Preference Shares Rating

Preference shares is a hybrid instrument with both debt and equity-like characteristics. While preference share rating is done in the same manner as any other instrument rating, a critical element is the assessment of the individual features of an issue to determine the degree of protection it offers to the investors versus issuers. Since ratings depict the risk to investor, the more protection the terms offer for the investor, the higher will be the rating. PACRA begins by determining the issuer’s debt repayment capacity, adjusted to reflect the financial impact of preference shares dividend obligations on the issuer’s financial profile. Given the subordinated nature of preference share dividends, this is usually followed by further notching down, the extent of which depends on the terms and conditions of the issue.