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Announcement:

Moody's updates its global methodology for financial statement adjustments

 The document has been translated in other languages

15 Jun 2015

New York, June 15, 2015 -- Moody's Investors Service has today updated its methodology for the financial statement adjustments it uses in rating analysis for non-financial corporates globally. The main changes are revised standard adjustments for operating leases and refinement of the criteria for when adjustments are made for securitizations and factoring arrangements.

The updated methodology, "Financial Statement Adjustments in the Analysis of Non-Financial Corporations," is now available on www.moodys.com and can be accessed via this link: http://www.moodys.com/viewresearchdoc.aspx?docid=PBC_181430. The update follows a market consultation initiated via a Request for Comment that was published in April 2015.

"Our updated methodology will enhance consistency in the way we factor financial adjustments into Moody's ratings for companies across different sectors in different countries. For most companies, the operating lease changes will reduce adjusted debt amounts used in Moody's analysis," says Suzanne Wingo, a Moody's Group Credit Officer for the Corporate Finance Group and author of the report.

The most significant changes relate to Moody's approach to operating leases, placing greater emphasis on capitalizing the minimum legal obligation under lease commitments, which the rating agency estimates by a present value calculation. Moody's previous approach to capitalizing operating leases derived a debt adjustment for most issuers from a multiple of annual rent. The multiples Moody's used varied by sector and were established to align with a scenario in which a company borrows to buy assets rather than leasing them. The lower adjusted debt amounts that result in most cases under Moody's updated approach align with a view that companies leasing assets have more flexibility in their legal and financial arrangements than when they incur debt to purchase the assets.

Under the updated methodology, Moody's will continue adjusting debt by calculating a present value for each company. The rating agency will use this amount or the amount derived from the use of a sector multiple applied to annual rent. However, present value will be the basis for the capitalized debt amount for many more companies than before because the sector multiples will be lower than they were previously in almost all cases. Ranging from 3x to 6x, rather than 5x to 8x, the new multiples will serve as a minimum floor to the present value calculation because Moody's expects that companies with very short lease tenors will renew most leases.

The update also includes a cap on the present value calculation to reflect Moody's view that leases with very long tenors are typically more conditional and can often be renegotiated. Under the new approach, Moody's debt adjustment will be capped at 10x rent expense when the present value exceeds this amount. The revised approach for leases will result in an average reduction in Moody's adjusted debt of about 5% across all non-financial corporates globally.

The second change refines the conditions under which Moody's makes adjustments for non-financial companies' securitization transactions, particularly factoring or securitization of accounts receivable. Moody's has not changed its adjustments and will continue to view these transactions as being akin to borrowing. Under its refined conditions, Moody's will now make adjustments when the discontinuation of an activity, such as the sale or securitization of receivables, would result in a consumption of cash that is broadly similar to what occurs when a loan matures. Refining the conditions for making the adjustment will affect the financial ratios of a small number of companies for which adjustments are not currently made, resulting in an increase in Moody's adjusted debt.

The updated methodology applies to all non-financial corporates and over the next few days Moody's will place on review the ratings of all companies whose ratings are likely to be affected by the change in the methodology. In some cases, Moody's will consider revising ratings or outlooks without a review. Moody's plans to complete its reviews within six months of the publication date of the rating methodology.

Moody's current assessment is that the revised approach for operating leases may result in positive rating actions for approximately 3% of nonfinancial corporates globally, or about 100 issuer families. The impact is positive for companies where the reduction in adjusted debt results in a relatively large improvement in financial ratios. Accordingly, the impact of the revised methodology will have a greater impact on sectors in which leases represent a large amount of Moody's adjusted debt, such as retail, airlines, and shipping. Very few if any rating changes are expected to result from the revised conditions for making adjustments for securitizations. Any changes in ratings or outlooks would be in a negative direction. The rating impact for any company will depend on our overall assessment of its credit quality, which is not limited to financial ratios and includes considerations such as expected industry trends, issuer specific qualitative assessments, and the issuer's likely future operating and financial performance.

Moody's global rating methodology "Financial Statement Adjustments in the Analysis of Non-Financial Corporations" is available at:

http://www.moodys.com/viewresearchdoc.aspx?docid=PBC_181430

NOTE TO JOURNALISTS ONLY: For more information, please call one of our global press information hotlines: New York +1-212-553-0376, London +44-20-7772-5456, Tokyo +813-5408-4110, Hong Kong +852-3758-1350, Sydney +61-2-9270-8141, Mexico City 001-888-779-5833, São Paulo 0800-891-2518, or Buenos Aires 0800-666-3506. You can also email us at mediarelations@moodys.com or visit our web site at www.moodys.com.

This publication does not announce a credit rating action. For any credit ratings referenced in this publication, please see the ratings tab on the issuer/entity page on www.moodys.com for the most updated credit rating action information and rating history.

Suzanne Wingo
VP - Senior Credit Officer
Credit Policy
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Daniel Gates
MD - Chief Credit Officer
Credit Policy
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's updates its global methodology for financial statement adjustments
No Related Data.
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