This article describes how BRE has been derived and how to interpret them.
The concept of Bond Rating Equivalent (BRE) was introduced by Altman in his study “Measuring Corporate Bond Mortality and Performance” published in the Journal of Finance in 1992.
We have leveraged on this approach to transform our SME Z-Score from a relative measure of risk different for each portfolio it is applied on, to a standardized risk metric associated to the well-known Standard and Poor’s (S&P) rating scale.
To build our BRE grading, we have used a sample of more than 100,000 S&P rated corporate bonds from 1971 to 2022. We segmented this sample by country and industry sector to replicate the segmentation used by our SME Z-Score models and we ran our proprietary models on all companies included in each of the subsamples.
The benefits of developing a BRE are mainly associated with the ability to provide investors with a commonly accepted language of credit that will sound more familiar than a simple scoring number.
|
SME Z-Score |
BRE Grade |
|
16 |
D |
|
24-50 |
CC- |
|
51-90 |
CC |
|
91-120 |
CC+ |
|
121-170 |
CCC- |
|
171-210 |
CCC |
|
211-240 |
CCC+ |
|
241-270 |
B- |
|
271-310 |
B |
|
311-326 |
B+ |
|
327- 340 |
BB- |
|
341-355 |
BB |
|
356-365 |
BB+ |
|
366-430 |
BBB- |
|
431-520 |
BBB |
|
521-630 |
BBB+ |
|
631-750 |
A- |
|
751-800 |
A |
|
801-900 |
A+ |
|
901- 950 |
AA- |
|
951- 967 |
AA |
Once the SME Z-Score is calculated for each company, we assigned it to an S&P rating to derive the mapping of our SME Z-Score distribution to the different rating classes by country and industry sector. An example of the final mapping is provided below.
The highest BRE grade on the Wiserfunding platform is AA and the lowest is D. Our grading is a mapping of our SME Z-Score with the S&P rating scale.
To view our detailed Z-Score:BRE Grade mapping, please click here.
The Z-Score is a number between 0 and 1000 that summarises the risk profile of companies: The lower the number the riskier the company. This represents a point-in-time, independent and objective assessment of the credit risk of a counter party and it is grouped into 5 areas:
- Outstanding 701+
- Low risk 451-700
- Mid risk 251-450
- High risk 101-250
- Distressed 0-100
If you have any further questions or face any issues, please contact our support team.