  Date: 28.06.2022
  Number: 22-96a

 Note

MDB Portfolio Expansion -

Agency Ratings and Value at Risk

1. Introduction

This note presents analysis of how the agency ratings of a Multilateral Development Bank (MDB) are affected
by a proportionate expansion in its Development Related Assets (DRAs) and liabilities while capital resources
are kept constant. We identify the ratios that the rating agencies employ in rating MDBs and compute, for a
stylised example MDB, how much this MDB can expand its lending before different ratios trigger ratings
downgrades.

The modeling of ratings impact is based on a detailed analysis of CRA methodologies, building on Risk
Control's experience in working on the application of these methodologies to actual MDBs. The calculations are
performed using Risk Control's Rating Scenario System. This software replicates the full scorecard of MDB
ratings for the three major rating agencies, Fitch, Moody's and Standard & Poor's. The analysis demonstrates
the considerable variation among the MDB rating methodologies of the three major agencies and how their
criteria bind in very different ways as a particular MDB changes its strategy.

The calculations are performed using asset, liability and other financial data for a stylised MDB. Development
Related Asset (DRA) data for this MDB have been created using publicly available information from other
existing MDBs. The liability non-DRA asset and other financial data employed are comparable to data that we
have encountered in earlier assignments with MDBs.

The rating exercise reported here is a conceptual experiment designed to improve understanding of how MDB
ratings are affected by increases in lending. The "stylized" MDB employed is designed to be realistic and
representative but the actual impact of expansion on ratings can vary substantially across MDBs, depending on
other aspects of their activities and business model. The numbers we present should, therefore, not be
interpreted as the actual lending headroom of other MDBs.

To examine whether rating agency views of MDBs are conservative, we also compute credit risk Economic
Capital estimates for the stylised MDB. The Economic Capital estimates (using credit Value-at-Risk (VaR) and
Expected Shortfall (ES) measures) are calculated using Risk Control's RC-Capital Model, an industry standard,
rating-based credit portfolio model. This approach closely resembles those followed by MDBs. RC-Capital
Model is used for this purpose by several MDBs, and others employ comparable methodologies.

The note is organised as follows. Section 2 describes the data used in the calculation including the balance sheet
of the stylised MDB and summaries the VaR and ES calculation methodology. Section 3 presents the results and
Section 4 concludes.

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2. Data and methodology

2.1 Ratings calculations

This section provides a description of the assets and liabilities data for the stylised MDB the note
considers. These data were compiled using public information on the balance sheets of several
prominent and familiar MDBs. A summary balance sheet is shown in

Table 1.

Figure 1 shows the rating distribution of Development Related Assets (loans and equity investments) in the first
panel and the distribution of capital provided the member states in the second panel. The stylised MDB's
callable capital is equal to four times its total equity which may be regarded as representative, although the ratio
varies substantially across such banks.

The parameter data used to perform the rating calculations are specified by the rating agencies in the MDB
rating criteria documents, with some exceptions. The geographic concentration matrix used by S&P to calculate
the geographic concentration RAC ratio adjustment is recalculated based on the methodology described in the
S&P methodology document. The factor weights used in the Fitch rating calculation are approximately inferred
based on the replication of MDB ratings. Sovereign ratings are taken as of November 2021. BICRA and ERG
scores are taken from Standard & Poor's (2021).

Table 1: Summary balance sheet ($, 000)

Assets

Development assets (sovereign)              45,000,000

Development assets (non-sovereign)          5,000,000

Equity investments                          3,000,000

Treasury assets                             16,500,000

Cash                                        500,000

Total assets                                70,000,000

Liabilities

Debt securities                             48,000,000

Total liabilities                           48,000,000

Equity

Paid-in capital                             15,000,000

Other reserves                              7,000,000

Total equity                                22,000,000

Figure 1: Sovereign Rating Breakdown of Development Related Assets and Member Country Equity

              Development assets ($ mlns.)                                 Capital ($ mlns.)

                                            AAA                                               AAA

                                            AA                                                AA

                                            A                                                 A

                                            BBB                                               BBB

                                            BB                                                BB

                                            B                                                 B

                                            CCC                                               CCC

                                            NR                                                NR

2.2 Economic Capital calculations
The VaR and ES calculations mentioned in the introduction are performed using a Monte Carlo that
approximates the distribution of portfolio value at a given risk horizon. The distribution is computed based on
the simulated evolution of credit ratings according to a Markov chain model, with transitions driven by a
region-based factor model. The parameters employed in this model consist of sovereign and corporate

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transition matrices, which are taken from S&P's 2021 global default and rating transitions studies, and a region
correlation matrix, for which we use the same S&P equity index correlation matrix that is used in the S&P rating
analysis. Exposures are repriced at the horizon using USD swap rates and credit spreads generated (with
additional risk premia) from the rating transition matrices.

Conservative assumptions are adopted for the VaR and ES calculations. The idiosyncratic risk weight is taken to
be 0% for sovereign loans and 53% for corporate loans and equity investments, based on prior calibration
analyses. The recovery rate for sovereign loans is taken to be 90%, which may be regarded as a conservative
`best-guess' estimate. The recovery rate for corporate loans is taken to be 55%, in line with the Basel foundation
approach. The annualised volatility of equity investment returns is taken to be 25%. 1,000,000 simulations
were used for all VaR and ES calculations.

The covariance matrix of country risk factors employed in the VaR and ES calculations is estimated using equity
returns. The estimation approach employed mimics, as far as we are able to discern, in data inputs and
methodology, the approach followed by Standard & Poor's in its calibration of a country-equity-index
correlation matrix for use in that agency's Risk Adjusted Capital Framework (RACF) approach to evaluating the
credit quality of MDBs.

3. Results

3.1 Rating results
Table 2 shows a set of ratios that crucially affect rating calculations for the major regional MDBs. (Some other
ratios may be important for specific MDBs, for example those that specialise in private sector lending or equity
investments.) We do not here evaluate the usefulness of the ratios appearing in Table 2 as indicators of risk.

CC/equity is the ratio of callable capital to paid in equity and reserves. This varies widely across MDBs, as may
be seen from the table. It should be noted that some MDBs have no callable capital at all. The Risk Adjusted
Capital (RAC) ratio is S&P's measure of capital adequacy and is loosely based on Basel capital ratios in that the
ratio equals capital resources divided by a complex computation of Risk Weighted Assets (RWAs). The Moody's
ratios identified here are Assets to Equity and Callable Capital to Debt. The Fitch ratios are Equity to Assets and
a Capital to RWAs ratio that, like S&P's RAC ratio, is a complex agency-specific computation broadly
comparable to a Basel capital ratio.

For each ratio, we provide the value for particular MDBs and then compare these values with that implied by
the stylised MDB data we have constructed for our analysis. The stylised MDB has a comparatively high RAC
ratio and a comparatively low leverage ratio, which means to say that its portfolio is evaluated unfavourably
when a risk-insensitive approach (the leverage ratio) is employed, but favourably by a more risk sensitive
approach.

Table 2: Ratios for Regional MDBs

                                                          S&P            Moody's                       Fitch

                         Development      CC/Equity       RAC ratio (%)  Assets/Equity  CC/Debt ratio  Equity/Assets  Capital/RWA
                         assets ($, 000)                                    ratio (%)         (%)         ratio (%)         (%)

IBRD                     211,129                     6.7       24        513.8          111.0          15.1           44.2

ADB                      132,818                     2.8       35        223.9          132.9          28.0

IADB                     105,549                     4.9       21        314.6          150.0          22.1           49.3

AfDB                     34,079           12.0                 19        298.6          230.3          22.0           37.0

Stylised                 53,000                      4.0       32        227.3          183.3          31.4           94.4

Note: The ratios shown for each MDB are as of 2020 and were obtained from rating agency reports. The IBRD coverage of net

debt by callable capital and ADB capital/RWA ratio were not included in the most recent Fitch reports. Development assets

are as measured by S&P.

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Table 3: DRA Increase Thresholds for Rating Downgrades

                     S&P                                         Moody's                                     Fitch

          DRA        RAC ratio (%)  Enhanced RAC      DRA        Assets/Equity CC/Debt ratio      DRA        Equity/Assets  Capital/RWA
      growth (%)                       ratio (%)  growth (%)                                  growth (%)        ratio (%)         (%)
                                                                 ratio (%)  (%)

Base              0       32.3      56.5                      0  227.3           183.3                    0  31.4           94.4

AA+           197         10.0      55.4          11             252.3           163.5        34             25.0           70.4

AA            281         7.0       26.7          77             402.3           99.1         34             25.0           70.4

AA-           425         5.0       20.3          182            640.9           60.9         170            13.7           35.0

A+            425         5.0       20.3          282            868.2           44.6         170            13.7           35.0

A             780         3.0       13.1                                                      170            13.7           35.0

A-                                                                                            296                   9.7     23.8

Note: For each rating agency, the percentages shown in the leftmost column equal the percentage increases in Development

Related Assets (DRAs) that generate a decline in the rating from an initial AAA level to the level shown in the first column.

The remaining columns show the financial ratios corresponding to the increases in DRAs. The financial ratios that imply

rating downgrades are highlighted in red. `CC' denotes callable capital.

Table 3 shows the results of rating calculations for the stylised MDB. For each rating agency, the leftmost
column shows the percentage increases in the sizes of Development Related Assets (DRAs), including equity
investments that result in downgrades to the ratings shown on the left. The increases are applied
proportionately across all exposures and are balanced by increases in liabilities. The subsequent columns show
the impact of the increase in DRAs on key ratios that are used to determine the rating. A ratio is highlighted in
red if the downgrade is driven by the change in that ratio. For example, increasing development assets by more
than 182% results in a downgrade of the Moody's rating to AA- (or Aa3). This downgrade is driven by the
decrease of the contractual support ratio to 60.9%.

The S&P rating downgrades are driven by a decline in the RAC ratio, which has an initial value of 32.3%. The
RAC ratio is first calculated excluding callable capital and guarantees and then calculated again (in the
assessment of the enhanced Financial Risk Profile (FRP)) taking in account callable capital and guarantees.
Only callable capital from shareholders with ratings not lower than the Stand-Alone Credit Profile (SACP) of the
MLI is included in the enhanced RAC ratio calculation. Both RAC ratio calculations may impact the final rating.
The uplift in rating from callable capital is capped at 3 notches or less depending on the bank's Policy
Importance. This is determined by the answers to three questions about the likelihood that callable capital
could indeed be successfully called. Here, we assume that S&P is confident in the reliability of the callable
capital and that Policy Importance of the institution is judged to be high.

The Moody's and Fitch rating downgrades are driven by changes in leverage ratios (assets/equity for Moody's
and equity/assets for Fitch). The Moody's rating is also affected by the contractual support ratio (callable
capital/total debt) while the Fitch rating is affected by the MDB's usable capital/risk-weighted assets ratio and
liquidity buffer (liquidity assets/short-term debt).

The results show that the bank is close to the threshold for a rating downgrade from Moody's before the
expansion in DRAs commences. They also highlight the non-linear nature of the impact of balance sheet
expansion on the integer number of notch downgrades and the limited headroom that MDBs face when they are
rated by multiple agencies. Indeed, an important finding of our study is that variation across rating agency
methodologies means that an MDB considering a change in its strategy (for example, an expansion its DRAs),
faces multiple inconsistent constraints from the different agencies that rate it.

Note that several other factors play a role in determining the agency ratings, both quantitative and qualitative.
For example, Moody's assess capital adequacy by taking a weighted average of the leverage ratio assessment, a
development assets credit quality assessment and an asset performance assessment. An MDB with higher credit
quality development assets or a record of strong asset performance might be able to expand its balance sheet
further without being downgraded.

Inspecting Table 3, one may note that, on the face of it, the notional AAA-rated MDB could increase its DRA
assets by 425%, 182% and 170% before the ratings of S&P, Moody's and Fitch, respectively, fall to AA-.
However, this calculation does not allow for the long-run effects of the deterioration in funding costs that the
MDB would experience if it adopted policies that involved such portfolio expansion.

Furthermore, the rating agencies might alter judgmental aspects of their credit assessments if they thought that
governance and sound credit disciplines had been relaxed. Finally, some MDBs have high leverage ratios that
are offset, in agency evaluations, by other aspects of the rating calculation. Whether it is realistic to expect that
these MDBs could expand their balance sheets substantially without suffering downgrades might be questioned.

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3.2 Value at Risk and Expected Shortfall
To provide some perspective of how conservative is the rating agency evaluation of MDBs, in this section we
calculate credit risk Economic Capital for the stylised MDB. Note that here we only consider capital required to
cover credit risk, omitting the capital demands of Market and Operational risks. In our experience, these are
minor in MDBs. Interest and FX risks are systematically hedged or swapped out when funding instruments are
issued, and historical experience suggests that operational risk appears is very limited.

Table 4: Value at Risk and Expected Shortfall ($ millions)

                                    VaR                              ES

Confidence level (%)       1-year             3-year  1-year             3-year

      99.00                2,023              2,617   2,613              3,128

      99.50                2,476              2,954   2,999              3,491

      99.90                3,319              3,796   3,792              4,425

      99.95                3,673              4,246   4,109              4,858

      99.99                4,450              5,284   4,734              5,782

Note: The VaR and ES are shown at varying confidence levels and

at horizons of 1 year and 3 years.

Table 4 shows the credit value at risk and expected shortfall of the stylised MDB at confidence levels ranging
from 99% to 99.99%. Results are shown for horizons of 1 year and 3 years. The 1 basis point confidence level 3-
year VaR is just over $5 billion. One might regard capital equal to a 1 bps confidence level, 3-year horizon VaR
as consistent with a AAA rating. From Table 1, one may observe that the paid in equity plus reserves of the
stylised MDBs used in this note is $22 billion. (Here, we make no allowance whatsoever for callable capital,
only counting as capital paid in equity and accumulated reserves.) Even if one allows for the fact that we have
omitted market and operational risk from consideration, this suggests that the stylised MDB is very
substantially over-capitalised if the objective were to meet a AAA solvency standard.

An important aspect of the calculations here reported is that the calibration has been adjusted for Preferred
Creditor Treatment (PCT). Most notably this means that while loans to Non-Sovereign Obligors (NSOs) are
assumed to have Loss Given Default (LGD) rates of 45%, Sovereign Obligor (SO) exposures are assumed to have
LGDs of 10%. Historical experience shows that such low LGDs (or even lower) are characteristic of MDB SO
loans. In the companion notes to this document, we calibrate LGDs for MDBs.

Table 5 shows the VaRs that the stylised MDB would obtain if it expanded its DRAs to the degree associated
with rating downgrades (inferring these latter expansions from Table 3). The figures shown in the second and
third column of each rating-specific block of results in Table 5 equal the probabilities that the MDB's losses will
be less than the institution's capital of $22 billion. Hence, if one were to employ a 3-year VaR as a basis for
required capital, for all three agencies, it could expand its portfolio by 300% without its probability of
exhausting its capital exceeding 1 basis point.

This is consistent with the implication of Table 4 that its capital requirement (at a 1 basis point, 3-year horizon
level) is about a quarter of its capital resources. This may be compared to the DRA expansions that would
trigger loss of AAA status for the stylised MDBs according to S&P, Moody's and Fitch of 197%, 11% and 34%,
respectively.

Table 5: Implied VaR Confidence Levels Corresponding to Rating Downgrades

                      S&P                                                Moody's                                     Fitch

          DRA        Implied 1-year Implied 3-year        DRA        Implied 1-year Implied 3-year        DRA        Implied 1-year Implied 3-year
      growth (%)                                      growth (%)                                      growth (%)
                     VaR conf. level VaR conf. level                 VaR conf. level VaR conf. level                 VaR conf. level VaR conf. level

                      (%)                (%)                             (%)      (%)                                (%)     (%)

Base              0   100.00             100.00                   0      100.00   100.00                          0  100.00  100.00

AA+           197     100.00             100.00       11                 100.00   100.00              34             100.00  100.00

AA            281     100.00             100.00       77                 100.00   100.00              34             100.00  100.00

AA-           425          99.98              99.94   182                100.00   100.00              170            100.00  100.00

A+            425          99.98              99.94   282                100.00   100.00              170            100.00  100.00

A             780          99.51              98.40                                                   170            100.00  100.00

A-                                                                                                    296            100.00  100.00

Note: This table shows implied VaR confidence levels corresponding to the levels of DRA growth that would trigger a rating

downgrade for each rating agency, Confidence levels are shown for VaRs with horizons of 1 year and 3 years.

The implication has is that some agencies' methodologies, when applied to an MDB similar to the one we study
here, are much too conservative. In this case, the methodologies of Moody's and Fitch are the most out of line

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with risk as measured by the industry standard VaR model. Note that, with our stylised MDB, the headroom for
DRA expansion under the S&P rating methodology would be distinctly less if a more conservative assumption
were made about how S&P evaluates the reliability of the MDB's callable capital. (For more details, see the
discussion in the Appendix.) In fact, the relatively large headroom apparent for S&P is attributable to the
allowance the agency makes for callable capital. Without this, the headroom before a downgrade from AAA is
just 43% increase in DRA assets (see Table A1 in the Appendix). Note that the VaR analysis makes no allowance
for callable capital. Overall, the agencies might consider re-evaluating PCT as it affects MDB risk.

4. Conclusion

This note analyses the effect on the agency rating of a stylised Multilateral Development Bank (MDB) of a
proportionate increase in its Development Related Asset (DRA) portfolio. In it, the ratings of all three major
agencies, Fitch, Moody's, and Standard & Poor's, are considered. We illustrate the conservative nature of rating
agency evaluations of MDBs by calculating Economic Capital requirements for our stylised MDB using an
industry-standard, ratings-based Credit Portfolio Model (CPM) of the kind employed by most MDBs.

Our key findings are that:
      On ratings, although all three agencies would initially judge the stylised bank to be AAA, the
          methodologies lead to very different results. This is demonstrated with expansion of DRAs rapidly
          leading to a downgrade in the Moody's rating but not in that of Standard & Poor's. (Note that the
          greater headroom that our stylised MDB enjoys under the S&P methodology reflects the allowance that
          S&P makes for callable capital.)
      The relationship between rating downgrades and DRA expansion is highly non-linear in its impact on
          the number of notches. So, the scope for one or other rating to experience severe downgrades as DRAs
          expand is great.
      For the notional MDB, substantial growth of the portfolio would appear to be possible if an AA rating is
          deemed acceptable. The calculations do not allow for the long-run impact on the MDB of a
          deterioration in the spreads it would face in the bond market or any re-evaluation by the rating
          agencies of the MDB's governance or credit risk controls. Some MDBs already have relatively high
          leverage ratios which are currently offset by other aspects of the rating methodologies.
      On Economic-Capital-based assessments of capital adequacy, the confidence level of the stylised MDB
          is very high, i.e., the probability of failure is vanishingly small before the portfolio is boosted. Based on
          the calculations reported here, the MDB could expand its DRAs by 300% before its probability of
          exhausting capital over a 3-year horizon exceeds 1 basis point. (Here, we do not allow for the capital
          demands of market or operational risks which tend to be minor for MDBs but we do not allow either for
          callable capital.)
      Our calculations suggest that the rating agencies would downgrade the notional MDB after DRA
          expansions of 197%, 11% and 34% in the cases of S&P, Moody's, and Fitch, respectively. The relatively
          large headroom under S&P reflects the allowance that agency makes for callable capital. If, in its
          qualitative choices, S&P a took less favourable view of the reliability of the MDB's callable capital than
          we assume in our central-case assumptions, the headroom would shrink to 43% (see the Appendix and
          Table A1, in particular). This result is consistent with the conclusion that the rating agency evaluation
          of AAA status for MDBs is too conservative and suggests that the allowance they make for preferred
          Credit Treatment (PCT) is insufficient.

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Appendix: Callable Capital in the Standard & Poor's Methodology

The calculations presented in Table 3 allow for the fact that the MDB is presumed to have callable capital from
highly rated equity holders. Callable capital can, in principle, create significant headroom for DRA lending
particularly under the Standard & Poor's (S&P) methodology. The approach taken by S&P is described in the
agency's methodology document in the section entitled "Assessing the Likelihood Of Extraordinary Shareholder
Support".

Text from S&P:
     93. Once we have assessed an MLI's SACP under our criteria, we incorporate the likelihood that an
          institution would receive extraordinary shareholder support in order to service its debt obligations. In
          the case of MLIs, extraordinary shareholder support usually comes in the form of an injection of
          callable capital and less often in the form of guarantees or other types of support.
     94. Callable capital is a characteristic of most MLIs. It corresponds to a commitment by each shareholder
          to make additional capital available, but, generally, is only to prevent a default on an MLI's debt or a
          call of a guarantee. The size of capital subscriptions generally varies among members, in proportion to
          their ownership shares. However, the ratio of paid-in to callable capital is generally the same for each
          shareholder. An MLI's callable capital is typically a multiple of its paid-in capital and often exceeds not
          only paid-in capital, but also shareholders' equity. If an MLI were to make a capital call, each
          shareholder would be responsible for providing the percentage of the capital called to which it has
          subscribed. Moreover, a shareholder's responsibility for meeting a call on capital, up the amount to
          which it has subscribed, does not depend on whether other shareholders have paid up.
     95. In some cases, a joint shareholder guarantee on nonperforming outstanding loans may exist. Exercising
          this guarantee may be subject to certain defined conditions. Analytically, we treat these guarantees as
          callable capital because we would expect the process and the financial impact of calling on the
          guarantee to be broadly comparable with that of making use of callable capital.
     96. To show the extent to which callable capital and guarantees would support the MLI's creditworthiness,
          we recalculate the RAC ratios to include in the numerator the callable capital from all shareholders that
          have foreign currency ratings equal to or higher than MLI's SACP. The denominator of the RAC ratio is
          unchanged. We then reapply our adjustments to include this additional capital and update our
          assessment as described in Table 10. Assuming there is no change in the liquidity and funding profile, if
          capital were called, it may improve the MLI's capital adequacy. This enables us to quantify the potential
          financial benefit of callable capital.
     97. We determine the indicative ICR on the MLI (see chart 4) by combining the enhanced FRP (including
          the benefit of the eligible callable capital) and the ERP as per table 2.
     98. We only include the callable capital from the shareholders rated at or above the SACP of the MLI. We
          make this distinction in the level of support, because in the sort of market conditions that would lead to
          an MLI being on the verge of default, and thus resorting to a capital call, we anticipate that its own
          shareholders may be under similar stress. Their capacity to provide support would therefore be
          diminished, which might be reflected in our ratings on the shareholders.
     99. In our view, calling capital is an uncertain process. We therefore anticipate limiting the maximum
          support it can provide above the SACP. The maximum uplift due to callable capital is limited to three
          notches above the SACP. This notching depends on the shareholders' willingness and ability to make a
          payment on callable capital, as informed by the following considerations:
          - The adequacy of the legal and administrative process in place to ensure that a capital call will be
                made if management believes that a call is necessary to avoid a default;
          - The shareholders' ability to pay in the additional capital when called. Our view is informed by the
                legal and administrative processes required for the shareholders to make the payment shortly after
                the capital call;
          - The shareholders' willingness to make the payment of capital when called. This view is informed by
                the shareholders' record in increasing the MLI's capital when needed to support its public policy
                role or its growing activity, and their record of paying on schedule the paid-in capital for general
                capital increases. We do not limit our assessment to the shareholders' record with regard to this
                specific MLI--it could extend to the shareholders' record of promptly paying capital subscriptions
                to other MLIs they have subscribed to. Where shareholders' have failed to pay capital subscriptions,
                or have repeatedly been in arrears on capital subscriptions, we may consider them to have low
                willingness to pay callable capital. Conversely, recent increases in paid-in capital by shareholders
                would affect positively our assessment of shareholder's willingness to support the MLI; and
          - An MLI's policy importance (see tables 6 or 7 as applicable). If we assess policy importance as very
                strong or strong, the uplift due to callable capital may be up to three notches, whereas if the
                assessment is adequate, the uplift is capped at one notch. MLIs with moderate or weak policy
                importance cannot receive any uplift for callable capital.

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This approach means that callable capital may or may not create additional headroom for MLI lending
depending on the MLI's Policy Importance (as assessed by the agency) and the answers that the agency
determines for the three other qualitative questions listed in paragraph 99 above.

Table A1 below presents results that are the equivalent of those for S&P contained in Table 3, Section 3 but
assuming that all three qualitative issues in the above S&P text are assessed negatively but that the MDB's
Policy Importance is still regarded as high.

In performing the calculations, we frame the three issues as three questions taking values Yes or No. If three
Yes's or three No's are received, we add or subtract a notch, respectively and otherwise add zero notches to the
Enhanced SACP. We cap the gap between the Enhanced SACP and the SACP at 3 notches. Since we assume that
the three questions receive negative answers, the immediate uplift from callable capital is reduced by one notch
before it is capped.

Table A1: DRA Thresholds for S&P Downgrades with Negative Qualitative Question Responses

                     S&P

          DRA        RAC ratio (%)  Enhanced RAC
      growth (%)                       ratio (%)

Base              0       32.3      56.5

AA+           43          22.9      55.4

AA            281         7.0       26.7

AA-           425         5.0       20.3

A+            425         5.0       20.3

A             780         3.0       13.1

A-

One may observe that the DRA multipliers, consistent with different degrees of S&P downgrade, are much
reduced under these assumptions. These calculations illustrate the fact that the rating agency methodologies
contain judgmental assessments that substantially affect the rating and which are hard to second guess from
outside the agency.

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