S&P Global Ratings — methodology overview
S&P uses a structured, two-pillar framework that separates an issuer's business characteristics from its financial profile before combining them into an overall credit assessment. The framework applies consistently across corporate sectors, with sector-specific calibrations for financial metrics. NotchWork applies this framework as the primary engine for its shadow ratings.
Approach in brief
The starting point is an assessment of the issuer's operating environment. S&P analyses the industry in which the company operates — how cyclical it is, what competitive dynamics look like, and how much pricing power participants typically have — combined with a view of the country or countries where the issuer generates most of its cash flows. These two components are combined into a single anchor for the industry and country context, often called the CICRA (Corporate Industry and Country Risk Assessment).
On top of the industry and country foundation, S&P assesses the issuer's competitive position within its sector: scale, market share, diversity of revenue, operating efficiency, and the sustainability of its margins relative to peers. Together, the CICRA and the competitive position assessment form the business risk profile — a qualitative anchor that captures how structurally resilient the business is, independent of its balance sheet.
The financial risk profile is driven primarily by cash flow and leverage metrics: the ratio of funds from operations to debt, EBITDA to interest expense, free cash flow generation, and debt to EBITDA. S&P applies sector-specific benchmarks for each of these metrics, reflecting the different capital structures and cash flow volatility that characterise different industries. The two profiles — business and financial — are combined into an anchor rating, which is then adjusted upward or downward by a set of modifiers.
Modifiers cover capital structure (if unusual debt features affect credit quality), liquidity (adequacy of sources relative to uses over a 12-month horizon), financial policy (management's stated and observed appetite for leverage), management and governance quality, and a comparable rating analysis step where the issuer is benchmarked against peers at the same rating level. After modifiers, S&P arrives at a stand-alone credit profile (SACP). Where group or government support is relevant, the SACP is then adjusted to reflect that support or constraint before the final issuer credit rating is assigned.
Key analytical anchors S&P emphasises
- Industry cyclicality and competitive dynamics — the starting point for all corporate assessments
- Competitive position — scale, differentiation, market share stability, and margin resilience
- Cash flow ratios relative to debt — funds from operations to debt and free cash flow to debt are the primary financial metrics
- EBITDA interest coverage — a secondary but closely watched metric
- Leverage trajectory — whether the financial profile is improving, stable, or deteriorating
- Liquidity — S&P applies a strict two-year forward look at cash sources versus uses
- Financial policy — management's track record and stated targets for leverage and shareholder returns
Where to read the source
S&P publishes its methodology documents on its public website. The core document for corporate ratings is the Corporate Methodology, supplemented by sector-specific criteria for industries including utilities, telecoms, media, healthcare, real estate, and others. These documents are freely available and provide the definitive analytical framework.
NotchWork references these materials as analytical inputs. The shadow ratings NotchWork produces are indicative assessments only and do not represent the view of S&P Global Ratings.