Correlation Between Long-Term and Short-Term Rating Scales

The Pakistan Credit Rating Agency Limited
Correlation Between Long-term and
Short-term Rating Scales Criteria
Methodology
Table of Contents Summary

1. Introduction .......................................... 2
2. Correlation Between Long-term & Short￾term Ratings.................................................. 2
   This criterion explains the correlation between PACRA’s long￾term and short-term rating scales. The correlation shown is indicative and, in certain scenarios, may not hold due to specific factors. Analyst Contacts The Pakistan Credit Rating Agency Limited Momin Farooque +92-42-3586 9504 momin.farooque@pacra.com Head Office FB1 Awami Complex Usman Block, New Garden Town Lahore Phone +92 42 3586 9504 Karachi Office PNSC Building, 3rd Floor M.T. Khan Road, Lalazar, Karachi Phone +92 21 35632601 Disclaimer: PACRA has used due care in preparation of this document. Our information has been obtained from sources we consider to be reliable but its accuracy or completeness is not guaranteed. PACRA shall owe no liability whatsoever to any loss or damage caused by or resulting from any error in such information. Contents of PACRA documents may be used, with due care and in the right context, with credit to PACRA. Our reports and ratings constitute opinions, not recommendations to buy or to sell.

Page | 2 April 2026
Criteria – Cross-Sector Qualitative Rating Considerations Methodology – Asset Manager Rating Correlation Between Long-term and Short-term Rating Scales Criteria Methodology Introduction PACRA’s Credit Ratings reflect forward-looking opinions on the creditworthiness of an underlying entity or instrument. More specifically, a rating depicts the relative ability of an entity or instrument to honor its financial obligations. The primary factor captured on PACRA’s rating scale is the relative expectation of credit risk or credit quality, where the AAA (triple A) category reflects the highest credit quality while the C (single C) category reflects the highest credit risk. The addition of plus “+” and minus “-” provides a way to create relative distinctions within rating categories that range from the AA (Double A) to B (Single B) categories. The AAA and CCC (Triple CCC) to C (Single C) categories have no plus “+” or minus “-” attached to them. PACRA expresses its opinions in terms of:

1. Long-term rating: A long-term rating denotes vulnerability to default on a medium to long-term
   horizon (> 12 months). Hence, the primary rating considerations while assigning a long-term rating are factors that highly impact the long-term sustainability of the underlying entity/issuer.
2. Short-term rating (where applicable): A short-term rating is an opinion on the short-term
   vulnerability to default for obligations coming due within 12 months. Hence, while assigning a short￾term rating, the primary rating considerations are factors that can materially alter credit quality in the short-term. A key factor for determining short-term ratings is the liquidity position of an entity/issuer. PACRA rates entities/issuers on a short-term rating scale from A1 (A-one) to A4 (A-four). Within the A1 category, it can be designated with a plus sign (+). This denotes the highest capacity for timely repayment, whereas “A4” captures the likelihood of an inadequate capacity to ensure timely repayment. PACRA has a single category (D) to denote obligations that are currently in default. PACRA assigns a “D” rating to capture an event of default (For further details, refer to PACRA default recognition policy “What is Default” on www.pacra.com). Correlation Between Long-term & Short-term Ratings Long-term and short-term ratings are linked to each other, although long-term opinion is evolved first and then annexed with supporting short-term scale. PACRA’s short-term rating approach is similar to that used for long-term rating. However, two factors gain more prominence in short-term rating assignment, namely: i) liquidity position and ii) financial flexibility. i) Liquidity Position: When assessing liquidity, PACRA focuses mainly on the cash flow and working capital management of the entity to assess repayment ability. In addition to this, the availability of unencumbered liquid investments and/or other liquid current assets ensures a cushion for urgent cash in stressed times. ii) Financial Flexibility: Financial flexibility allows an entity the latitude to meet its debt service obligations and manage stress without eroding credit quality. While one aspect of financial flexibility is an entity’s capital structure (thoroughly assessed during long-term rating assignment), alternative sources include support available from a sponsor (in the form of a line of credit or otherwise) and commercial credit lines available to the entity. Two different long-term ratings may carry the same short-term rating and each short-term rating corresponds to a band of long-term ratings. This is because there are fewer short-term rating grades. For instance, the “A1” short-term rating corresponds to the long-term rating band from “AA-” to “A-” and assigned separately. The rating matrix for long-term and short-term ratings is indicative and designed for illustration purposes to facilitate understanding. In some extraordinary cases, such as when a firm has an

Page | 3 April 2026
Criteria – Cross-Sector Qualitative Rating Considerations Methodology – Asset Manager Rating Correlation Between Long-term and Short-term Rating Scales Criteria Methodology exceptional liquidity position or is experiencing a liquidity crisis, the long-term and short-term relationship may not hold. Long-Term and Short-Term Rating Correlation Scale An Illustrative Representation