Quantitative or Qualitative Analysis: What works best when evaluating the credit risk of LRGs?

Today’s market for local and regional governments is increasingly complex. Fiscal imbalances, slower tax revenue growth, and increased spending on social services have contributed to a challenging economic landscape.

Our U.S. State and Local Government and Non-US Local and Regional Probability of Default (PD) Scorecards for assessing the creditworthiness of public finance-level debt issuers takes a deep look at seven important risk dimensions:
• Institutional framework
• Economy
• Financial management
• Liquidity
• Budgetary performance
• Budgetary flexibility
• Debt and contingent liabilities

How does it work? Each risk dimension is assigned a weight, with all seven weights totaling 100%. A range of factors are evaluated for each dimension, and seven scores are created. The weighted average of the scores calculates a Probability of Default expressed as a numerical score between 1 (“strong”) and 10 (“weak”).

“Overriding factors” are considered, which can adjust the numerical score up or down. The final score is broadly aligned with the S&P Global Ratings’ scale or to your own internal credit rating system, with an associated PD estimate.

Quantitative factors play an important role in creating each score—but that isn’t enough for local and regional governments. Our approach takes into account five important qualitative factors that can have an upward or downward effect on the score:

1. Depth and diversity of the economic base
2. Organizational and financial flexibility
3. Budgetary performance
4. Expected financial improvement or deterioration
5. Unaddressed exposure to large unfunded pension obligations

Combining quantitative and qualitative factors based on in-depth market knowledge, forward-looking analyses, and a transparent scoring framework is essential to fully understand possible credit risks with local and regional governments.

If you would like to learn more about these 5 key qualitative risk dimensions and how to measure your exposure to LRGs, check out our blog.

For more information on how you can leverage our U.S. State and Local Government and Non-US Local and Regional PD Scorecard and associated workflow tools, please request a demo at https://pages.marketintelligence.spglobal.com/Risk-Insight-BlogVideo_8-LRG-Scorecard-Request.html.

To read the full blog, please go to https://marketintelligence.spglobal.com/blog/quantitative-or-qualitative-analysis.