Manual of credit rating for water districts in the Philippines

This manual explains the steps involved in credit rating for water districts (WDs) in the Philippines. It defines the credit rating asan opinion on the ability and inclination (or willingness) of the water district to service its debt obligations

The credit rating model and analysis focus on the ability of the water district, while the inclination of the water district is gauged by the management’s quality. The manual suggests that the credit rating should not be perceived as a recommendation to extend or not extend a loan to a water district. It merely helps in making an informed credit decision backed by an understanding of underlying credit risks.

It highlights several benefits of credit rating of water districts, including:

• helps in credit history formation
• will improve visibility & bankability with development institutions
• will facilitate flow of capital to water districts
• is indicative of improved governance and transparency in WD sector
• helps in benchmarking among WDs and with corporate entities
• facilitates independent monitoring of overall debt levels and financial risks
• will facilitate accessibility to funds from the bonds market in the long-term
  

The credit rating criteria takes the form of a credit rating framework evaluating five broad credit risk factors including:

• regulatory risk - analysis of the regulatory framework is based on the various laws and presidential directives governing the water districts
• economic risk – assessment of the revenue base, elasticity of revenues, and the possibility of enhancing the WD’s revenue base and revenue-generating potential
• financial risk – looks at past financial performance to assess the future performance of the entity, based on the audited financial results for individual parameters, including debt factors, accounts receivable, liquidity, and net revenues available for debt service
• operating risk - analysis of operating efficiency takes into account the concentration risk and existing infrastructure facilities
• management risk - assessment revolves around the degree of effectiveness and efficiency exhibited by the management in harnessing the available resources and providing adequate infrastructure in its service area

After the initial rating is assigned, the rating is kept under surveillance for the period of the loan guarantee and for a minimum of one year, though the rating should be reviewed as and when there is any event that can potentially impact the credit rating.