of IC-3 represents adequate credit quality. While the overall strength of insurance companies in this rating classification is acceptable, there are often weaknesses in asset quality, core earnings, and/or capital that make the company more susceptible to stress in periods of adverse economic conditions and create the possibility of poor experiences in the areas of claims and persistency. With some IC-3 credits, a better rating is restricted by competitive weaknesses or the presence of negative qualifying factors.
A claims paying rating of IC-4 is speculative. Insurance companies rated in this category normally have a meaningful weakness in at least one or two of the key areas of asset quality, capital, and profitability, and often lack critical mass and competitive strength in their key markets.
A claims paying rating of IC-5 is highly speculative. Major weaknesses create a high degree of uncertainty regarding the ability of the company to pay its claims on a continuing basis in the future, especially in periods of economic recession and/or adverse claims and persistency experience.
A security rated D implies the issuer has either not met a scheduled claims payment or the issuer has made it clear it will miss such a payment in the near future. In some cases, DBRS may not assign a D rating under a bankruptcy announcement scenario, as allowances for grace periods may exist in the underlying legal documentation. Once assigned, the D rating will continue as long as the missed payment continues to be in arrears, and until such time as the rating is discontinued or reinstated by DBRS.
An Income Fund stability rating provides an indication of both the stability and sustainability of the income fund's distributable income. Rating categories range from STA-1 to STA-7, with STA-1 being the highest. In addition, DBRS® further separates the ratings into "high", "middle", and "low" subcategories to indicate where they fall within the rating category. Ratings take into consideration the seven main factors of: (1) operating and industry characteristics; (2) asset quality; (3) financial flexibility; (4) diversification; (5) size and market position; (6) sponsorship/governance; and (7) growth. In addition, consideration is given to specific structural or contractual elements that may eliminate or mitigate risks or other potentially negative factors. Funds that have halted or deferred distributions will be carefully assessed and assigned to the category deemed most appropriate, given that fund's specific circumstances.
Income funds rated STA-1 have the highest level of stability and sustainability of distributions per unit. Funds with this rating have a superior combination of the following factors: good history of operating performance, outstanding financial flexibility, high quality assets, good diversification, large size in terms of breadth and scale of operations, and a strong industry structure. The fund is likely to have strong sponsors or owners or specific structural or contractual elements that eliminate or mitigate risks or other potentially negative factors.
Income funds rated STA-2 have very good distributions per unit stability and sustainability. The fund exhibits performance that is only slightly below the STA-1 category, typically shows above-average strength in areas of consideration, and possesses levels of distributable income per unit that are not likely to be significantly negatively affected by foreseeable events. The fund is above average in many, if not most, areas of consideration.
Income funds rated at STA-3 have good distributions per unit stability and sustainability, but performance may be more sensitive to economic factors, have greater cyclical tendencies, and may not be as well diversified as an STA-2, resulting in some potential for distributions per unit to fluctuate. The fund will not be above average in all areas of consideration, but will tend to outperform in many areas. STA-3 is usually the highest rating category for a new and smaller fund and also often represents a ceiling for some of the better commodity-oriented funds.
Income funds rated at STA-4 have adequate distributions per unit stability and sustainability, but distributions per unit are affected by one or more factors such as cyclicality, seasonality, and commodity price fluctuations, and economic cycles have a comparatively greater influence over performance when compared to higher rating categories. There may be concentration issues where a lack of diversity may affect stability.
Income Funds rated at STA-5 have weak distributions per unit stability and sustainability. The Fund is subject to many of the same cyclical, seasonal, and economic factors as in the STA-4 rating category, but the lack of diversification is generally more pronounced, and the Fund will tend to be below average in several areas.
Income Funds rated at STA-6 have very weak distributions per unit stability and sustainability. The Fund will tend to be below average in many areas of consideration. There may be a high degree of volatility associated with current levels of distributions per unit, and the ongoing operational performance and financial flexibility of the Fund is weak. The Fund may also be relatively new and small, and have limited sponsor support.
Income Funds rated at STA-7 have poor distributions per unit in terms of stability and sustainability. The Fund is below average in most areas of consideration. There is a high degree of volatility associated with current levels of distributions per unit. In addition, depending upon the specific circumstances, this category may also contain those Income Funds that have ceased distributions.
Under a standardized approach, servicers can be compared directly using the evaluations assigned that indicate their respective servicing competence. Servicers are evaluated based on eight criteria which include (a) Company Structure, Management Experience, and Outlook (b) Asset Administration, Reporting, and Customer Service (c) Loss Management (d) Technology and Systems (e) Financial Condition (f) Staff and Training (g) Procedures and Controls and (h) Outsourcing and Sub-Servicing Arrangements. Servicer evaluations may be taken as evidence of DBRS having assigned a capacity evaluation and may be relied on by third parties as such.
A servicer evaluation of "Superior" represents those entities that have exhibited a full understanding of the eight servicing criteria. In addition, they have received a positive review in implementation and execution of all of the facets of servicing. The entities would be characterized as companies that have seasoned servicing professionals, capacity to handle ebbs in workflow and exhibit market leadership.
A servicer evaluation of "Good" represents those entities that have exhibited positive review in most of the aspects of servicing but could fine tune some areas. Examples include servicers who have strong policies and procedures in place, yet may lose some efficiencies by lack of updated technology to monitor the loans. They may also have experience servicing assets outside of securitization and are entering securitization servicing as a new line of business.
A servicer evaluation of "Adequate" represents those entities that have exhibited a full understanding of the eight criteria reviewed by DBRS however lack a certain level of experience in implementation. Examples of these companies might include a new entrant to the market with experienced professionals and documented policies and procedures, yet do not have substantial volume to demonstrate execution.
A servicer evaluation of "Weak" represents those entities that have fallen short in one or more of the eight criteria, either in absence or lack of understanding. Examples include those servicers without documented policies and procedures, a lack of adequate staffing including or antiquated technology.
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