A credit rating is a formal assessment by an independent agency of a potential borrower’s relative creditworthiness. It indicates the borrower’s ability, capacity, and willingness to repay its debt. Rating agencies consider a number of financial, economic, and political factors when assessing a borrower’s creditworthiness. Credit ratings are widely used by banks and the financial sector to indicate the riskiness of a loan or bond.
PPIAF’s Sub-National Technical Assistance (SNTA) program can assist sub-national entities to prepare for and obtain credit ratings. The SNTA program can also provide technical assistance to improve the sub-national’s creditworthiness and address weaknesses highlighted by a rating assessment.
Sub-national entities are often perceived to be high risk borrowers, which increases their cost of borrowing funds. By obtaining formal (public) credit ratings, creditworthy sub-nationals can increase their pool of lenders, raise cheaper funds, and borrow without sovereign guarantees. Shadow, or confidential, ratings allow sub-nationals to identify the issues that need to be addressed to improve their creditworthiness before obtaining a formal rating.
Below are several examples of SNTA activities and related materials.
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In 2007 the government of Swaziland requested PPIAF assistance to improve the creditworthiness of key sub-national entities and facilitate their entry into regional finance markets. This activity assisted the Matsapha Town Board and the Manzini City Council to obtain long-term domestic credit ratings and concluded with a capacity building workshop on municipal creditworthiness and borrowing. A handbook on municipal creditworthiness was also prepared to provide guidance to municipalities seeking funds for capital infrastructure programs. The report provides a brief overview of the technical, management, and governance issues related to municipal borrowing. Please click here to read the handbook.
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In 2008 and 2009 the SNTA program helped six Peruvian sub-national entities obtain credit ratings as part of two activities to facilitate their access to commercial finance. As a result of this support, the Municipality of Lima obtained a $70 million commercial bank loan, the largest market-based financing ever obtained by a sub-national government entity in Peru. SNTA’s support also contributed to a $10 million commercial bank loan to the Regional Government of Arequipa, which was the first borrowing by a Regional Government in Peru without a sovereign guarantee. Read more about this activity in the impact story, PPIAF Helps Peruvian Sub-Nationals Tap Financial Markets.
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The Southern Africa Power Pool requested PPIAF support in 2009 to improve its members’ financial viability and access to market-based financing. A credit rating agency procurement guide was prepared as part of the credit advisory services to the utilities. The guide outlines the rating process and examines the rating methodologies of several international rating agencies. Please click here to read the full report.
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In 2009 the SNTA program helped three Mexican sub-national governments improve their creditworthiness through the first phase of the Regional Credit Rating Improvement Program. The three sub-nationals undertook credit diagnostic assessments and received a total of seven formal credit ratings. As a result of this support, the State of Guerrero obtained a $79.5 million commercial bank loan and the Municipality of Puebla obtained a $10.9 million commercial bank loan. The second phase of this activity is currently helping sub-national governments in Costa Rica and Argentina to improve their creditworthiness and obtain credit ratings.
Related materials:
Credit Rating Agency Procurement Criteria Documents
Handbook for Municipalities: Creditworthiness, Credit Ratings, and Borrowing to Fund Municipal Infrastructure
PPIAF Helps Peruvian Sub-Nationals Tap Financial Markets