Public Enterprises Rating Methodology
Public Enterprises Rating Methodology
  • A-
  • A
  • A+

In the JCR ER methodology; in which central administrations or local governments have the majority in the voting, control and management or directly or indirectly more than half of the share structure, and based on commercial, industrial and agricultural principles;

•    With businesses operating for profit,t
•    Businesses that produce or market monopoly goods and services for the public interest, 


It is considered as a public enterprise as a whole, if it has a full bookkeeping system and can borrow and lend on its own behalf. This comprises public banks, privatization portfolio institutions, and municipal government businesses. 

Even if they fall under the category of public enterprises, the following institutions are not included in this ranking methodology;

•    Except in exceptional circumstances, organizations that do not cover more than half of their operating expenses from sales revenue and receive assistance from local or central governments over time are excluded from this rating methodology, assuming that they cannot sell the majority of their products at an economically meaningful price in the JCR ER system. 
•    The rating methodologies of public banks, which are majority owned by the government, are also dissociated and differentiated from those of public enterprises. 
•    Enterprises with a special status (General Directorate of the National Lottery in Tü
rkiye, Spor Toto Organization and so on), which do not have the status of a company but have the quality of public enterprises in terms of their operations, are not rated according to the methodology of public enterprises. 

The extent to which they are subject to private law provisions in terms of auditing, accounting, budgeting, and employment policies, their competitiveness as a trader, and their general separation from central/local governments, as well as their autonomy and commercialization, are all considered positive factors. In this respect, public enterprises are evaluated in three categories in the JCR ER methodology. These are:

•    Institutions with high integration with the public,
•    Public policy based institutions,
•    Institutions without a public policy based work mission.


Institutions with a high level of public integration are generally used to carry out government projects, and all of their capital and administration are provided by central administration institutions. The international ratings of such institutions are closely tied to the country rating. Ministries, state oil monopolies, deposit insurance fund, export credit institutions are in this category. Governments are always assumed to have a theoretical guarantee on their requirements. Full operational and even financial support is provided by central administrations. 

Public policy based institutions have a somewhat lower level of integration with government, rather than operating for the execution of government programs. They differ slightly from institutions with substantial public integration in terms of separation, autonomy, and commercialization criteria. It is not generally considered that governments have theoretical guarantees on their liabilities, and international ratings of such institutions may not be very closely tied to country ratings.  

Organizations that do not have a public policy-based work mission, on the other hand, are quite advanced in terms of separation, autonomy and commercialization criteria. Despite the fact that they operate under market conditions and are regulated, they are frequently excluded from government guarantees. Generally, private sector initiatives for capital and management are involved in such organizations together with the public.

JCR ER ratings of public enterprises are essentially close to the methodology applied by JCR ER for private sector enterprises. However, in addition to the method applied for private sector companies and the factors discussed, the dividend, capital, duty losses they undertake and the compensation forms of these losses, income losses of public enterprises are examined especially and separately. On the other hand, because the priority of financial and non-financial factors differs between public and private sector organizations, JCR ER differentiates the weighting coefficients of these criteria for public enterprises. Again, subset weights and ranking priorities of financial criteria are applied differently compared to private sector companies. Because, in the JCR ER systematic, it is assumed that the reliability level of financial information of public institutions will be higher than that of the private sector. Non-financial rating criteria are also differentiated compared to private sector companies. Another difference is that the values taken as reference for financial factors and ratios are naturally differentiated by taking the country averages for public enterprises.

A public institution, on the other hand, is differentiated by having a high level of public integration, being a public policy based institution, or having a public policy based work mission is also a considered as criterion and is more important in determining support ratings.   

Debt Instruments Rating 
In the JCR ER methodology, corporate credit ratings of firms, central governments, local administrations, public enterprises, financial institutions and similar issuers are taken as the basis for rating debt instruments. Corporate credit ratings already include specific, systemic, transfer and convertibility risks. Therefore, on top of the corporate credit rating the debt instruments; 


•    Guarantee structure,  
•    Being insured or not, 
•    Being under a guarantee scheme or not, 
•    Maturity, 
•    The level of protection of the investors 


being evaluated separately, the results being calculated from these factors are being added to the corporate credit rating and do form a new independent rating for the debt instruments. If there has not been established a guarantee structure for the debt securities, the credit rating and the issuance rating are generally at a similar level. In this context; except the stock securities and the perpetual bonds, the capital instruments which might be issued as debt instruments or securities in general differ among them according to the rights, possibilities, risks, the issuer institution, the issuers guarantees have been stated as below.      

1.    Bonds
1.1.    Government bonds and Treasury bonds 
1.2.    Secured and Unsecured Bonds
1.3.    Bonds with Premium, Bonds at par
1.4.    Lottery Bonds  
1.5.    Participation Bonds
1.6.    Fixed and Floating Interest Rate Bonds
1.7.    Registered and Bearer Bonds
1.8.    Bonds Convertible with Securities
1.9.    Convertible Bonds
2.    Profit and Loss Participation document
3.    Profit and Loss Participation Documents Convertible to Securities
4.    Bank Bonds and Bank Guaranteed Bonds
5.    Financial Bonds  
6.    Asset Guaranteed Securities 
7.    Covered Bonds
8.    Asset Backed Securities
9.    Shareholder Warrants
10.    Intermediary Institutions Warrants
11.    Sukuk 
12.    Real Estate certificates
13.    Investment Fund Participation Documents 
14.    Future and Option Agreements
15.    Precious Metal Bonds (Gold, Silver, Platin Bonds) 


Although their restrictions do vary from country to country the debt instruments can be issued by governments, local authorities, public businesses, corporates, financial institutions. When the saving volume accumulated in the local capital markets, is not in a position to meet the demand for fund in the market and/or the interest rates in the local markets differ from the interest rates prevailing in the international markets, those who want to benefit from the lower interest rates in foreign markets and those in need of funding, can issue debt instruments, primarily foreign currency bonds, in foreign markets.

According to the JCR ER rating methodology, the rating of debt instruments is based on the credit rating of the issuing institution, and depending on the characteristics of the debt instrument and it can sometimes be above or below the rating of the issuing institution. The debt securities guaranteed by an institution with a higher rating or any asset backed  debt instruments or income flow backed debt instruments issued can have a higher rating than the issuing institution’s rating.   

The rating of Capital Market debt instruments is an opinion on the probability of timely and full payment of the principal and interest of the security in question. In this respect, naturally, the solvency of the security depends on the opinion of the default probability of the issuer company. Even though the issue ratings given by JCR ER in this regard indicate the default risk, they are not an absolute default risk criterion, they are only a comparison of different debt instruments in standard risk categories with respect to each other.

While examining the default risk of capital market debt instruments, factors that will affect the default probability and loss amounts at the time of default are taken into account.
For the probability of default, inferences made from historical default data are taken into account. Loss at the time of default, on the other hand, is basically a function of the amount of use at the time of default, but also depends on many different qualitative factors such as the legal regulations of the countries, investor rights, follow-up systems, enforcement-bankruptcy laws, assets under guarantee of debt instruments.


The loss at the moment of default or the rate of recovery are being impacted heavily by the factor and the most important being the guarantee of the debt instruments. Securitization is the backing of the issued debt instruments with another asset against the risk of non-payment. Guarantees can be very diverse. 

•    Asset or income flow backed  
•    Insurance 
•    Guarantee 


The quality and liquidity of the collateral is highly influential on the credit risk of the debt securities. Because a strong and liquid collateralization means a strong recovery in case of a default, it raises the rating of the bond. The asset backed bonds issued are considered fully guaranteed. On top of that, capital market debt instruments can be backed by insurance guarantee. Among the aims of insuring;

•    To reach additional investor groups,  
•    To use the price advantage existing in other markets, 
•    To mitigate the transfer and convertibility risk of debt instruments or, in other words, to eliminate systemic risk arising from country risk, 
•    To emphasize the issuer’s specific risk assessment,
•    To accelerate the rating level of debt instruments upwards
are among the motivations behind. In a broader context, debt instruments are insured by "monoline" bond insurance companies in structured finance bonds. 


The monoline insurance companies are insuring the asset backed bonds issued by issuers from emerging countries, they also insure the securities named sub-prime bonds in developed markets, that is, below threshold or speculative level bonds.

Another way for the issued bond to have a higher rating than the issuer’s rating is to guarantee bonds. The guarantee can be given by another company of the group in which the company issuing the bond is a member, the holding, the shareholder himself or an international organization.

The analysis quality of the debt instruments made by JCR ER;

•    The issuer company’s revenues and their sufficiency to repay the capital and interest must be studied,
•    The company’s past and current financial ratios,
•    Whether the debt instruments are secured or not,
•    The adequacy and time coordination of the market values of the assets shown as guarantee and the cash flows to be generated,
•    The protectiveness of the investors, their rights and the law and regulations,
•    The priority status of debt instruments,
•    The issued debt instruments’ maturity (since those with longer term have a lower rating), 
•    The sector’s situation in which the company operates, 
•    The structural strength of the company, financial structure and overall structural strength, 
•    Whether the debt instruments are marketable,
•    The general market interest rates, inflation levels, whether debt instrument’s interest rate fixed or floating or indexed


are issues being concentrated on. In general, those who invest in debt instruments are not shareholders of the issuing institution, but the creditors. Although they can’t participate to the management of the institution issuing, the owners of the securities are being paid for the interest before the dividends are paid to the shareholders. From the debt securities perspective the same priority is valid in case of company liquidation. The bonds issuance price and coupon values are being determined according to several criteria. Those criteria are;

•    The credit risk of the issuer (this is being measured by the credit rating of the company),
•    Tax ratio and amount,
•    The maturity of the debt instrument,
•    The liquidity of the other bonds of the issuer,
•    The return of the debt instrument,
•    The margin between the US Treasury Bonds which are being considered as risk free bonds(risk premium),
•    Encompassed by the risk premium are the probability of default of the governments, the loss of value of a country’s money (devaluation) and law and regulation,  

•    The difference between the local capital market regulation and the internationally accepted norms.

In addition to the default risk, there is also the risk of transfer and convertibility in the foreign currency bonds issued by the governments of developing countries in foreign markets. Those type of risks define the risk of governments who might bring restrictions to foreign currency and the probability of their asset in foreign currency being not sufficient to cover their liabilities in foreign currency. The risks entailed by corporate bonds differ according to the economy they operate in. In American corporate bonds only corporate specific risks are in question whereas for emerging market corporates the bonds they issue encompass the systemic risk named country risk and the corporate risk specific. While there is only company-specific risk in American corporate bonds, there are also systemic risk, called country risk, as well as company-specific risks in bonds issued by developing country companies. For those investing in the debt instruments the risks of the debt instruments; 

•    The systemic risk of the issued debt instruments arising from country’s macroeconomic and political environment and the law and regulation,  
•    The part of the risk not related with the return of the asset endured by the corporate and the investment and the correlation between market movements is Specific risk,   
•    Transfer and convertibility risk specific to bonds issued in foreign currencies in foreign markets
are constituted by three categories as mentioned.


Systemic risk is the change of market factors such as interest rates, exchange rates, inflation rates, purchasing power changes, which affect all firms, states and projects at different scales, and political crises, wars, international political and commercial disputes, military coups or their possibilities, election periods, the net loss or decrease in asset value due to cash flow disruptions that will be affected by political risk, such as the cessation or reduction of trade relations with neighboring countries. As it is known, purchasing power risk refers to the inflation risk, that is, the gradual loss of the purchasing power of the local currency due to the rise in the general level of prices. For investors, debt instruments issued in local currency mean that their investments lose value depending on the inflation rate. Interest rate risk, on the other hand, is a situation where there is a possibility of up or down volatility in market interest rates, and it is a risk that mostly affects fixed income instruments.

The specific risk is the sum of the specific risks that the company is exposed to in addition to the systemic risk elements contained in government bonds in the debt instruments issued by the companies. The specific risks associated with bonds, are the financial risks defining the financial strength of the company. This risk is associated with the probability of default risk. It can be listed as the risks related to the business line and industry in which the company is involved, and management risk. The time to maturity of the bond and the volatility of the company value of the issuer are also associated with the bond risk and are effective in determining the risk premium of the bond. Risks that companies are exposed to in relation to their operations can be listed as;

•    Project risk, 
•    Competition environment,
•    Industrial Risk,
•    International Risk.


Project Risk: The risks affecting the project. It results in the realization level of the expected and planned cash flows differing from the estimated ones.

Competition Environment Risk: These are the risks of positive or negative impact on the cash flow of the project in line with the different movements of the competitors between the realized and expected reactions.  

Industrial Risk: Technological risk arising from technology that is realized differently or is renewed than expected, legal risk arising from changes in legal regulations, commodity risk arising from price changes in input goods and services produced by a particular industry disproportionately arise when these three components affect cash flow and earnings of the company.

International Risk: It is the risk that the company will face with respect to its overseas projects, because the currency in which the cash flow of the project is measured is different from the currency in which the company's stock price or earnings are measured. In such a case, the income and cash flow to be generated from the project may be different from the expected due to political risk and changes in exchange rates. These are the additional uncertainties that will occur on the cash flow of the project due to the political risks and currency risks that may occur in foreign markets. 

The ratings given to the company's bond generally reflect the company's creditworthiness in line with financial ratios that measure the company's capacity to meet its debt obligations and generate a stable cash flow.

As a result, in the JCR ER methodology, the Corporate Credit rating of firms, central governments, local administrations, public enterprises, financial institutions and similar issuers is taken as the basis for the rating of debt instruments. Corporate Credit ratings already include the specific, systemic, transfer and convertibility risks listed above. Therefore, on top of the corporate credit rating, the debt instruments; 

•    Guarantee structure,  
•    Whether it is insured or not, 
•    Whether it is covered by the guarantee or not, 
•    Maturity, 
•    The level of protection of the investors 


being evaluated separately, the results being calculated from these factors are being added to the corporate credit risk and form a new independent rating for the debt instruments. If there has not been established a guarantee structure for the debt securities, the credit rating and the issuance rating are formed at similar levels.