DBRS Publishes Commentary: The Use of Rating Trends in the Context of Sovereign Ratings

DBRS Ratings Limited (DBRS) published a commentary titled, “The Use of Rating Trends in the Context of Sovereign Ratings”.

This commentary reviews the use of rating trends among DBRS-rated sovereign governments over the past decade. Among sovereigns historically-rated by DBRS, a change in their rating trend assignments have reliably signalled the most likely rating actions. While the results of this study are likely skewed by the global financial crisis that occurred during the review period, this review provides insight into what rating trends signal in the context of sovereign ratings and how they have been used over time. It is not an assessment of the ‘future’ ability of trends to predict rating actions.

A change in the rating trend generally preceded a change in the credit rating approximately 80% of the time, among sovereigns rated by DBRS. The remaining 20% are instances when rating changes have occurred without a prior trend change. These cases highlight the possibility that upside or downside risks to a rating may materialize faster than expected or fail to materialize at all.

DBRS highlights key factors that could lead to a change in sovereign trends and ratings via rating drivers. Regardless of the trend in place, uncertainty regarding near-term developments can be significant at times. Key ratings considerations are discussed within the Rating Drivers section of each Sovereign rating report. The drivers are meant to explain the key factors that could lead to a rating action and/or a potential trend change, and to reflect the perceived balance of risks to the current rating.

This commentary is available at www.dbrs.com.