Criteria | Corporates | General:

Methodology: Business Risk/Financial

Risk Matrix Expanded
Criteria Officer:
Mark Puccia, Managing Director, New York (1) 212-438-7233; mark.puccia@standardandpoors.com

Table Of Contents

Business Risk/Financial Risk Framework

Updated Matrix

Financial Benchmarks

How To Use The Matrix--And Its Limitations

Related Criteria And Research

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 Criteria | Corporates | General:
Methodology: Business Risk/Financial Risk Matrix
Expanded
(Editor's Note: We originally published this criteria article on Sept. 18, 2012. We're republishing it following our periodic
review completed on August 21, 2015. This article has been partially superseded by the article titled, "Corporate Methodology,"
published on Nov. 19, 2013, for issuers within the scope of that criteria, but remains in effect for the following sectors or entities:
project developers, transportation equipment leasing, auto rentals, investment holding companies and companies that maximize
their returns by buying and selling equity holdings over time, corporate securitizations, and other entities whose cash flows are
primarily derived from partially owned equity holdings.

Table 1 in this criteria article supersedes table 1 in the articles titled: Key Credit Factors: "Global Criteria For Rating Real Estate
Companies," published on June 21, 2011; "Methodology And Assumptions On Risks In The Global High Technology Industry,"
published Oct. 15, 2009; "Methodology And Assumptions On Business And Financial Risks In The U.S. Movie Exhibitors
Industry," published Aug. 28, 2009; "Methodology And Assumptions On Risks In The Hotel And Lodging Industry," published
Aug. 11, 2009; "Methodology And Assumptions On Risks In The Aerospace And Defense Industries," published June 24, 2009;
"Methodology And Assumptions On Risks In The Mining Industry," published June 23, 2009; "Business And Financial Risks In
The Auto Component Suppliers Industry," published Jan. 28, 2009; "Business And Financial Risks In The Global
Pharmaceutical Industry," published Jan. 22, 2009; "Business And Financial Risks In The U.S. For-Profit Health Care Facilities
Industry," published Jan. 21, 2009; "Business And Financial Risks In The Investor-Owned Utilities Industry," Nov. 26, 2008;
"Business And Financial Risks In The Commodity And Specialty Chemical Industry," published Nov. 20, 2008; "Business And
Financial Risks In The Global Building Products And Materials Industry," Nov. 19, 2008; and "Business And Financial Risks In
The Retail Industry," published Sept. 18, 2008.)

1. Standard & Poor's Ratings Services is refining its methodology for corporate ratings related to its business
risk/financial risk matrix, which we published as part of "2008 Corporate Ratings Criteria" on April 15, 2008. We
subsequently updated this matrix in the article "Criteria Methodology: Business Risk/Financial Risk Matrix Expanded,"
published May 27, 2009. In order to provide greater transparency on the methodology used to evaluate corporate
ratings, this article updates table 1 of the May 27, 2009, article to reflect how we analyze companies with an excellent
business risk profile and minimal financial risk profile, as well as companies with a vulnerable business risk profile and
a highly leveraged financial risk profile. This article amends and supersedes both the 2008 and 2009 articles mentioned
above. This article is related to "Principles Of Credit Ratings," published on Feb. 16, 2011.

2. We introduced the business risk/financial risk matrix in 2005. The relationships depicted in the matrix represent an
essential element of our corporate analytical methodology (see table 1).

Table 1
Business And Financial Risk Profile Matrix
Business Risk Profile --Financial Risk Profile--

Minimal Modest Intermediate Significant Aggressive Highly Leveraged

Excellent AAA/AA+ AA A A- BBB --
Strong AA A A- BBB BB BB-
Satisfactory A- BBB+ BBB BB+ BB- B+

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 Criteria | Corporates | General: Methodology: Business Risk/Financial Risk Matrix Expanded

Table 1
Business And Financial Risk Profile Matrix (cont.)
Fair -- BBB- BB+ BB BB- B
Weak -- -- BB BB- B+ B-
Vulnerable -- -- -- B+ B B- or below

These rating outcomes are shown for guidance purposes only. Actual rating should be within one notch of indicated rating outcomes.

3. The rating outcomes refer to issuer credit ratings. The ratings indicated in each cell of the matrix are the midpoints of a
range of likely rating possibilities. This range would ordinarily span one notch above and below the indicated rating.

Business Risk/Financial Risk Framework

4. Our corporate analytical methodology organizes the analytical process according to a common framework, and it
divides the task into several categories so that all salient issues are considered. The first categories involve
fundamental business analysis; the financial analysis categories follow.

5. Our ratings analysis starts with the assessment of the business and competitive profile of the company. Two
companies with identical financial metrics can be rated very differently, to the extent that their business challenges and
prospects differ. The categories underlying our business and financial risk assessments are:

Business risk
• Country risk
• Industry risk
• Competitive position
• Profitability/Peer group comparisons

Financial risk
• Accounting
• Financial governance and policies/risk tolerance
• Cash flow adequacy
• Capital structure/asset protection
• Liquidity/short-term factors

6. We do not have any predetermined weights for these categories. The significance of specific factors varies from
situation to situation.

Updated Matrix
7. We developed the matrix to make explicit the rating outcomes that are typical for various business risk/financial risk
combinations. It illustrates the relationship of business and financial risk profiles to the issuer credit rating.

8. We tend to weight business risk slightly more than financial risk when differentiating among investment-grade ratings.
Conversely, we place slightly more weight on financial risk for speculative-grade issuers (see table 1, again).

9. This version of the matrix represents a refinement--not any change in rating criteria or standards--and, consequently,

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no rating changes are expected. However, the expanded matrix should enhance the transparency of the analytical
process.

Financial Benchmarks
Table 2
Financial Risk Indicative Ratios (Corporates)
FFO/Debt (%) Debt/EBITDA (x) Debt/Capital (%)
Minimal greater than 60 less than 1.5 less than 25
Modest 45-60 1.5-2.0 25-35
Intermediate 30-45 2-3 35-45
Significant 20-30 3-4 45-50
Aggressive 12-20 4-5 50-60
Highly Leveraged less than 12 greater than 5 greater than 60

How To Use The Matrix--And Its Limitations

10. The rating matrix indicative outcomes are what we typically observe--but are not meant to be precise indications or
guarantees of future rating opinions. Positive and negative nuances in our analysis may lead to a notch higher or lower
than the outcomes indicated in the various cells of the matrix.

11. In certain situations there may be specific, overarching risks that are outside the standard framework, e.g., a liquidity
crisis, major litigation, or large acquisition. This often is the case regarding issuers at the lowest end of the credit
spectrum--i.e., the 'CCC' category and lower. These ratings, by definition, reflect some impending crisis or acute
vulnerability, and the balanced approach that underlies the matrix framework just does not lend itself to such
situations.

12. Similarly, some matrix cells are blank because the underlying combinations are highly unusual--and presumably would
involve complicated factors and analysis.

13. The following hypothetical example illustrates how the tables can be used to better understand our rating process (see
tables 1 and 2).

14. We believe that Company ABC has a satisfactory business risk profile, typical of a low investment-grade industrial
issuer. If we believed its financial risk were intermediate, the expected rating outcome should be within one notch of
'BBB'. ABC's ratios of cash flow to debt (35%) and debt leverage (total debt to EBITDA of 2.5x) are indeed
characteristic of intermediate financial risk.

15. It might be possible for Company ABC to be upgraded to the 'A' category by, for example, reducing its debt burden to
the point that financial risk is viewed as minimal. Funds from operations (FFO) to debt of more than 60% and debt to
EBITDA of only 1.5x would, in most cases, indicate minimal financial risk.

16. Conversely, ABC may choose to become more financially aggressive--perhaps it decides to reward shareholders by

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borrowing to repurchase its stock. It is possible that the company may fall into the 'BB' category if we view its financial
risk as significant. FFO to debt of 20% and debt to EBITDA of 4x would, in our view, typify the significant financial risk
category.

17. Still, it is essential to realize that the financial benchmarks are guidelines, neither gospel nor guarantees. They can vary
in nonstandard cases: For example, if a company's financial measures exhibit very little volatility, benchmarks may be
somewhat more relaxed.

18. Moreover, our assessment of financial risk is not as simplistic as looking at a few ratios. It encompasses:

• A view of accounting and disclosure practices;

• A view of corporate governance, financial policies, and risk tolerance;
• The degree of capital intensity, flexibility regarding capital expenditures and other cash needs, including acquisitions
and shareholder distributions; and
• Various aspects of liquidity--including the risk of refinancing near-term maturities.

19. The matrix addresses a company's standalone credit profile, and does not take account of external influences, which
would pertain in the case of government-related entities or subsidiaries that in our view may benefit or suffer from
affiliation with a stronger or weaker group. The matrix refers only to local-currency ratings, rather than
foreign-currency ratings, which incorporate additional transfer and convertibility risks. Finally, the matrix does not
apply to project finance or corporate securitizations.

Related Criteria And Research

• Principles Of Credit Ratings, Feb. 16, 2011
• Criteria Methodology: Business Risk/Financial Risk Matrix Expanded, May 27, 2009
• 2008 Corporate Ratings Criteria, April 15, 2008

20. These criteria represent the specific application of fundamental principles that define credit risk and ratings opinions.
Their use is determined by issuer- or issue-specific attributes as well as Standard & Poor's Ratings Services' assessment
of the credit and, if applicable, structural risks for a given issuer or issue rating. Methodology and assumptions may
change from time to time as a result of market and economic conditions, issuer- or issue-specific factors, or new
empirical evidence that would affect our credit judgment.

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