Saha Corporate Governance and
Credit Rating Services

Credit Rating Methodology

Credit Rating Methodology

SAHA’s credit rating methodology is composed of criteria grouped under quantitative and qualitative topics, each contributing to the final grade with their specific weights.

The quantitative analysis components are

  • SAHA-Score
  • Industry comparative financial ratio analysis
  • Analysis of fund flows and free cash generation
  • Base-case and stress scenario financial projection analyses
  • Risk specific factors analysis

The qualitative analysis affecting the final rating covers

  • Industry risk analysis
  • Company risk analysis
  • Analysis of parent/subsidiary dependencies
  • Compliance with corporate governance principles
  • Analysis of shareholding structure

     

Quantitative Analysis

SAHA-Score

SAHA-Score, which carries a specific importance in the credit rating methodology of SAHA, is a scoring model that reflects a theoretical default probability, developed to discriminate default cases, based on the financial data of industrial companies listed on BIST since its establishment. SAHA-Score is an original modeling study based on data of institutions some of which which were and some of which still are active in Turkey, hence reflecting the structural characteristics of Turkish companies and markets.

Industry Comparative Financial Ratio Analysis

Another criterion within the scope of quantitative analysis is the result of a company peer comparison in the industry in terms of financial ratios and performance. Comparative ratios are examined under 6 categories, and the analysis is carried out on a total of 60 ratios. These categories are:

  • Liquidity ratios (13 ratios)
  • Cash ratios (9 ratios)
  • Financial structure ratios (16 ratios)
  • Operating ratios (10 ratios)
  • Profitability ratios (10 ratios)
  • Growth performance (2 ratios)

Analysis on Funds Flow and Free Cash Generation

Another evaluation within the scope of quantitative analysis is to distinguish the company’s funds flow sources and their allocation in recent years. The analysis aims to identify the efficiency of the company’s fund flows, their suitability to the characteristics of the field of activity, and the sources and causes of the inadequacies, if any.

In addition to the analysis of the composition of sources and uses of funds, the Cash Generation analysis examines the adequacy of the operational and free-cash generation capacity of the company compared to its liabilities, thus enabling a classification of the company’s liabiliy servicing performance.

Base-case and Stress Scenario Analysis on the Financial Projection

While the past performance and status quo of the company provide significant indicators, it is also important to diagnose future risks. Therefore, projections are based on the financial model of the company and different scenarios are analyzed.

The financial analysis model aims to analyze the the financial strength of the company under future base-case and stress-case scenario alternatives based on distinct assumptions.

Following the assumptions in the model classified as: a) General economic parameters and b) Operational and financial parameters of the company, two sets of projections for the next 5 years are generated for these parameters.

The base-case scenario assumptions are generated based on the company’s medium-term budget and planning projections. In this secnario, the performance of the company under the assumption that the activities planned under usual conditions will go on without major deviations is evaluated.

The stress-case scenario assumptions are obtained by determining the values that will create a future stress situation, taking into account the volatility of the general economic and operational/financial parameters.

Under these assumptions, the increasing and decreasing future trends of the company’s liabilities and the changes in overall risk to fulfill these obligations are evaluated.

Default Specific Risk Factors Analysis

Specific factors affecting the probability of default are evaluated separately. Some are:

  • Age
  • Size
  • Growth trends based on real sales income, volatility in variables such as real sales revenue, gross profitability, EBITDA, net Profitability and share market value

Qualitative Analysis

Qualitative Analysis consists of the risk factors related to the scope of activity, the corporate governance level of the company and the evaluation of the shareholders/parent company. The evaluation regarding the field of activity includes the evaluation of the industry and the position of the company within the industry.

Industry Risk

Industry risk covers the analysis and evaluation under sub-titles of factors such as the industry’s contribution to the economy and growth trend, competitive environment and conditions within, ease of entry, marketing channels and supply structure.

Company Risk

The main factors which constitute such risks are evaluated as the company’s strategy, market share and position, growth trend, production capacity and utilization, cost structure, product quality, organization and stability, as well as ability to access and diversity of financing sources, alternative financing sources, short/long-term liabiliy structure, off-balance sheet liabilities and accounting practices.

Parent/subsidiary Company Relationship

Another heading related to company risks is to be able to distinguish the risks decisive on rating which may arise in the event that the analyzed company is a parent company or a “captive” subsidiary company affiliated to the parent company.

While analyzing the parent companies; the number of affiliates, industry and strategic compatibility, the size of the related party, commercial and financial relations, the scale of mutual obligations, consolidation scope of the financial reports, and the possible risks that the affiliates may reflect are taken into account.

In case of a subsidiary company, the following are scrutnized: The incorporation of the parent company, its governance, alignment of parent and subsidiary companies in terms of their fields of activity, their commercial and financial relations, mutual guarantees and obligations.

Compliance with the Corporate Governance Principles

Another important subtitle of qualitative analysis aims to distinguish the company’s corporate governance risks. The level of compliance of the company with corporate governance principles is the standard criterion in this regard. The corporate governance competence analyzed within the scope of credit rating is not as comprehensive as the corporate governance rating study, instead it questions compliance to basic principles in general terms.

If the company already has a valid corporate governance rating from an authorized rating agency, this rating is used. If not, a rating is determined within the scope of the credit rating project.

Shareholders

Shareholders are one of the determining factors in the company’s credit risk level. While reviewing the shareholders’ risk, both the reputation of the shareholders and the importance of the company for the shareholders are taken into account.

Regarding the reputation of the shareholders, the corporate/structural quality, age, size, past performance and corporate governance and credit rating of the main partner are taken into account. While considering the importance of the company for the shareholders, factors such as the strategic position of the main partner, participation rate in the company, the compatibility and complementarity of the company and the main partner’s fields of activity, the control level of the main partner, its effect on the decision-making procedure, the guarantees and sureties are evaluated.