Moody's published a rating methodology for trading companies

Moody's Japan K.K. has published a rating methodology for trading companies.

The methodology seeks to provide a transparent presentation of the rating considerations that are usually most important for companies in this sector and incorporates refinements in Moody's analysis that better reflect the key credit fundamentals of the industry.

The methodology includes a detailed rating grid and illustrative examples that compare the mapping of rated companies against the factors in the grid. The grid contains four factors that are important in Moody's analysis of trading companies: Scale (20% weighting); Business Profile (30%); Leverage (20%); and Financial Policy (30%).

The grid is a reference tool that can be used to approximate credit profiles within the general and commodity trading industry in most cases. The grid scoring presents an approximate summary that does not include every rating consideration.

Moody's currently rates 12 trading companies, including seven general trading companies (GTCs) and five commodity trading companies (CTCs), with approximately $44 billion in rated debt. The global rated universe covers a wide range of products and business models.

The seven GTCs are all Japanese. These "sogo shosha" have an important position in the Japanese economy and very close relationships with key domestic banks. The broad credit environment in Japan has tended to be supportive of such prominent companies and these credit considerations are not fully reflected in the characteristics scored in the grid, which is designed to apply globally. However, our ratings consider these additional favorable credit considerations as part of our qualitative assessment of each company.

There are five rated commodity trading companies, which are involved in the sourcing, handling, transportation, and merchandising of commodities. These commodities primarily fall into three areas - agriculture, energy and metals. Additionally, these companies have significant investments in logistics assets (silos, warehouses, storage tanks, port facilities, etc.) that enable them to extract additional value versus brokers or agents. These companies differ from most corporate issuers in their extensive use of derivatives (both on and off-exchange futures and options) and varying levels of proprietary trading to enhance margins. In addition, many of these companies have very liquid but more volatile balance sheets relative to other industrial companies.

Subscribers can access the rating methodology "Trading Companies" at: http://www.moodys.com/viewresearchdoc.aspx?docid=PBC_179476