KED Credit Rating Methodology · KED targets Korean enterprises including but not limited to...

KED Credit Rating

Methodology

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Credit Rating Methodology1

1. Overview of Issuer Rating

This Rating methodology explains how both qualitative and quantitative factors, which play

the most prominent role in credit rating, are used to produce a rating of an issuer. The

purpose of this document is to help users, supervising authorities, and related parties

understand how KED's ratings are produced and guide them in making ideal decisions on

their prospective business.

KED's methodology comes from a combination of quantitative credit rating model and

qualitative analysis with heavier focus on the former. A consistent credit risk measuring

methodology is applied to KED's model building methodology, which is used in producing

ratings for corporations, and also in compliance with the BASEL II requirements.

In order to produce a rating for a corporation, over 300 credit investigators and analysts

evaluate the qualitative aspects of the target corporation such as industry trends and risks,

business risks, operating risk, and management risk. Next we combine the result of the

analysis with the scores generated from the quantitative models to produce a rating.

Lastly, the rating is taken under the deliberations of the Rating Committee. Once

adjustments (overriding if necessary) are made, the Committee approves of the rating and

the final rating is produced.

Credit rating grade is KED's own opinion on corporations' credibility derived from ranking

them based on their PD (probability of default) and sorting them out with meaningful

symbols.

KED targets Korean enterprises including but not limited to corporations, self-employed,

newly-created enterprises, public institutions, financial institutions, and non-profit

organization.

Credit ratings are valid until one year from the day they were first given. There are two

different types of ratings, first being the periodic rating and the second being on

demand(updated) rating which takes place when a credit-related event occurs to an issuer.

The factors that are taken into consideration when rating a corporation are analysis on

past management accomplishment, objective information available at the time of

assessment, financial forecast under normal and stress-scenario, expert judgment and

diverse experience of credit analysts, and etc. However, none of the characteristics related

to individual financial obligation such as guarantee, security, and repayment are not

considered at all.


The main features of KED's corporate credit assessment are as follows:

Features of KED credit rating structure

－ Corporations are divided into several different segments according to asset size and

industry type with proper models being used for each segment.

－ There is a qualitative (non-quantitative non-financial) model dedicated to Public

Institutions.

－ Financial institutions are classified into seven different segments with each segment

having its own rating model.

－ The application of quantitative factors have increased as well as the application

scope of CEO information.

－ Quantitative and non-quantitative rating processes are independent of each other

when producing credit ratings.

－ Normal and Stress Projections (financial forecasts) are reflected on the rating

process.

KED Ratings

－ There are 22 different ratings.

－ Regardless of the enterprise size and industry type, identical ratings represent the

same level of risk.

－ Qualitative analysis and projection results (financial forecast) are used in the

overriding process.

1.1. Issuer Rating System

1) Who are we rating?

Both private and corporate enterprises including public and financial institutions.

Individuals are not rated.

2) What information are we using?

KED only uses information that assures objectivity.

Financial Information

－ For general corporations, we evaluate audit reports and the most recent three or

more annual financial statements. For newly-established ones and in the case of

incorporating business, the number of annual financial statements required can


be reduced to two or less.

－ In the case of consolidation and spin-off, we use the merged and/or separated

F/S of the corporations relevant to such event.

－ In the case of transfer and/or acquisition of business whether in part or in

whole, including financial obligations, we evaluate the financial condition of the

company after the transfer and/or acquisition process.

Qualitative Information

Interview material, on-site inspections, and off-site investigation need to be

objective and rational.

How the necessary information is obtained

Information necessary for rating is obtained by two different ways. The information

related to financial and public transactions comes from the Korea Federation of

Banks where such information is pooled. The other information comes directly from

KED's own credit investigation results. The information acquired from credit

investigation, whether it was given to or requested by us, is handled and inputted

into our computers according to the instructions stated in the [Standards on Using

Client Information].

－ Information obtained from credit investigation : copy of the resident registration,

written confirmation of financial transactions(if necessary),

financial statements and annexation, enterprise outline,

certified copy of the corporation registration, certified copy of

the real estate registration, copy of the VAT form, and etc.

－ Information obtained from KFB : default, issuance of credit, loan,

guarantee(surety) information, and etc.

3) How is the system structured?

A rating system consists of models, filtering, and overriding. The final rating is

produced after going through each of the above stage in order.

－ Rating Model : It is a quantitative model making use of quantitative factors. It

consists of financial model, quantitative non-financial model, and CEO model.

Each model has its own sub-models for different segments which is classified

based on size and industry type

－ Risk Filtering : It is a process of adjusting the initial score generated by the

rating models. Essential factors and the factors not reflected on the rating

models are utilized during this stage.


－ Overriding : It is a process when credit analysts and Rating Committee adjust

and conclude the final rating. Expert judgment, results from qualitative models,

and projection results are taken into consideration.

[ Procedure of Issuer Rating ]

4) How are the issuers classified?

By size

Audit, unaudit, and small corporations are classified by asset size only. How the

enterprise is established is not taken into account. SOHO refers to private

enterprise without financial statements.

Audit : Audited Corporations whose asset is worth over 7 billion KRW. The

corporations whose asset was worth less than 7 billion KRW in the previous

year(t-1) but is worth over 7 billion in the current year(t), belongs to this

category as well.

Unaudit : Corporations whose closing financial statement is submitted with

asset worth between 1 billion and 7 billion KRW. The corporations with

unsuitable audit report are considered to be classified as unaudit even if their

asset is worth over 7 billion KRW.

Small Corporation : Corporations with asset worth less than 1 billion KRW or

private enterprises.

SOHO : Private enterprises without any financial information(bookkeeping by

double-entry or did not submit any).


By Corporation Type

Depending on the type, enterprises are classified into General Corporation

(Corporate) and Non-general Corporation. Non-general Corporation

(Non-corporate) is further divided into Public Institution and Financial Institution.

General Corporation (Corporate) : Corporations or private enterprises

excluding public and financial institutions. They are classified into

Audit, Unaudit, Small Corporation, and SOHO depending on the

asset size and reliability of information.

Financial Institution : Those subject to Financial Supervisory Service(FSS)'s

audit according to the [Act on Establishment of Financial

Supervisory Body]. Financial Institutions are divided into seven

different categories based on the classification rules of the Korea

Listed Company Association.

- Life insurance Business : Life insurance Companies

- Non-life(accidental) insurance business : Non-life insurance

companies

- Securities business : Securities and futures companies

- Investment banking business : Asset managers, investment

advisers

- Non-bank depository institution : mutual savings bank, credit

union

- Credit-financing business : credit card, installments, leasing, and

Venture capital funding companies

Public Institution : Institutions that are being invested by central or local

governments. The central and local governments must possess

ownership in part or in whole and exercise some control over

them.

Based on the New BIS standards, public institutions are categorized as

follows.

- Public corporations established by special Acts, whose deficit is

not recovered by the government

- Institutions established by the Local Autonomous Government

Act including directly-managed corporations, local corporations,

and local complexes

- Government (including local autonomous governments) invested

or re-invested institutions

- Other institutions classified as public institution at FSS director's

own discretion

* When using quantitative ratings, public institutions are treated

as same as general corporations (corporate), whereas a


designated model is utilized for public institutions when using

non-quantitative ratings.

By Industry Type

Classification by industry type is done after the corporations are classified

according to the asset size, corporation type, and which rating method to be

applied. The standards for classification is based on how the differences among

the corporations are utilized in order to improve the outcome of the rating

models by applying KED's segmentation methodology.

(The classification by industry type is exhibited in detail in the quantitative and

non-quantitative model classification table)


1.2. The Structure of Issuer Rating Model

There are two fundamental ways to classify the rating models. The rating models can

be divided into general corporation (corporate) and non-general corporation

(non-corporate) by corporation type. On the other hand, they can also be divided into

quantitative and non-quantitative based on the characteristics of models. The

quantitative rating model consists of financial, quantitative non-financial, and CEO

models. The qualitative rating model consists of non-quantitative non-financial models.

General Corporation (Corporate) Model

Model designed for general corporations which consists of financial, quantitative

non-financial, and CEO models.

－ Financial Model

Model utilizing the financial ratios of past and present information of a

corporation

－ Quantitative Non-financial Model

Model making use of non-financial factors which can be quantified

－ CEO Model

Model based on CEO's private and financial information

－ Qualitative Model

Model reflecting the credit analysts expert judgment on non-financial

characteristics of a corporation. The model is utilized during the overriding

process.

※ Financial, quantitative non-financial, and CEO models all have specific

sub-models for different segments categorized by asset size and industry type.

Non-General Corporation (Non-corporate) Model : Non-corporate rating models are

divided into financial institution model and public institution model.

－ Financial Institution Model

Designed for those subject to FSS's audit, it is only composed of financial models

which are further broken down depending on the categories explained above. The

institutions are rated using both quantitative and qualitative aspects on which the

attributes of financial business are reflected.

－ Public Institution Model

The financial, quantitative non-financial, and CEO models for public institutions

are exactly the same as the ones used for general corporations. Only the

non-quantitative non-financial model is specially designed and added to public

institution.

1) Model Classification Structure

Rating models are divided into quantitative and non-quantitative models which use

quantitative aspects and qualitative aspects respectively.


Segmentation Sub-models Sub-models by industry type

GeneralCorporation

Audit

Financial Light IndustryHeavy

IndustryConstruction Retail, Wholesale, & Service

Quantitative

Non-financialAll Industry

Unaudit

Financial Light IndustryHeavy

IndustryConstruction Retail & Wholesale Service

Quantitative


CEO All Industry

SmallCorporation

Financial Manufacturing Construction Retail & Wholesale Service

Quantitative


CEO All Industry

SOHO

Quantitative


CEOSmall-scale

Manufacturing

Heavy Equipment &

ConstructionWholesale Retail Service

Financial

InstitutionFinancial Banking Non-life

Insurance Securities Investment Banking

Non-bank Depository Institution

Credit Finance

Life Insurance

Quantitative models consist of financial model evaluating the financial characteristics,

quantitative non-financial model reflecting the quantitative aspects of non-financial

characteristics, and CEO model which examines the reliability of the CEO. Each model

is segmented further according to asset size, corporation type, and industry type.

Non-quantitative models are used for the purpose of evaluating the factors which

cannot be obtained through quantitative measures but have impact on the credit

rating of corporations. They are also segmented further, according to asset size,

corporation type, and industry type.

Quantitative Model Classification

[ Quantitative Model Segmentation ]

General Corporation (Corporate)

- The financial model separates risks into growth, profitability, stability,

liquidity, volatility, and cash flow and then uses the risk factors selected from

each area. Different financial ratios are used depending on the asset size and

industry type. If identical financial ratios are used, weight may be distributed

differently.

- The quantitative non-financial model has its own version for audit, unaudit,

small corporation, and SOHO. It's risk factors include company overview,

reliability of financial transactions and financial statements, change in money

flow, and shareholder status. Each model has its own rating standards and

risk factors.

- The CEO model only applies to unaudit, small corporation, and SOHO. There

is only one model for unaudit and small corporation each, whereas there are


Classification Qualitative (non-quantitative non-financial) Models by Industry Type

General

Corporation

Audit Construction(general)

Construction(housing)

Construction(specialized)

Non-Construction Manufacturing

Unaudit Construction(general)




Small Enterprise &

SOHOConstruction

(general)Construction

(housing)Construction(specialized)


Financial Institution Banking Non-lifeInsurance Securities Investment

Banking

Non-Bank Depository Institution

Credit Finance

Life Insurance

Public Institution All Industry

five different models for SOHO depending on the industry type. Risk factors

include credit information such as credit card issuance, loan and guarantee

information, personal information, and officially registered information. Each

model has its own rating standards and risk factors.

Financial Institution

- There are seven different financial models for firms categorized as financial

institution. The models cover banking, non-life insurance, securities,

investment banking, non-bank depository institution, and credit finance

industry.

- There are six different risk factors which are capital adequacy, asset quality,

profitability, liquidity, size, and productivity.

Public Institution

- Public institutions are treated as general corporation (corporate) when using

quantitative models.

Qualitative Model Classification

[ Non-quantitative Model Segmentation ]

General Corporation (Corporate)

- Industry risk, operating risk, and management risk are the three major risk

factors of qualitative (non-quantitative non-financial) model. They are further

segmented into specific risk factors according to asset size and industry type.

- If an audited company's foreign currency debt is over 1 million USD or the

percentage of foreign currency debt is more than 10 percent of the total

asset, foreign exchange risk is added to the risk factors. (FSS policy)

- Companies subject to being rated on foreign exchange risk are divided into

large, medium, and small companies with different risk factors and weight

being applied to them.

Financial Institution

- The seven industry types are the ones written in the quantitative model

segmentation table. Risk factors include Industry risk, management risk,

operating risk, risk management, and stress analysis.


Category Factors

Credit

Information

has default history with 'three months past due'

has default history with 'subrogation'

- The same risk factors are applied with different weight for each industry type.

Public Institution

- The possibility of government aid, business risk, management risk, and stress

analysis are the four major categories which will be segmented into eleven

different sub-categories

2) Flow Diagram of Model Application

If there is a rating request, which model to apply is determined based on the

information acquired during the investigation process. Once the appropriate models are

applied the scores and ratings are produced.

[ Flow Diagram of Rating Models ]

* The quantitative models for public institution are applied in the same way as they

are applied to the general corporations. The stress projection is reflected on the

crisis analysis, which is one of the risk factors of non-quantitative non-financial

rating.

3) Filtering

Filtering is a necessary step to reflect some of the risk factors that were not applied

in the previous process, but have crucial impact on the credit score. Filtering takes

place after checking whether the new credit-affecting factors are applicable or not,

once the rating models have generated credit scores.

[ Applicable Factors for Filtering ]


has default history with 'nonpayment information'

has default history with the 'person involved'

has default history with 'person disrupting financial order'

has default history with non and/or deferred payment

default information cleared

CEO's personal experience on delayed payments / subrogation / nonpayment /disrupting financial order/ and etc.

CEO's personal information on 'person involved' and non and/or deferred

payment

Financial

Factors

unsuitable audit report, refusal, evasion, and limitation of audit

encroachment of equity on the settling day

net profit of the last three years (-)

cash operating income of the last three years (-)

Miscellaneous additional factors chosen based on analysis result

4) Override

Overriding takes place after the filtering work is done. The Rating Committee adjusts

the grade by looking at additional information obtained from non-quantitative

non-financial models and other relevant means.

Qualitative analysis based on industry risk, operating risk, management risk,

comments of the credit analysts regarding economic fluctuations, and both normal and

stress projections are all taken into consideration.

The scope and contents of the overriding process is determined by the Rating

Committee according to the rules and policies of the rating policies.


2. Detailed Explanation of the Rating Model

2.1. Financial Rating Risk Factor

1) Definition of financial risk factors

Only the risk factors that are statistically proven to be important financial ratios of

activity, liquidity, stability, profitability, growth, volatility, and cash flow are chosen.

The risk factors differ depending on the financial model applied.

Stability

Measuring the stability, also known as the ability to correspond to market

fluctuation, among the ratios of asset, debt, and equity.

- (Total Liabilities - Retained Earnings) / Tangible Asset)

Measures the size of tangible asset compared to borrowed capital.

Companies are considered to be stabler with lower ratio.

- Borrowings Dependency Ratio

Financial expense is divided by sales to indicate the level of financial expense

incurred. Since financial expense has characteristics of fixed costs, it is better

for companies to keep this ratio low in the long run.

- Gross Profit / Interest Expense

Indicates the ability to pay interest with profit.

- Net Financial Expense / Sales

Measures net financial expense(Interest Expense - Interest Income) over sales.

- Current Assets / Total Assets

Indicates the percentage of assets that can be liquidated over total assets.

- Retained Earnings / Total Liabilities

Represents how much debt can be repaid with retained profit.

- Retained Earnings / Current Assets

- Retained Earnings / Total Assets

Represents the percentage of cumulative profit over total assets.

- Total Shareholders' Equity / Financial Expense

Indicates how much financial expense can be covered with equity.


- Reserve Ratio

(Total shareholders' equity - Paid-In Capital) / Total shareholders' equity

- Total Borrowings and Bonds Payable to Total Assets

Shows the percentage of borrowed amount over total assets.

Higher ratio represents lower profitability and stability.

- EBITDA / Financial Expense

Indicates how much financial expense can be covered with EBITDA.

(EBITDA : Operating Profit + Depreciation + Amortization on Intangible Assets)

- EBITDA / Total Borrowings

Indicates what percentage of total borrowings can be covered with EBITDA.

- Adjusted Interest Coverage Ratio

Represents what percentage of net financial expense can be covered with the

sum of operating income, depreciation, amortization on intangible assets, and

retirement allowance.

Profitability

Measuring the performance of management to examine the ability to create

profit. The factors regarding profitability can be the measure of management

rationalization.

- Current Profit to Sales Ratio

The main indicator of management's total performance.

It not only captures the company's performance on its main field of business but

also its financial activities as well.

- Gross Profit / Current Assets

Indicates the earning power of current assets.

- Ordinary Income to Capital Stock

Ordinary income over average paid-in capital.

- Net Income on Capital Stock

Net income over average paid-in capital.

- Gross Value Added to Total Assets or Productivity

Indicates how much value is added during the period of one year with the total

capital invested.

- Return on Assets

Indicates the ultimate result of total asset invested.


- EBITDA (corrected)

EBITDA over CPI (consumer price index)

Represents the company's ability to generate cash.

- EBITDA Margin Rate

EBITDA over Sales

Represents the ability to generate cash from sales.

Growth

Measuring the increase in size and performance of companies compared to the

previous year.

Growth is an indirect indicator of corporations' competitiveness and ability to

make profit.

- Total Assets Growth Rate

Indicates the growth rate of total assets invested and also represents the overall

growth performance of a company.

Liquidity

Measures the ability to pay short-term liabilities.

- Quick Ratio

Quick assets (current assets less fixed assets) over current liabilities

A supportive indicator of liquidity. The ratio is used to measure the ability to

pay short-term liabilities of a company. Companies with ratios over 100% are

considered to have favorable liquidity. It is also known as Acid test ratio.

- Short Term Borrowings / Quick Assets

Short term borrowings over quick assets

Companies with low ratio are considered to have favorable short-term liquidity.

- Cash Ratio

Indicates the ability to pay current liabilities in extremely short period of time

with cash and cash equivalents, short term financial instruments, and etc.

- Cash Quick Assets / Current Assets

Represent the ability to turn current assets into cash.

Cash quick assets (the sum of cash and cash equivalents, short term financial

instruments, securities, and etc) over current asset

Activity

Measures how actively the capital invested has been employed.

It is also known as turnover ratio analysis. Since the ultimate purpose of a

company is to make profit, the capital is continuously "turned over." Therefore


the main indicator to measure the turnover ratio is sales, and activity of a

company can be expressed with multiples of a turnover ratio.

- (Trade Receivables+Inventory)/Sales

Represents the inverse of operating assets turnover rate.

Companies with lower ratio are considered to efficiently manage their trade

receivables and inventory.

- Trade Payables Turnover Ratio

Sales over average balance of trade payables

Represents the ability to pay and how well the trade payables are being settled.

- Net Working Capital Turnover Ratio

Sales over average balance of net working capital

indicates how well the net working capital is being employed.

Higher ratio means higher level of net working capital management efficiency.

(working capital : trade receivables + inventory)

- Inventory Turnover Ratio

Sales over average balance of inventory

Measures how fast inventories are turning into quick assets.

In general, higher inventory turnover ratio means higher efficiency in inventory

management. However since the ratio is also high when there are not enough

inventories to run the business, it is advised to pay special attention when

interpreting this ratio.

- Total Capital Turnover Ratio

Sales over average balance of assets

Measures the efficiency in terms of how well the company has employed the

total capital invested.

Companies with higher ratio are considered to be efficient and operating

actively.

Volatility

- Coefficient of Variations on Sales

Standard deviation of past three years' sales over average sales

Measures the relative volatility of sales.

- Revenue Value DD

Operating income over interest expense

Revenue value DD is used to understand the asset value in terms of profitability

and activity.

If the value is below 0, the company is unable to cover interest expense with

operating income and therefore has high risk of being insolvent.


- Book Value DD

Used to assess unlisted companies' asset values using their balance sheets.

If the value is below 0, the asset value of a company is less than the book

value, and therefore has high risk of being insolvent.

- Cash Flow DD

(cash flow after operating activities - interest expense) over standard deviation

of cash flow after operating activities

Higher cash flow after operating activities, lower interest expense, and lower

volatility of cash flow after operating activities all contribute to lower risk of

being insolvent.

* DD Variables

DD models are default-projecting models based on debt-assessment. The risk

of being insolvent is measured with distance to default (difference between

assets and liabilities) and volatility of asset value. KMV Corporation developed

DD models using Merton's option pricing theory.

Stocks are treated as some sort of call options that are valuable only if a

company's asset value is greater than its liability value. If the value of the

company is greater than the liability value, the company is able to pay the

interests. On the other hand, if the value of the company is less than the

value of liability, payment for debt is requested. Therefore DD can be defined

with the expression below.

In simple words, closer distance between asset value and liabilities and greater

volatility of asset value contribute to higher probability of default.

Cash Flow

Cash flow ratios indicate a company's ability to repay the borrowed capital to

investors. Since companies are borrowing capital from investors in order to

expand their business, cash flow ratios are used to measure a company's ability

to repay borrowings.

- Net Interest Coverage Coefficient

Measures the amount of net financial expense covered with the cash flow after

operating activities.

- Cash Operating Income / Liabilities

Measures the amount of total liabilities covered with cash operating income.

Higher ratio indicates greater ability to repay debt in the long run.

- Cash Operating Income / Total Borrowings

Measures the amount of total borrowings covered with cash operating income.


Category Financial Ratios Formula

Stability

(Total Liabilities-Retained Earnings)/Tangible Asset

(Total Liabilities-Retained Earnings)/Tangible Asset *100

Borrowings Dependency Ratio

(Interest Expense+Loss on Disposal of Trade Receivables)/Sales*100

Gross Profit/Interest Expense

(Gross Profit/Interest Expense) *100

Net Financial Expense/Sales

(Interest Expense-Interest Income)/Sales *100

Current Assets/Total Assets

Current Assets/Total Assets *100

Retained Earnings/Total Liabilities

Retained Earnings/Total Liabilities *100

Retained Earnings/Current Assets

Retained Earnings/Current Assets *100

Retained Earnings/Total Assets

Retained Earnings/Total Assets *100

Total Shareholders' Equity / Financial Expense

((Total Shareholders' Equity(Current Period)+Total Shareholders' Equity(Prior Period))2)/(Interest Expense(Current Period)+Loss on Disposal of Trade Receivables(Current Period))

Reserve Ratio(Capital Surplus+Retained Earnings+Capital Adjustment)/Total Shareholders' Equity *100

Total Borrowings and Bonds Payable toTotal Assets

(Short-term Borrowings+Current Portion of Long-term Liabilities+Long-term Borrowing+Corporate Bonds+Capital Lease Liabilities)/Total Assets *100

EBITDA/Financial Expense(Operating Income+Depreciation Cost on PL+Amortization on Intangible Assets+Depreciation cost on CR)/(Interest Expense+Loss on Disposal of Trade Receivables)

EBITDA/Total Borrowings

(Operating Income+Depreciation Cost on PL+Amortization on Intangible Assets+Depreciation Cost on CR)/(Short-term Borrowings+Current Portion of Long-term Liabilities+Corporate Bonds+Long-term Borrowings+Capital Lease Liabilities) *100

Adjusted Interest Coverage Ratio

(Operating income+Depreciation Cost on PL+Depreciation Cost on CR+Amortization of Intangible Assets+Retirement Allowance on PL+Retirement Allowance on CR+Bad Debt Expenses+Other Bad Debt Expenses)/(Interest Expense+Loss on Disposal of Trade receivables-Interest Income)

Total Shareholders' Equity/ Financial Expense

((Total Shareholders' equity(Current Period)+Total Shareholders' equity(Prior Period))/2)/(Interest Expense(Current Period)+Loss on Disposal of Trade Receivables(Current Period)

Profitability

Current Profit to Sales Ratio

Ordinary Income/Sales *100

Gross Profit/Current AssetsGross Profit(Current Period)/((Current Assets(Current Period)+Current Assets(Prior Period))/2) *100

Ordinary Income toCapital Stock

Ordinary Income(Current Period)/((Capital Stock(Current Period)+Capital Stock(Prior Period))/2) *100

Net Income onCapital Stock

Net Profit(Current Period)/((Capital Stock(Current Period)+Capital Stock(Prior Period))/2) *100

Gross Value Added to Total Assets or Productivityof Capital

(((Ordinary Income(Current Period)+Salary(Current Period)+Retirement Allowance(Current Period)+Welfare Expenses(Current Period)+Interest Expense(Current Period)-Interest Income(Current Period)+Rent Fee(Current Period)+Taxes and Dues(Current Period)+Depreciation Cost(Current Period))+on CR(Labor Cost(Current Period)+Welfare Expenses(Current Period)+Depreciation Cost(Current Period)+Heavy Machinery Rent

- EBITDA / Short-term Borrowings

Measures the amount of short-term borrowings covered with EBITDA, one of the

risk factors of cash generating ability.

- EBITDA / Current Liabilities

Measures the amount of current liabilities covered with EBITDA

2) Financial Ratio Formulae


Fee(Current Period)+Rent(Current Period)))/((Total Liabilities and Shareholders' Equity(Current Period)+Total Liabilities and Shareholders' Equity(Prior Period)on PL)/2)) *100

Return on AssetsNet Profit(Current Period)/((Total Assets(Current Period)+Total Assets(Prior Period))/2) *100

EBITDA(corrected)((Operating Income+Depreciation Cost on PL+Amortization on Intangible Assets+Depreciation Cost on CR/avgCPI(1)

EBITDA Margin(Operating Income+Depreciation Cost on PL+Amortization on Intangible Assets+Depreciation Cost on CR)/Sales *100

Growth Total Assets Growth Rate (Total Assets(Current Period)/Total Assets(Prior Period)) *100-100

Liquidity

Quick Ratio (Quick Assets/Current Liabilities) *100

Short-term Borrowings/Quick Assets

(Short-term Borrowings+Current Portion of Long-term Liabilities)/Qucik Assets *100

Cash Ratio(Cash and Cash Equivalents+Short term Financial Instruments)/Current Liabilities *100

Cash Quick Assets/Current Assets

(Cash and Cash Equivalents+Short-term Financial Instruments+Securities+Short-term Investment Securities)/Current Assets *100

Activity

(Trade Receivables+Inventory)/Sales

((Trade Receivables(Current Period)-Allowance for Bad Debt regarding Trade Receivables(Current Period)+Inventory(Current Period)+Trade Receivables(Prior Period)-Allowance for Bad Debt regarding Trade Receivables(Prior Period)+Inventory(Prior Period))/2)/Sales *100

Trade Payables Turnover Ratio

Sales(Current Period)/((Trade Payables(Current Period)+Construction Cost Payables(Current Period)+Trade Payables(Prior Period)+Construction Cost Payables(Prior Period))/2)

Net Operating CapitalTurnover Ratio

Sales(Current Period)/((Trade Receivables(Current Period)+Inventory(Current Period)-Trade Payables(Current Period)-Construction Cost Payables(Current Period)+Trade Receivables(Prior Period)+Inventory(Prior Period)-Trade Payables(Prior Period)-Trade Cost Payables(Prior Period))/2)

Inventory Turnover Ratio (Sales(Current Period))/((Inventory(Current Period)+Inventory(Prior Period))/2)

Total Capital Turnover Ratio

Sales(Current Period)/((Total Assets(Current Period)+Total Assets(Prior Period))/2)

Volatility

Coefficient of Variation onSales

Standard Deviation of the Last 3 Years' Sales/Average of the Last 3 Years Sales

Revenue Value DD(Operating Income-Interest Expense)/Standard Deviation of Operating Income

Book Value DD3 Year Average of Total Assets*Log(Total Assets/Total Liabilities)/Standard Deviation of 3 Year Average of Total Assets

Cash Flow DD(Cash Flow After Operating Activities-Interest Expense)/Standard Deviation of Cash Flow After Operating Activities

Cash Flow

Net Interest Coverage Coefficient

Cash Flow After Operating Activities/(Interest Expense+Loss on Disposal of Trade Receivables-Interest Income)

Cash Operating Income/Liabilities

Cash Operating Income/Total Liabilities *100

Cash Operating Income/Total Borrowings

Cash operating Income/(Short-term Borrowings+Current Portion of Long-term Liabilities+Corporate Bond+Long Term Borrowing+Capital Lease Liabilities) *100

(Net Profit+Tangible&Intangible Assets Depreciation Cost)/ Short-term Borrowings

(Net Profit+Depreciation Cost on PL+Amortization on Intangible Assets+Depreciation Cost on CR)/(Short-term Borrowings(Prior Period)+Current Portion of Long-term Liabilities(Prior Period) *100

(Net Profit+Tangible&Intangible Assets Depreciation Cost)/ Current Liabilities

(Net Profit+Depreciation Cost on PL+Amortization on Intangible Assets+Depreciation Cost on CR)/Current Liabilities *100

Average CPI : Average Consumer Price Index on financial Settlement Date

(CPI, The National Statistical Office)


C

A

T

E

G

O

R

Y

Financial Ratio

Audit UnauditSmall

Corporation

L.I. H.I. C

R,W

&

S

L.I. H.I. C R&W S M C R&W S

S

T

A

B

I

L

I

T

Y

(Total Liabilities-Retained Earnings)

/(Tangible Assets)O O O O O O O O

Borrowings Dependency

RatioO O O

Gross Profit/

Interest ExpenseO O O O O

Net Financial Expense/Sales O O

Current Assets/Total Assets O

Retained Earnings/

Total LiabilitiesO

Retained Earnings/

Current AssetsO O

Retained Earnings/

Total AssetsO O O O O

Total Shareholders'

Equity/

Financial Expense

O O O O O

Reserve Ratio O

Total Borrowings and

Bonds Payable to

Total Assets

O O O O

EBITDA/Financial Expense O O

EBITDA/Total Borrowings O

Adjusted Interest Coverage

RatioO

P

R

O

F

I

T

A

B

I

L

I

T

Current Profit to Sales

RatioO O O O

Gross Profit/Current Assets O

Ordinary Income to

Capital StockO O

Net Income on

Capital StockO

Gross Value Added to

Total AssetsO O O O

Return on Assets O

EBITDA(Corrected) O

EBITDAmargin O

3) Financial Risk Factors Breakdown The table below shows the financial risk factors for each rating model. Identical

financial ratios may be applied with different weights depending on the sub-models.


Y

G

R

O

W

T

H

Total Assets Growth Rate O

L

I

Q

U

I

D

I

T

Y

Quick Ratio O O

Short-term Borrowings/

Quick AssetsO

Cash Ratio O O O O O O

Cash Quick Assets/

Current AssetsO

A

C

T

I

V

I

T

Y

(Trade

Receivables+Inventory)/

Sales

O O O

Trade Payables Turnover

RatioO

Net Operating Capital

Turnover RatioO

Inventory Turnover Ratio O O

Total Capital

Turnover RatioO

V

O

L

A

T

I

L

I

T

Y

Coefficient of variation

on SalesO O

Revenue Value DD O O O O

Book Value DD O O O O O O

Cash Flow DD O

C

A

S

H

F

L

O

W

Net Interest

Coverage CoefficientO

Cash Operating Income/

LiabilitiesO

Cash Operating Income/

Total BorrowingsO O

(Net Profit+Tangible&Intangible Assets Depreciation

Cost)/Short-term Borrowings

O O O O

(Net Profit+Tangible&Intangible Assets Depreciation

Cost)/Current Liabilities

O

Total Risk Factors 7 8 7 6 8 8 7 8 6 8 7 10 7


※ L.I.=Light Industry

H.I.=Heavy Industry

C=Construction

M=Manufacturing

W=Wholesale

R=Retail

S=Service

The risk factors can be added, subtracted and modified if necessary.


2.2. Quantitative Non-financial Risk Factors

1) Definition of quantitative non-financial risk factorsQuantitative Non-financial risk factors are drawn from factors that crucially impact the

credit rating of a company but are not related to financial elements. The factors are

chosen after checking the significance test and fidelity of the acquired information.

The risk factors of the quantitative non-financial models are selected from the

company overview, reliability of financial transactions, change in cash flow, and

shareholder status that are statistically proven to be important. The risk factors and

standards vary depending on the model used.

Company Overview

- Duration after Establishment

Factors based on the number of years past since the day of establishment.

Since the risk based on the duration of establishment does not change

dramatically every year, adequate categorization is required. For smaller

companies' early years, further break-down of categories is required compared

to the audited companies.

- Ownership of Workplace

Whether the place of business is owned or not is used as the risk factor. If not,

whether the place is leased or rented, lease amount or monthly rental fee, and

violation of rights status are all taken into consideration. If there are multiple

work places, the main one is used for rating.

Reliability of Financial Transactions

- Checking on Bad Credit Transaction History

Assess the reliability of financial transactions by grouping bad credit transaction

incidents with financial institutions.

Reliability of Financial Statements

- Reliability of Financial Statements

It's a factor to reflect the reliability of the F/S. By using several financial

accounts and comparing them with the ones in the same industry and size,

suspicious accounts are linked with the bad rate of the company, then quantified

and grouped. The cut-off value is decided by reflecting the characteristics of

specific industry and company size. Company size is categorized into audit,

unaudit, and small enterprise and industry type is based on the industry

segment of the financial model with the exception of the construction industry

where the maximum and minimum values show huge difference. The

Construction Industry is further segmented into light industry, heavy industry,


CategoryQuantitative non-financial

risk factorsAudit Unaudit

Small

EnterpriseSOHO

Company

Overview

Duration of Establishment ○ ○ ○ ○

Ownership of Workplace and

Violation of Rights Status○ ○ ○ ○

Reliability of

Financial

Transactions

Checking on Bad

Credit Transaction History○ ○ ○ ○

Reliability of

Financial

Statements

Reliability of

Financial Statements○ ○ ○

Change in

Cash Flow

Change in Cash Flow

over the Past Three Years○ ○ ○

Shareholder

Status

Shareholding Ratio of

an Affiliated Person○

Total 6 5 5 3

general construction, housing construction, specialized construction,

retail/wholesale, and service.

Change in Cash Flow

- Change in Cash Flow over the Past Three Years

Unlike the approach taken in the financial model, it takes the perspective of

identifying the fund flow of companies and classifying the 3-year trend into

similar categories. The cash flow after interest payment is evaluated and larger

companies have better ability to distinguish the risk levels.

Shareholder Status

- Shareholding Ratio of an Affiliated Person 특수 관계인 지분율

- Factor indicating whether the shareholding ratio of an affiliate person of the

management (oneself, family, relative, affiliated company) is over 50%

2) Quantitative Non-financial Risk Factors Breakdown

When checking the reliability of Financial Statements, the identical quantitative

non-financial risk factor's critical values are defined differently by industry type. The

composition of variables, band values during grouping process, and reference values

are all applied differently as well, depending on the size of the company.

The risk factors can be added, subtracted and modified if necessary.


2.3. CEO Risk Factors

1) Definition of CEO risk factorsCEO rating is conducted under the assumption that CEO's credit rating and

characteristics have relevance to the credit rating of his/her company. The risk factors

chosen are the ones that have impact on the credit rating of a company.

The factors of CEO models are selected from personal and credit information that are

statistically proven to be important. Different risk factors and standards are applied to

each CEO model in order to reflect the characteristics of each industry. Audited

companies however, are not applicable to CEO model.

Credit Information

- Credit Card Issuance

Risk factors related to credit card issuance and the variables used for

assessment is as follows.

Number of days passed since the issuance

The most recently issued credit card's duration days since the initial set up of

the account is used as the risk factor. The card-holding period works against

the card holder until certain amount of time has passed and then it works in

favor of the card holder's credit rating.

Recently issued credit card patterns

It is a risk factor judging whether the holder has established too many credit

card accounts. Excessive issuance of credit cards in recent period has adverse

effect on card holder's credit rating.

Credit card issuance during certain period of time

The issuance of credit card during certain period of time is also considered as

a risk factor. The definition of excessive issuance vary depending on the

industry type and company size and excessive issuance deteriorates credit

rating.

- Loan Information

Risk factors related to CEO's loan information and the variables selected for the

model are as follows.

Number of loans

The total number of loans from each business sector is used as a risk factor.

The business sectors and the criterion of excessive loans are defined

differently depending on the industry type and company size. Fewer number

of loans have favorable effect on credit rating.


Loan status in each business sector

Whether any loan was given to the CEO, number of loans, and the loan

amount from business sectors such as life insurance, capital, credit card,

mutual savings bank, and National Credit Union/Korean Federation of

Community Credit Cooperatives are used as risk factors. Again the criteria

vary on the industry type and company size. Fewer number of loans and

lower amount of loans contribute to better credit rating. Receiving loans from

several of the above mentioned business sectors harms credit rating.

Amount borrowed per loan

The total money borrowed is divided by the total number of loans received. If

the average loan amount exceeds specific amount, it is considered

satisfactory.

Loan patterns

The total number of loans received from financial sector and the total loan

amount are used as risk factors. Although fewer number of loans received

improves credit rating, how the total loan amount affects the credit rating

cannot be easily explained by itself because the total number of loans must

be taken into consideration at the same time.

- Guarantee Information

It is a risk factor related to CEO's guarantee and the variables selected are as

follows.

Guarantee patterns

Whether the CEO has any banking guarantees, non-banking guarantees, the

total guarantee amount, and the total number of guarantees are used as risk

factors. Fewer number of guarantees and smaller total guarantee amount

contribute to better credit rating.

Number of guarantees over the past twelve months

Whether the CEO has any banking guarantees, non-banking guarantees, the

total guarantee amount, and the total number of guarantees during the past

twelve month period are used as risk factors. The risk factors are reclassified

according to the number of guarantees. Fewer number of guarantees and

smaller total guarantee amount have positive effect on credit rating.

Non-banking guarantee amount

The total non-banking guarantee amount is used as a risk factor. The risk

factor is reclassified according to the amount. Fewer number of guarantees

and smaller guarantee amount have favorable impact on credit rating.

Banking guarantee amount


- Officially Registered Information

The risk factor based on officially registered information of CEO. The variables

are as follows.

Whether the CEO's information has been officially registered (on the public

blacklist) or not

The existence of CEO's record on the public blacklist is used as a risk factor.

No such record leads to good credit rating.

Investigation Information

- Personal Information

It is the risk factor related to CEO's personal information. The variables are as

follows.

Age

Age is classified into several different brackets. Older CEOs have better credit

ratings.

Residence type

CEO's residence type is categorized and reflected on the rating.

Number of years working in the same industry

CEO's period of working in the same industry is categorized and evaluated.

Longer period leads to good credit rating.

Residential ownership patterns

Relationship between the owner, whether violation of rights exists, and the

lease/rent amount are categorized and reflected on the rating.

Industry type

Industry type is categorized and reflected on the rating.

Building size

Building size is categorized and reflected on the rating.

Living area

Living area is categorized and reflected on the rating.


CategorySubcateg

oryRisk factors Unaudit

Small

Enterprise

SOHO

S.S.M. R W H.I. S

Credit

Information

Credit CardIssuance

Number of days passedsince the issuance

O O O O O O O

Recently issuedcredit card patterns O O

Credit card issuance during

certain period of timeO O O O O

Loan

Information

Number of loans O O O

Loan status of in each

business sector O O O O O O O

Amount borrowed per

loanO O O

Loan patterns O O O

Guarantee

Information

Guarantee patterns O O O O O O

Number of guarantee

over

the past twelve months

O

Non-banking

guarantee amountO O

Banking

guarantee amountO

Officially

Registered

Information

Whether the CEO's

information has been

officially registered or not

O O O O O O O

Investigation

Information

Personal

Information

Age O O O O

Number of years working

in the same industryO O O O O

Residence type O O O

Residential ownership

patternsO O O O O O O

Business type O O

Building size O O O

Living area O

Total 8 12 10 10 12 8 13

2) CEO Risk Factors Breakdown

※ S.S.M.=Small-scale manufacturing

R=Retail

W=Wholesale

H.E=Heavy Equipment

S=Service

The variables' composition, critical values, and range definition of each risk factor are

applied differently depending on what particular model is used.

Risk factors can be added, subtracted, and modified if necessary.


2.4. Qualitative (non-quantitative non-financial) Risk Factors

1) Summary of Qualitative Risk Factors

Risk factors which cannot be evaluated with financial model are used and there are

three major categories which are industry risk, operating risk, and management risk.


Qualitative Risk Factors for General Corporation

CategorySub

CategoryRisk Factors

Audit Unaudit

Small

Enterprise/

SOHO

M C R&W M C R&W M C R&W

Industry

Risk

industrial

environment industrial Environment ○ ○ ○ ○ ○ ○ ○ ○ ○

stress impact under stress ○ ○ ○

subtotal 1 1 1 1 1 1 2 2 2

Operating

Risk

purchasing/

producing

risk

stability of purchase ○ ○ ○ ○ ○ ○ ○ ○ ○

human resources

/technology

competitiveness

○ ○ ○ ○ ○ ○ ○ ○ ○

location & facilities

quality○ ○ ○ ○ ○ ○ ○ ○ ○

selling risk

the proportion of sales

allotted to regular clients ○ ○ ○ ○ ○ ○ ○ ○ ○

diversity of clients ○ ○ ○ ○ ○ ○ ○ ○ ○

market situation

& economic prospects for

the main line of business

○ ○ ○ ○ ○ ○

cont ract -under tak ing

level○ ○ ○

work brought forward

& contracting price ○ ○ ○

construction stability ○ ○ ○

competition structure ○ ○ ○ ○ ○ ○ ○ ○ ○

credit ratings of

primary clients ○ ○ ○ ○ ○ ○ ○ ○ ○

quality of

trade receivables ○ ○ ○ ○ ○ ○

subtotal 9 11 9 9 11 9 8 10 7

Management

Risk

CEO riskprofessionalism &

managing abilities○ ○ ○ ○ ○ ○ ○ ○ ○

management

structure

stability of

top management○ ○ ○ ○ ○ ○

relations between

labor union &

management

○ ○ ○ ○ ○ ○

risk from affiliates &

subsidiary companies○ ○ ○

financial

management

ability to raise funds 1 ○ ○ ○

ability to raise funds 2 ○ ○ ○ ○ ○ ○

foreign exchange risk ○ ○ ○

Credibility

management ethics ○ ○ ○ ○ ○ ○ ○ ○ ○

civil appeal regarding

environmental pollution ○ ○ ○ ○ ○ ○

whether possessing

pollution control facilities○ ○ ○ ○ ○ ○

product liability ○ ○ ○ ○ ○ ○

reputation ○ ○ ○ ○ ○ ○ ○ ○ ○

reliability of

financial information○ ○ ○ ○ ○ ○

subtotal 12 12 9 10 10 7 7 7 4

Total 22 24 19 20 22 17 17 19 13

※ M=Manufacturing, C=Construction, R&W=Retail & Wholesale


2) Definition of Qualitative Risk Factors

The explanation on the risk factors of each major category is as follows.

Industry Risk

RiskFactor

Rated Contents Rating Method

Industrial Environment

the elements which effect the industry where the company belongs to

grade 1 through 6 is given depending on the level of damage inflicted.

Impact under Stress

the level of impact caused by business fluctuations and critical situations

grade A through F is given depending on the level of damage inflicted on sales, operating profit, net income, and etc under stressed situation.


Operating Risk

RiskFactor


Stability ofDemand

Basis

The proportion of sales allotted to regular clients (more than 2 years of transaction experience) A through F is given depending on the said proportion.

Diversity of clients A through E is given depending on the number clients the company is having transactions with compared to competitors.

Market situation & economic prospects for the main line of business

A through F is given depending on the stability of demand basis, probability of maintaining good relationships with existing clients, and ability to acquire new clients.

Contract-undertaking levelA through F is given depending on the contract-undertaking rankings in the country and the ability to carry out construction work.

Construction brought forward & contract price

A through F is given depending on the value from the following equation.{(Price of construction brought forward in the previous fiscal year+Sum of contract prices in the current fiscal year) / Cost of construction in the previous fiscal year}

Construction stability

Construction(general)

A trough F is given depending on sales to number of construction undertaken ratio.

A through E is given depending on size if the construction area.


A through F is given depending on the rate of sold and leased houses. A through F is given depending on the completion rate of construction work.


A through D is given depending on the number of construction license and engineer licenses possessed. Company without a license is given an F.

A, B, C, E, or F is given depending on the number of regular clients and their credit ratings.

PurchaseStability

Change in price and change in material demanded and supplied due to diversity of sellers, contract terms, history of fluctuations in the price of raw materials and etc, future prospects, oil price, and foreign exchange rate

A through F is given depending on purchasing stability by examining the change in price and change in material demanded and supplied due to external elements such as diversity of sellers, oil price, foreign exchange rate.

HR & Technical

Competitiveness

Human resources and technical competitiveness

Excellent, above average, average, below average, or unsatisfactory is given depending on the human resources and technical competitiveness possessed.

Locations&Facilities

Locations & facilities quality Excellent, above average, average, below average, or unsatisfactory is given depending on the quality of business locations and facilities.

CompetitionStructure

Comprehensive evaluation on Suppliers,customers, competition within the same industry, available substitutes, and potential competitors

A through F is given according to the number of competing companies and possibility of substitute product and/or service appearing.

Credit Rating

ofPrimaryClients

Primary client's(client with the biggest sales proportion) credit rating

A through F is given depending on primary client's credit rating and its existence.

Qualityof

TradeReceivables

Whether to own dishonored bills and bad long-term bonds

A, C, E, or F is given depending on the quantity of dishonored bills and bad long-term bonds owned and how they affect the operation of money by checking the trade receivables status based on the day of investigation and financial settling day.


Management Risk

RiskFactor


Professionalism &

ManagingAbilities

Expertise, external negotiation abilities, marketing abilities, and ability to cope with crisis

Excellent, above average, average, below average, or poor is given depending on the expertise, external negotiation abilities, marketing abilities, and ability to cope with crisis. The relevance of CEO's degree to the work he/she is doing, work experience in previous jobs, and directors and employees of the same industry are reviewed as well.

Stability of Top

Management

Crisis over top management, succeeding issues, CEO's term, and replacement of heavy shareholders (except construction business)

A, C, E, or F is given depending on whether the top management has been replaced in the last two years. If so, the number of times it happened and whether there is any on-going crisis for the right of top management.

Relations between Labor

Union & Management

Relations between labor union and management, possibility of dispute, and employee benefits package

A through F is given depending on the relationship between labor union and management, quality of work environment, and level of employee benefits package.

Risk from Affiliates & Subsidiary Companies

Internal & external credit ratings of affiliates and subsidiary companies, financial situation, and degree of internal transactions

Excellent, above average, average, below average, or unsatisfactory is given depending on the credit ratings of the affiliates and subsidiary firms, financial situation, internal transactions, and the amount of funds provided to.

Ability to Raise Funds(Audit)

Whether any unsecured debentures were issued and their grades, possibility of increase in paid-in capital, ability to borrow money from financial institutions and the terms and conditions on the borrowed money.

Excellent, above average, average, below average, or unsatisfactory is given depending on whether any unsecured debentures were issued and their grades, possibility of increase in paid-in capital, ability to borrow money from financial institutions and the terms and conditions on the borrowed money.

Ability to Raise Funds

(Others except Audit)

Ability to borrow money and the terms and conditions on it, possibility of raising funds through affiliated companies, the value of CEO's own asset.

Excellent, above average, average, below average, or unsatisfactory is given depending on the ability to borrow money and the terms and conditions on it, possibility of raising funds through affiliated companies, the value of CEO's own asset.

Foreign Exchange

Risk

Evaluation of foreign exchange risk according to the Financial Supervisory Service's policy

A through F is given depending on the rating scores of foreign exchange risk.

Management Ethics

Ethical management

Excellent, above average, average, below average, or unsatisfactory is given depending on the CEO's morality and his/her will to ethically manage the company. (whether the company violated any ethics code, was awarded for faithfully paying tax on time, and did any community service on a regular basis are also reviewed.)

SocialResponsibilities

Whether there are any civil appeals regarding environmental pollution

Excellent, above average, average, below average, or unsatisfactory is given depending on whether there are any civil appeals regarding environmental pollution.

Whether there are any pollution control facilities

A through F is given depending on whether any pollution control facilities exist. Quality of the facilities and the rate of operation are also taken into consideration.

Product Liability

Excellent, above average, average, below average, or unsatisfactory is given depending on whether designated team for PL exists, degree of PL risk management, CEO's interest in PL, PL training for directors & employees, quality of rules & regulations regarding PL, whether insured or not, and the compensation level of the insurance.

Company reputations and lawsuits against the company

F is given if the company is having troubles maintaining their usual business due to reasons such as delinquency in payment of taxes & public dues, occurrence of lawsuits, delayed payments of wage, legal restrictions, and environmental regulations

Reliability of Financial

InformationReliability of financial information

A through F depending on the auditing firm's report In the case of unaudited firms, the same grades are given depending on the reliability of financial information

Qualitative risk factors can be added, subtracted, and modified if necessary.


Weight Distribution of Each Risk Category

Qualitative weight distribution of each risk category is as follows.

Category Audit UnauditSmall Enterprise

& SOHO

Industry Risk 23 9 9

Operating Risk 50 62 62

Management Risk 27 29 29

3) Rating Method for Qualitative Risk Factors

The risk factors of judging the level of contract-undertaking.

－The national contract-undertaking standings means the ranking with respect to "the ability to carry out contracts" and the ability to carry out contracts means "the price of contracts."

－Although a company is ranked within the top 10% in the national contract-undertaking standings, if the price of contracts has been declining, a second grade is given.

－If a single company owns multiple construction licenses, the company's contract-undertaking standing is based on its main line (the license with the highest contract price) of business.

The stability of Construction is rated as follows.

－Classification Standards of General Construction, Housing Construction, and Specialized Construction is as follows.

ClassificationConstruction

(general)

Construction

(housing)

Construction

(specialized)

Industry F45 (except F4521 ) F4521, L70121 F46

－Companies that supply realty(realty supplying business L70121) belong to housing construction which runs self-operated business only. Companies in the realty business(L70) other than L70121 are classified into Service.

－The risk factors of General Construction, Housing Construction, and Specialized Construction are different from one another.

－The rate of sold and leased houses is calculated with only on-going business as destination as of the investigation date.


Construction brought forward and contract price are rated as follows.

－The construction brought forward and contract price mean the remaining balance of construction and contract price received from other companies by undertaking the contracts.

－The cost of construction in the previous fiscal year should be computed by using the cost occurring from the constructions contracted. However if the construction contracted by self-operated business is insignificant, therefore making it difficult to compute the cost of construction contracted, the total cost of construction can be used as the cost of construction in the previous fiscal year.

－ Fourth grade is given to construction companies that run self-operated business only without any contracted constructions.

Stress forecasting applies to small enterprises and SOHOs only. The risk

factors are rated as follows.

－ Definition of stressed scenario : Companies are rated under the assumption that domestic market is getting stagnant

․ The assumptions are GDP growth rate in the previous year is less than or

equal to 2%, highest exchange rate against the USD is over 1,300 KRW,

lowest exchange rate against the USD is under 850 KRW, oil price is

over 50 USD, WTI (West Texas Intermediate) oil price is over 60 USD,

and etc. The variables with favorable effects on the domestic market are

excluded when rating the firms.


Category Weight

Management System

establishment & administration of regulations

0.28division of organization & duties

level of computerization process

specialization of the employees in charge

Limit Setting

foreign exchange risk limit setting

0.12open position limit setting

derivatives transaction (with the purpose of selling and buying) limit setting

Management State

ratio of total open position

0.60

ratio of profit and loss occurred due to exchange rate

possession ratio of derivatives transaction (with the purpose of

selling and buying)

Category Weight

Management System

establishment & administration of regulations

0.24division of organization & duties

level of computerization process

specialization of the employees

4) Rating Method for Foreign Exchange Risk

Rated Companies

Companies applicable to the "Act on the external audit of corporations" or audited

companies whose foreign currency assets or liabilities are over 1 million USD or

they account for more than 10% of the total assets. (policy of supervising

institutions)

※ 1 million USD is equal to 1 billion KRW during computerizing data

Instruction for Inputting Relevant Data into the Computer

․ Input the foreign currency assets, foreign currency liabilities, and derivatives

balance, located at the bottom of the balance sheet, into the computers in USD

and KRW.

․ When filling out the credit grade table, input the necessary data and

non-quantitative risk factors on the foreign exchange risk screen, proper grade

will be generated. (A through F)

Risk factors and Weight of Each Category: Divided into Large companies and

small & medium companies

․ Large Company (10 subcategories)

․ Small and Medium Companies (9 subcategories)


Grade A B C D E F

Score 91 ~ 100 81 ~ 90 66 ~ 80 46 ~ 65 36 ~ 45 0 ~ 35

Limit Setting

foreign exchange risk limit setting

0.06open position limit setting

derivatives transaction (with the purpose of selling and buying) limit setting

Management State

ratio of total open position

0.70


possession ratio of derivatives transaction (with the purpose of

selling and buying)

Requested Information and Rating Method

－ The ‘present situation of foreign exchange management’ attached in the ‘credit

investigation information’, audit report, and business report are requested and

used as the basic source for rating.

－ Input the necessary information by referring to the rating standards and point

distribution table with the obtained information.

－ Quantitative risk factors are produced automatically with the inputted data,

whereas non-quantitative risk factors are chosen at the discretion of the

analysts.

－ A total of 100 points are allotted to foreign exchange risk assessment and

there are six grades from A to F


Rating method for each subcategory

Category Risk Factors Rating Method

establishment and administration of international loan regulations

A, C, or E is given depending on whether there are regulations for foreign

exchange risk and how they are administered.

division of organization

and duties

A, C, or E is given depending on whether foreign exchange service, foreign exchange trade limit & rating service, and foreign exchange settlement service are separated and independently operated.

level of computerization process A, C, or E is given depending on the level of system designed for identifying exposure to risk and supporting decision making.

specialization of employees

in charge

A, C, or E is given depending on the number of years the employees in charge has been working, whether the employees have any foreign exchange risk management-related license or certificates, and whether they have completed courses(advanced) offered by relevant institutions.1. Related license or certificates : CFA, CPA, FRM, and foreign exchange control officer2. Related courses : corporate foreign exchange risk courses offered by the Korea Banking Institute※ Grade A can still be given even though the company has contracted the foreign exchange risk management work to some other company. However, the company being assessed must be at least able to identify exposure to risk daily. Receiving a one-time consulting service is not accepted.

foreign exchange risk limit

setting

A, C, or E is given depending on whether the foreign exchange risk limit is set up and being properly managed.※ foreign exchange risk limit : total(daily) loss limit, VaR limit, Stop-Loss limit

open position limit setting A, C, or E is given depending on whether the position limit is set up and being properly managed.

limit setting for derivatives transacted

A, C, or E is given depending on whether the transaction is prohibited and transaction limit is set up

Ratio of total open

position A through E is given depending on the ratio level of total open position


A through E is given depending on the ratio of profit and loss due to

exchange rate.

possession ratio of derivatives transacted

A through E is given depending on the possession ratio of derivatives

transacted

How to fill out the quantitative risk factors

Total Open position Ratio

* The nominators are absolute value and the lowest score is given to the

company encroached on its capital

The basic date for filling out the factors is based on the settling day and

the exchange rate of KRW is based on the daily trading rate of each

currency.

Refer to the notes in the audit reports to check the balance and trade

status such as foreign currency liabilities and selling and buying of


derivatives. In the case of listed and registered companies, refer to the

important management-related contracts in the business report.

Derivatives such as foreign currency futures, options, and swaps fall under

this category.

Buying of foreign exchange call options/selling of foreign exchange put

options are treated as buying foreign exchange. On the contrary, selling of

foreign exchange call option/buying of foreign exchange put options are

treated as selling of foreign exchange.

Derivatives related to currencies are classified according to the currency of

each country and include them in the position.

When trading derivatives if they are non-monetary, the position is

computed based on foreign currency whereas monetary(bonds, stocks, and

deposits) products are excluded from computing the position.

<Examples of derivatives included when computing the total open position>

Category Currency

Interest rates when using

foreign currency and stocks

Other products

exposed to foreign

exchange risk

Futures/

Forwards

Amount in

Korean

Currency

O X X

Amount in

Foreign

Currency

O X O

Options

Amount in

Korean

Currency

O X X

Amount in

Foreign

Currency

O X O

Swaps

Amount in

Korean

Currency

O X X

Amount in

Foreign

Currency

O X X


Ratio of profit and loss occurred due to exchange rate

* The nominators are absolute values and the lowest score is given to the

company operating at a loss.

Refer to the income statement and exclude the profit and loss from

foreign exchange translation and the profit and loss from assessment of

derivatives

Only include the profit and loss from currency-related derivatives

* Possession ratio of derivatives traded

* The lowest score is given to the company encroached on its capital.

Refer to the publicized business report for the listed and registered companies.


2.5. Normal and Stress Projections

1) Normal Projection

Normal projection is a way of forecasting the financial elements of a company such as

revenue, profitability, growth, and funds situation. It is also a way of filling out the

forecasted financial statements. The main purpose of the forecasted financial

statements is to evaluate a company's ability to repay it's liabilities by transforming

the predicted business showings into coefficients based on the ratio of operating and

financial activities. When the projection takes place, proper explanation of projection

method and its procedures is required in order to give confidence to the readers.

Normal Projection is divided into simplified and comprehensive projections. In the

simplified projection, it is assumed that a company's growth rate stays constant and

therefore the average growth rate of the past three years are taken into

consideration. On the other hand, when the situation allows for more precise analysis,

values such as sales, cost of the goods sold, average interest on loans, depreciation

ratio, and operating capital ratio are selected and evaluated for the forecast. The

analyst can choose either simplified or comprehensive projection, and once the

projection type is determined, the analyst can acquire the most suitable results by

going through various simulation exercises.

2) Stress Projection The stress projection is used to safely maintain the final rating grade of a company by

reflecting its ability to repay liabilities under stagnant economic situation. The stress

projection assumes the situation under stress and forecasts how the company is

influenced by the situation.

The macroeconomic situation under stress reflects the expert judgment and opinions of

the credit analysts. When the experienced analyst inputs the newly predicted values

(under stress) of the already assumed values into the system, it produces the final

stress score and the PD. The comprehensive projection process is designed to fully

reflect the analyst's independent opinion on the change in macroeconomic

circumstances.

3) The Reflection of Normal and Stress Projection

The person in charge of the credit rating carries out both projections and checks the

possibility of change in the rating. Then whether it is necessary to override the grade

is reviewed and the result is reflected on the overriding process.


2.6. Financial Institution Model

1) Rated Institutions For the convenience of the working personnel and to maintain consistency of the

terminologies being used, the definition of a financial institution is as follows.

Those subject to Financial Supervisory Service(FSS)'s audit according to the [Act on

Establishment of Financial Supervisory Body]. Financial Institutions are divided into

seven different categories based on the classification rules of the Korea Listed

Company Association.

Banking : banks, financial groups

Life-Insurance : Life Insurance companies

Non-life (accidental) Insurance : non-life insurance companies

Securities : Securities and futures companies

Investment banking : Asset managers and investment advisers

Non-bank depository institution : mutual savings bank, Credit Union, and total

finance(merchant + investment banking) companies

Credit-financing business : credit card, installments, leasing, and venture capital

companies

※ Military Mutual Association, Korean Teachers' Credit Union, Korean Fireman's

Credit Union, and Housing Mutual Aid Association are considered as public

institutions.

※ Korea Technology Credit Guarantee Fund, Korea Credit Guarantee Fund, Korea

Export Insurance Corporation, Industrial Bank of Korea, Korea Development

Bank, Export-Import Bank of Korea, Korea Housing Finance Corporation, and

Bank of Korea are given the same rating grade as the Korean government,

hence excluded from the financial institutions category.

2) Selection of Risk Factors & Determining the Risk Level - Capital adequacy, asset quality, earning(profitability), and liquidity which are the

quantifiable risk factors from FSS's factors, the CAMELS, (stands for Capital,

Asset, Management, Earning, Liquidity, and Sensitivity) with factors related to

size and productivity are used as the risk factors for the quantitative models. The

detailed explanation of the risk factors are written in the table below.


Category Capital Adequacy Asset Quality Earnings Liquidity Size &

Productivity

Banking BIS capital ratio substandard loan ratio

ROA

net interest margin

liquidity ratio in KRW

total assets

operating income

profit per employee

Life-Insurancesimple capital ratio

solvency margin ratio

ratio of the sum of 20% classified as substandard asset, 50% classified as doubtful asset, 100% classifeid as estimated loss asset

ROA

ratio of death claim to

risk premium

ratio of actual expense to

expected expense

liquidity ratio

total assets

operating income

profit per employee

Non-Life(accidental)Insurance

simple capital ratio

solvency margin ratio

ratio of the sum of 20% classified as substandard asset, 50% classified as doubtful asset, 100% classifeid as estimated loss asset

ROA

accrued loss ratio

net expense ratio

liquidity ratio

total assets

operating income

profit per employee

Securities


operating net capital ratio

ROA

ratio of incomings to outgoings from operating activities

net current assets ratio

total assets

operating income

profit per employee

InvestmentBanking


ROA


liquidity ratioin KRW

total assets

operating income

profit per employee

Non-BankDepositoryInstitution

BIS capital ratio substandard loan ratio

ROA

return on operating income


liquidity ratio

total assets

operating income

profit per employee

Credit-Financing


substandard loan ratio

overdue loan ratio

ROA

ratio of profit and loss from operating

activities

liquidity ratioin KRW

total assets

operating income

profit per employee

- After dividing each industry's risk factors into six different sections, select the

classifying value (A:10%, B:17%, C:23%, D:23%, E:17%, F:10%) of each section

so the component ratios between the sections stay the same.

- By conducting the Risk Level Test, determine the weight to be allocated to each

indicator.

Business Category Score

- For each Risk Factor, divide it into several sections according to the standard

value


RatingFinancial Scoremin max

AAA 79.25 100AA+ 77.09 79.25 AA 75.01 77.09 AA- 71.56 75.01 A+ 68.26 71.56 A 65.89 68.26 A- 63.93 65.89

BBB+ 59.73 63.93 BBB 57.34 59.73 BBB- 54.70 57.34 BB+ 50.00 54.70 BB 47.74 50.00 BB- 44.88 47.74 B+ 41.48 44.88 B 38.84 41.48 B- 35.80 38.84

CCC+ 31.16 35.80 CCC 27.13 31.16 CCC- 23.47 27.13 CC 18.95 23.47 C 0.00 18.95 D - -

- Multiply the points alloted to each Risk Factor with the weight allocated to each

section.

- Sum up the scores of each Risk Factor (score from 0 to 100)

Financial Score

- Different score range is given to each business category in order to reflect

different risk level.

- Divide the Business Category Score by the value which belongs to the score

range allotted to the applicable Industry Category Score

Financial Score = (maximum value of each business category-minimum value of

each business category) × Business Category Score/100 + minimum value of each

business category

Financial Scores and their Ratings

- Ratings are given according to the score range set in the table below.


3) Financial Ratios of the Financial Institution Model - BIS Capital Ratio

BIS capital over risk-weighted assets

Higher value indicates the capital is sufficient enough to cover risks.

- Simple Capital Ratio

Equity capital over total assets

The representative financial ratio that shows the percentage of equity capital

accounted for of total assets. Higher ratio means more stability since it reduces

the amount of financial expense occurs.

- Solvency Margin Ratio

(assets-liabilities+internally reserved assets) over policy reserves

It is a ratio that shows the ability to pay insurance money. It is quite

similar to the BIS standards of banks. The higher the better.

- Operating Net Capital Ratio

Operating net capital over amount at risk

It shows how securities companies will cover the amount at risk with capital.

The higher the better.

- Substandard Loan Ratio

Loan performing on substandard level (classified as substandard according to

asset quality)

It is a measure of checking the quality of assets. Lower ratio means higher

quality of assets.

- Weighted Insolvent Asset Ratio

The sum of 20% of asset classified as substandard, 50% of asset classified as

doubtful, and 100% of asset classfied as estimated loss

- Overdue Loan Ratio

Ratio of delayed (at least one month) loan

- ROA

Net profit over total assetsIt indicates how efficiently a financial institution has managed its total assets.In other words, it shows how much profit the financial institution has made through securities and loans.

- Ratio of Death Claim to Risk Premium

Death claim over risk premium

- Ratio of Actual Expense to Expected Expense

Actual expense over expected expense


- Accrued Loss Ratio

Total Claims over accrued premiums

- Ratio of Incomings to Outgoings from Operating Activities

(Operating expense over operating revenue) × 100

- Net Expense Ratio

Net expense over total premiums received

- Net Interest Margin

(Interest income-interest expense)/asset accumulated from interest income

- Net Current Assets Ratio

Net current asset/total assets

- Liquidity Ratio (Insurance Business)

Net current asset / average amount of claims paid to insured

- Liquidity Ratio (Non-bank depository institution)

Current assets over current (matures within three months) liabilities × 100

- Liquidity Ration in KRW

(Current assets maturing within three months/current liabilities maturing within

three months)×100

- Return on Operating Revenue

Net profit over operating revenue

It measures how well the company is doing in making profits.

- Profit per Employee

Net profit over total number of employees


4) Qualitative Risk Factors of Financial Institutions

Category RiskFactors Rating Method

Grade

A B C D E F

IndustryRisk

Industry Risk

barriers to entry/competition status, stability of supply & demand/business prospects, industrial fluctuations, and etc.

excellent aboveavg avg below

avgunsatisfa

ctory fail

ManagementRisk

Shareholders&

ManagementStructure

decision-making process & shareholder status, will of large shareholders, whether the institution supports affiliates and subsidiaries, replacement of top management, whether there are any disputes over the right of management, and etc.


avgunsatisfa

ctory fail

ManagingAbility

managing strategy, leadership, marketing ability, contribution to revenue, and etc excellent above

avg avg belowavg

unsatisfactory fail

OperatingRisk

OperatingRisk

market position/competitiveness, operating efficiency, ability to generate revenue, volatility of revenue, and etc.


avgunsatisfa

ctory fail

RiskManagement

RiskManagement

whether the institution can correspond to risk with adequate system, whether it can strategically respond to BASEL II related matters, risk-managing ability, internal control, and etc


avgunsatisfa

ctory fail

Stress Analysis

Stress Analysis

measures the ability to perform under stress by analyzing the adequacy of capital and the possibility of change in profit due to unexpected economic downturn, fluctuating interest rates, increasing overdue accounts


avgunsatisfa

ctory fail


2.7. Public Institution Model

1) Rated Institutions Institutions that are being directly or indirectly invested by central or local

governments. The central and local governments must possess ownership in part or in

whole and exercise some control over them. The following institutions are considered

as public institutions.

- Public corporations established by special Acts, whose deficit is not recovered by

the government.

- Institutions established by the Local Autonomous Government Act including

directly-managed corporations, local corporations, and local complexes.

- Government (including local autonomous governments) invested or re-invested

institutions.

- Other institutions classified as public institution at FSS's director's own discretion.

Classification of public institutions is as follows.

- Government invested institutions listed on the [Public Institution's Management

Information Disclosing System] : Institutions where the government holds the

majority of stocks.

- Government contributed institutions listed on the [Public Institution's Management

Information Disclosing System] : Institutions with legal ground to receive

government's contributions.

- Institutions related to government subsidy or consignment which are listed on the

[Public Institution's Management Information Disclosing System] : Institutions

where more than 50% of the total revenue comes from the government.

- Subsidiaries listed on the [Public Institution's Management Information Disclosing

System] : Institutions whose major shareholder is a government invested or

contributed institution or institutions related to government subsidy and/or

consignment.

- Government re-invested institution listed on the [Public Institution's Management

Information Disclosing System] : Affiliated institutions of government invested

institutions which receive contributions from the government.

- Other institutions decided as public institution by the steering committee of

government agencies (those subject to management innovation) listed on the

[Public Institution's Management Information Disclosing System].


- Institutions established by the Local Autonomous Government Act including

directly-managed corporations, local corporations, and local complexes.

※ Among the public institutions listed on the [Public Institution's Management

Information Disclosing System], exclude Korea Technology Guarantee Fund, Korea

Credit Guarantee Fund, Korea Export Insurance Corporation, Industrial Bank of

Korea, Korea Development Bank, Export-Import Bank of Korea, Korea Housing

Finance Corporation, and Bank of Korea which are all classified as government

exposures by the BASEL II standards.

※ Among the public institutions listed on the [Public Institution's Management

Information Disclosing System], apply financial institution models to those that

are classified as banks according to the BASEL II standards.

2) Rating Standards for Public Institutions

Public institutions have quite different characteristics compared to ordinary

corporations. The central and local governments are the primary source of making

revenue. Large amount of fixed capital is needed to carry out their business due to

the kind of work (public related and oriented) they are doing although the profit they

are earning is relatively low. Therefore, in order to properly rate the public

institutions, not only their repayment ability but also the possibility of government

(central or local) support (either direct or indirect) must be analyzed.

- Repayment Ability : It measures the risk as a business entity. The same rules and

logics applied to ordinary corporations when rating them are applied again in the

same manner. It determines the public institution's credit risk as an individual

entity by analyzing the business circumstances, competition strategies, financial

foundation, and financial flexibility.

- Possibility of Government Support : It analyzes the possibility of government

support by reviewing whether the government (central or local) made any

guarantees, how clearly the means of support is stated in the establishment

report, supporting cases in the past, the political importance of the works carried

out, and possibility of being privatized.

Public Institution Rating Framework

The same process utilized when rating general corporations is applied to public

institutions in order to analyze its repayment ability. Since public institutions are

different from other corporations, we reflect the qualitative rating result on the


possibility of government support on the final rating.

- Evaluation on repayment ability

- Evaluation on the possibility of government support

[ Rating Procedure ]

Public Institution Risk Factors

The risk factors which could not be measured using quantitative models are evaluated

utilizing the qualitative models, including the possibility of government support.

There are five major risk factors. Management Risk, Financial Risk, and Repayment

Ability under Stress are the three factors used to evaluate the repayment ability of

the public institutions. Possibility of Government Support and Industry Risk are the

two factors to evaluate the possibility of government (central or local) support.

Management Risk

- Managing ability

Rate the institution's repayment ability and stability based on the evaluation on

the top management's overall ability to properly respond to various risks

occurring due to rapidly changing circumstances.

- Management status and shareholders

Judge whether the institution is structured to maintain and increase current

market position, competence, and business competitiveness.

Financial Risk

- Financial Flexibility

Evaluate the institution's ability to enhance cash flow and debt repayment by

effectively responding to adverse changes in business circumstances.


- Financial Stability

Evaluate the qualitative results which could not be acquired when using the

quantitative modes by analyzing whether the company has excessive debt

including concentrated maturities, proportion of short-term debt and off-balance

debt and ratio of total borrowings and bonds payable to total assets. In addition,

evaluate the estimated financial stability such as rise in borrowings in the future.

- Cash Flow Adequacy

Evaluate from the qualitative perspective whether the institution's cash flow is

sufficient enough to pay back the loan principal and interest and provide funds

needed for operation.

Repayment Ability under Stress

- The institution's will and capability to carry out contracted work during bad

economic period (inflation, rising interest rates, rapid decrease in demand, rapid

cost increase, and etc.), unexpected events, and reduced support from the

government due to change in governmental policies.

Possibility of Government Support

- Basis for legal/institutional support

Adequacy of cash flow : Using qualitative perspective, determine whether the

cash flow of the institution is sufficient enough to cover the funds needed for

operation and the amount needed to repay any loans.

- Relationship with the government

Analyze the possibility of government support by evaluating the level of

government control and the relationship status with the government

Business Risk

- Priority of government policies

Evaluate the political importance of the business undertaken by the institution

and rank their chances of getting support in order.

- Privatization Risk

Evaluate the risk associated with privatization if an institution is considered as

being subject to privatization.

- Business stability and competitiveness

Evaluate the stability of business structure and competitiveness.


Weight Distribution for Each Risk Factor

Risk FactorPossibility ofGovernment

Support

BusinessRisk

ManagementRisk

FinancialRisk

Stress Analysis

Weight 35 26 11 17 11


CategorySub-

CategoryRated Contents

Grade

A B C D E F

Possibility

of

Government

Support

Basis for

legal/

institutional

support

Evaluate whether the central or local government has made any direct guarantees on loans and the possibility of legal/institutional support such as explicit means of support stated when the institution was established as well as support cases in the past.

- basis for institutional support based on law and its explicitness - concreteness of the standards on financial support and the

actual contents of the support specified- prospects of its continuity in the future and political stance on

debt- financial power of the local autonomous government

excell

ent

above

avgavg

below

avg

unsatis

factoryfail

Relationship

with the

government

Evaluate the possibility of government support by considering the level of government control and its relationship with the government.

- level of government intervention when appointing top management

- level of government control on business management and budgeting

- level of government control through internal affairs department, the level of financial regulatory, and whether the institution is subject to governmental audit

excell

ent

above

avgavg

below

avg

unsatis

factoryfail

Business

Risk

Priority

among

government

policies

Evaluate the political importance of the business undertaken by the institution and rank their chances of getting support in order.

- whether the business falls into the basic industry (energy, water, road, and etc.) that has the highest priority among governmental policies.

- importance of establishment purpose and scope and level of being public

- social, economic, and political repercussion caused when the institution goes out of business

excell

ent

above

avgavg

below

avg

unsatis

factoryfail

Risk

of

privatization

Evaluate the risk associated with privatization if an institution is considered as being subject to privatization.

- intensity and sustainability of the government support in the case of privatization

- Directions of industry policy, regulatory policy, and competition policy which would greatly affect its business after privatization takes place

- whether the privatization is pursued in the direction of promoting "competitive structure under the market economy principles"

- whether the privatization is taking place due to external pressure (diplomatic/trade pressures by international organization and/or countries)

- whether the privatization is taking place because of the emergence of new business or substitutes

excell

ent

above

avgavg

below

avg

unsatis

factoryfail

Stability

and

competitiveness

of

Business

Evaluate the stability of structure and competitiveness of business run by the institution.

- level of clarity of the business stated when the institution was established and the level business fulfillment.

- ground and details of policy regulations and supports such as entry barrier, competition inducement, price control, and etc.

- possibility of changes in the business status caused by change in governmental (central or local) policies

excell

ent

above

avgavg

below

avg

unsatis

factoryfail

Management

Risk

Managing

ability

Management capacity is a qualitative element of the rated company to expand or reduce risks caused by changes in external

excell

ent

above

avgavg

below

avg

unsatis

factoryfail

3) Risk Factors of Public Institution's Qualitative Model

The explanation of the risk factors of each major category is as follows.


environments. Based on the level of the institution's management capacity, evaluate its repayment ability and stability.

- management strategy, leadership, marketing ability, and revenue contribution

- industry experience and expertise of the management- management's ability and reputation on developing and

maintaining company tasks- level of management participation in business and devotion to

the company.- ability to manage crisis : past experience on overcoming crisis

Business

status

and

shareholders

Evaluate whether the institution has the ownership structure that is capable of maintaining and expanding its internal competitiveness, current market positions, and business competitiveness by analyzing the business status of the institution.

- Whether the institution manages its organizations and employees effectively to enhance productivity

- Whether it is establishing foundation for independent management by improving the business balance or seeking voluntary business innovation

- Difference in the level of support according to the ownership structure of the company

- Rights and responsibilities of shareholders, board of directors structure, internal/external audit system, management supervision by stakeholders, disclosure policy, and etc. In addition, whether these are functioning properly is also evaluated

- major shareholder's commitment to steady financial and business support

excell

ent

above

avgavg

below

avg

unsatis

factoryfail

Financial

Risk

Financial

flexibility

Ability to enhance the cash flow and debt repayment by effectively responding to adverse changes in circumstances.

- whether the company is making up expenses needed for operation and financing by making appropriate amount of profits and maintains sufficient cash flow to meet debt repayment to certain level.

- whether the company is able to meet expected demand in capital through internally generated funds

- whether there is any restrictions on the company's size or means of stock issuance stated on the articles of incorporation or contracts when they are used for raising external funds

excell

ent

above

avgavg

below

avg

unsatis

factoryfail

Financial

stability

Evaluate the qualitative results which could not be obtained when using the quantitative models by analyzing whether the company has excessive debt including concentrated maturities, proportion of short-term debt and off-balance debt and ratio of total borrowings and bonds payable to total assets.Also evaluate the estimated financial stability, such as rise in borrowings in the future.

- loan structure- excessive borrowing and debt (including off-balance debt), total

borrowings and bonds payable to total assets

excell

ent

above

avgavg

below

avg

unsatis

factoryfail

Cash flow

adequacy

Evaluate from the qualitative perspective whether the institution's cash flow is sufficient enough to cover the funds needed for operation and the amount needed to repay any loans.

- operating cash flow, cash-on-hand- self-financing ratio on new investment- sustainability of (NCF >Financial expenditure+required working

capital+CAPEX)- NCF (Net Cash Flow) : operating income+depreciation cost

CAPEX (Capital Expenditure) : Funds used by a company to maintain or upgrade facilities and efficiencyFinancial expenditure : current portion of long term-debts+interest expense+20% of short-term borrowings

excell

ent

above

avgavg

below

avg

unsatis

factoryfail


Stress

Analysis

Stress

Analysis

Evaluate the institution's will and capability to carry out contracted work under bad economic situation (inflation, rising interest rates, rapid decrease in demand, rapid cost increase, and etc.), unexpected events, and reduced support from the government due to change in governmental policies.

excell

ent

above

avgavg

below

avg

unsatis

factoryfail


3. Model Combination and Producing the Final Rating

3.1. Model Combination

Credit ratings are produced after applying financial, quantitative non-financial, and CEO

models to companies classified based on industry type and company size. Once the scores

are produced, refer to the weights indicated in the below table and combine the scores by

using the linear-combination method to produce the final rating.

Models can be combined differently depending on the size of the companies after

considering the availability and reliability of the information and business sense. The final

weights for combining the models are determined after reviewing the above considerations

and the results of the simulation(which enhance the performance of the models) conducted

during the model-building stage.

Model Combination and System Ratings Determination

System ratings are produced by combining one sub-model from each(financial,

quantitative non-financial, and CEO) model depending on the asset size and

industry type.


Model Total Assets Industry Type Applicable Sub-model

Financial

Audit

Light Industry (1)

Heavy Industry (2)

Construction (3)

Wholesale/Retail & Service (4)

Unaudit

Light Industry (5)

Heavy Industry (6)

Construction (7)

Wholesale/Retail (8)

Service (9)

Small Corporation

Manufacturing (10)

Construction (11)

Wholesale/Retail (12)

Service (13)

QuantitativeNon-financial

Audit (14)

Unaudit (15)

Small Corporation (16)

SOHO (17)

CEOSOHO

Small-scaleManufacturing

(18)

Heavy Equipment &Construction (19)

Wholesale(20)

Retail(21)

Service(22)

Unaudit (23)

Small Corporation (24)


Combing Method by Company Size

Company Size Models Combined

Audit Financial + Quantitative Non-Financial

Unaudit Financial + Quantitative Non-Financial + CEO

Small Enterprise Financial + Quantitative Non-Financial + CEO

SOHO Quantitative Non-Financial + CEO

Financial Institution Financial

Weight for Model Combination

Sub-model

ClassificationAudit Unaudit

Small

CorporationSOHO

Financial

Institution

Financial 0.60 0.45 0.40 0.00 1.00

Quantitative

Non-Financial0.40 0.15 0.10 0.30 0.00

CEO 0.00 0.40 0.50 0.70 0.00

3.2. Producing the Final Rating

Once the score is generated from combining the models, the filtering process takes place.

Then, the qualitative evaluation, normal and stress projection results, and expert judgment

of the credit analysts, factors that are not reflected on the rating process, are taken into

consideration by the members of the Rating Committee who are in charge of the

overriding process. Finally the Rating Committee either approves or overrides a rating. The

approved or overridden rating is the final rating given to an issuer.

Matters related to the final rating determination including the overriding process, strictly

follow the rules and logics defined in the [Corporate Credit Rating Standards].

3.3. KED Ratings

There are 10 different credit ranges from AAA to D depending on the credit of the rated

company. + and - modifiers are given to ratings within a range from AA to CCC in order

to indicate their relative standings within each category.

The definition of each rating is explained in document publicized separately.

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