General explanations and definition of concepts 

International companies or institutions are those having subsidiaries branches, representatives, agents, having activities in many countries by using all technologic platforms and have entered and settled in other countries by benefiting from a centrealized administration. JCR ER rating methodology is separating the international financial institutions into 3 categories. 

• The transnational company and institutions,
• The supranational company and institutions,
• The multinational company and institutions.

When rating the international institutions JCR ER is making its analysis on the differences stated above and depending on the type of the institution.

The Transnational companies, are in theory a company whose capital shareholders’ origin and distribution are not given importance and are considered to be an international company with its management composed of persons coming from different countries. 

Supranational companies are companies that do not belong to any country, are established by an international agreement or registered with an international organization and are audited by their parent company, which is affiliated to this organization, which pays taxes to its parent company and thus loses its nation legally.

Multinational companies on the other hand are those companies which have been started to be managed from a certain country and where the activities in foreign countries are accepted as if they took place in the original country. According to another definition of multinational companies, although they have their head quarters at a specific country, their activities in one or many other countries are being coordinated by them and their branches and affiliates are being managed according to the management policy decided at the parent company. The companies within this group can be established on a region or global basis the multinational institutions are more focused on specific sectors or purposes and have a narrower shareholder/ownership structure and concentrate in specialized operations.

The supranational and the multinational companies are generally organized as banks and financial institutions. The multilateral development banks and other multilateral institutions due to their supranational status may not be subject to national or international jurisdiction or accounting system. These banks, including emerging countries whether funder or borrower are being characterized by a wide range membership. On top of that these bank’s operating geography is not limited to the member countries.  Each bank has a legal status specific to its own independent legal and operational position. However, they have a similar mission in terms of their duties.

The multilateral development banks MDB’s, are in emerging countries providing financial support and consultancy as loans and grants for investment projects and economic-social development operations and are institutions created by the gathering of different countries. 
The MDB’s except their capital, are getting borrowed funds from international capital markets and are providing these funds at long term to the emerging countries at the market interest rates. The Loans provided can be divided into 3 groups:

• Market interest rate based loan for countries with medium income level (Non-Concessional Lending Windows),
• Below market interest rate based loans for countries with low income (Concessional Lending Windows),
• The donations for the low income level countries (Donor).

The long-term loans lended below the market interest rate level, are being directly financed by the member countries participations. On top of that, technical assistance, counseling services or project preparation operations are being offered by some MDB’s within the scope of donations.

The Principles of Rating  
In the JCR ER rating methodology, the ratings of transnational companies and institutions, are being evaluated according to the JCR ER rating’s “Corporate Rating Methodology”. But the supranational companies and institutions and multilateral or multinational companies and institutions, are being rated according to the rules stated in this document with the status of the supranational and multilateral development banks.  

1. The supranational institutions and the multinational development banks are being rated within the same methodology. However, the due to the supranational status of the supranational institutions they are being provided only with the short term and long term foreign currency rating and don’t have national ratings. As for the multilateral development banks they have short term and long term foreign currency rating and in the event of special cases they can get national rating. If one country’s share in capital is major (more than 51 %) in the multilateral development bank’s shareholder structure and management,  and at the same time in case operations concentrated in one country instead of having operated from a region, besides the international foreign currency rating there can be a local rating based on country having the high level of concentration on the capital.
2. On the other side, it has been assumed that the correlation between the supranational institutions and the multinational development bank’s international rating and the sovereign rating of the member countries is low. But, the average score calculated according to the share of partner and member countries in capital and management and certain coefficients can be treated as a cap for the international foreign currency debt rating. 
3. The multilateral development banks sub group formed by;
   • Multinational development banks established on global base,
   • Development banks established on a multinational but regional basis ,
   • Multinational and sub-regional development banks, multinational financial institutions and banks focusing on specific sectors and specific purposes

   Although subject to subjectively separated criteria, they are rated within the same methodology in terms of financial risk.

4. From the financial analysis point of view the supranational institutions and the multinational development banks are analyzed under several headings. For the analysis of loans the separation of public and private, the guarantees obtained from the country treasury, the details of the project, the subsidiary structure and donations are being considered. On top of that the allocated loan limits and limit fullness ratios are also analyzed. The risk analysis is made under capital, funds and liquidity categories. Under the risk category, credit risk, market and operational risks and risk management system and the organization has to are evaluated. Based on time series current and historic profitability performances is examined together future plans and budgets.  In case of a debt instrument issue adequacy and time harmony (compliance with the maturity) of the cash flows to be produced for the principal and interest are examined.
5. At the subjective evaluations besides the financial analysis, structure of member countries, the analytical analysis of the operational areas of the institution on socio economic views, the compliance level to the principles of the corporate governance, mission and strategies are evaluated.

Rating Methodology of Debt Instruments 

Debt securities to be issued by multilateral development banks, multilateral financial institutions and other supranational institutions will be assessed in accordance with JCR-ER's rating methodology for debt instruments. Issues of other organizations similar to these organizations again will be assessed according to the methodologies established by JCR-ER.

Bond rating is the probability that the principal and interest of the bond will be paid in full and on time in other words a view for probability of default. In the methodological infrastructure of JCR ER, bond rating is based on the rating of the corporate local authority, the issuer. 

Depending on the specifics of the bond issued its rating can be above or below the rating of local authority. The bonds guaranteed by an institution having a higher rating or bonds issued as asset backed can obtain a higher rating than the local authority’s rating. 

Collateral is among the most important factors to determine probability of default and the recovery rate (from the creditors point of view how much risk does the investment carry) .

Collaterals; 

• The assets on and off the balance sheet of the institution issuing the bond
• Insurance
• Guarantee

can be provided in different ways.

The other assets on the balance sheet of the local administration, the off balance sheet assets and treasury bonds can be collateral. The quality and liquidity of the collateral are important factor on the credit risk of the bond.  Because a strong and liquid collateralization means a strong recovery in case of a default, it increases the rating of the bond. The asset backed bonds issued are considered fully collateralized.

if administrations are going to issue in foreign markets and want to avoid transfer and convertibilty risk they can insure the bonds. As rating of the insured bonds are free of country risk (systemic risk) and will be determined only regarding issuer’s risk, they are expected to have higher ratings compared to uninsured bonds. 

Structured finance bonds can be insured by “monoline” insurance companies. The monoline insurance companies are insuring the asset backed bonds issued by issuers of emerging countries, they also do insure the speculative rated securities called “sub-prime” of developed markets’. The interest rate margins of insured bonds are reflecting the insurer’s risk not the issuers. 

Another way for the issued bond to have a higher rating than the issuer’s rating is to be guaranteed. The guarantee can be provided by central government of local administration issuing the bond or external institutions (for example international institutions such as IFC-International Finance Corporation).  

The quality and liquidity of the collateral are important factor on the credit risk of the bond. Because a strong and liquid collateralization means a strong recovery in case of a default it increases the rating of the bond.