C REDIT RATING AGENCIES International Finance Derek Tilot Professor Jasper Kim

T ABLE OF CONTENTS Introduction CRA procedures and methods Moody’s, Standard and Poor’s and Fitch Cost and benefit of having a rating Conclusion 2

I NTRODUCTION Definition: CRA specialized in analyzing and evaluating credit worthiness. By solving the problem of informative asymmetry between lenders and borrowers. Rating agencies falls into 2 categories:  Non-recognized  Recognized by supervisors in each country for regulatory purposes 3

M OODY ’ S Began in 1900 with Mr. John Moody Moody’s rating focus on the Expected Loss (EL) which is a function of both Probability of Default (PD) and the expected Recovery Rate (RE). Moody’s ratings and analysis track debt covering more than: 100 sovereign nations 12,000 corporate issuers 29,000 public finance issuers 96,000 structured finance obligations 40 % of the world Source: 4

S TANDARD & P OOR ’ S Founded in 1860 by Henri Varnum Poor. Standard & Poor’s rating is based only on forward-looking of the occurrence default. Also well known for S&P 500 and S&P/ASX 200. Have been really criticize recently. 5

F ITCH Created in 1913 in New-York by John Fitch. Merged in December 1997 with IBCA Fitch rating is also focus on both PD and RE but they have more explicit variables. Smaller than the two others. 6

R ATING SYMBOLS 7

CRA PROCEDURES AND METHODS CRAs relied on quantitative and qualitative method assessment reviewed and finalized by a rating committee. More recently reliance on quantitative method based on publicly available data. All CRAs have different methods to calculate credits rating. Although most reliable agencies have some great similarities. 8

C OST AND B ENEFIT OF OBTAINING A RATING Purpose is to enhance access to private capital markets and lower debt issuance and interest rate. There is a clear correlation between bond spreads and rating grades: 9

C ONCLUSION Help to reduce the informative asymmetry They are not making any recommendations!!! It is just a screening tool that influences the composition of their portfolios as well as their investment decisions. Limit of CRAs: Asian Crisis, Enron, subprime etc… 10

T HANK YOU 11