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Structuring Key Credit Risk Parameters for Regulated Electric and Gas Utilities under Alternative Moody’s Rating Methodologies: A Case Study for a Natural Gas Distribution Utility

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  • Vahit Ferhan BENLI
  • Feyzullah YETGIN

Abstract

This paper elaborates the relevancy issue of a rating model in the context of credit rating analysis process of a natural gas distribution company. Against this background, we have analysed the Moody’s Analytics Risk Calc™ v3.1 Emerging Markets and the Regulated Electric and Gas Rating Methodology of Moody’s Investor Services dated from March the 16th, 2017. Methodologically, the article relies on case studies namely the Enron case and a case from regulated natural gas distribution company in Turkey. In terms of findings, Enron case highlights the importance of point-in-time rating models over agency based rating models in terms of default prediction. The EDF model provided a PD value of 0.65%, which corresponds to Baa3 level in Moody’s rating agency terms. On the other hand, the REGU Model indicates the Company with “Ba” rating, which is a “Speculative Grade”. This result indicates us a severe difference in default probabilities for the same entity. This is consequent and in line with the informational needs of different users and if different models are used respective to their needs. In summary, each rating model is developed by rating agencies for different purposes and we need to choose the appropriate rating model to make accurate analysis.

Suggested Citation

  • Vahit Ferhan BENLI & Feyzullah YETGIN, 2021. "Structuring Key Credit Risk Parameters for Regulated Electric and Gas Utilities under Alternative Moody’s Rating Methodologies: A Case Study for a Natural Gas Distribution Utility," Journal of BRSA Banking and Financial Markets, Banking Regulation and Supervision Agency, vol. 15(2), pages 227-259.
    • Handle: RePEc:bdd:journl:v:15:y:2021:i:2:p:227-259
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    References listed on IDEAS

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    1. Crouhy, Michel & Galai, Dan & Mark, Robert, 2000. "A comparative analysis of current credit risk models," Journal of Banking & Finance, Elsevier, vol. 24(1-2), pages 59-117, January.
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    More about this item

    Keywords

    Rating; Credit risk modelling; Moody’s.;
    All these keywords.

    JEL classification:

    • G20 - Financial Economics - - Financial Institutions and Services - - - General
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation
    • C - Mathematical and Quantitative Methods
    • C - Mathematical and Quantitative Methods
    • C88 - Mathematical and Quantitative Methods - - Data Collection and Data Estimation Methodology; Computer Programs - - - Other Computer Software
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty

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