Industry Research Credit Rating Agency Group 1 Chris Mei Yu Steven John
Group 1 CEP Industry Research: Credit Rating Agency Independence assessment of a creditworthiness of a bond The credit rating measures probability of timely repayment payment and interest of a bond ➢ AAA --- The highest investment grade ➢ BBB --- The lowest investment grade ➢ Below BBB--- Junk bond ➢ E.g. Moody, Standard & Poor and Fitch rating What is rating agency?
Group 1 CEP Industry Research: Credit Rating Agency Why credit rating agency exist? Reduce asymmetry between lenders and borrowers Enhance transparency and efficiency in the fixed-income securities market
Group 1 CEP Industry Research: Credit Rating Agency How are bond rated? Application form to rating agency by issuer or its agency either via telephone call or in writing Rating issuer's debt instruments for decades Doing several weeks before the issuance of the bonds Providing the documentations Present the credit worthiness agency at rating agency's or issuer's office The rating is released to the issuer, a wire service and a publication of full credit report
Group 1 CEP Industry Research: Credit Rating Agency Elements determining the rating Economic Factors Debt/Issue Structure Financial Factors Management/ Structure Factors Investment Policy and Practice Willingness to pay
Group 1 CEP Industry Research: Credit Rating Agency Credit Rating Information Bond Ratings Very High Quality High Quality Speculativ e Very Poor Standar d & Poor ’ s AAA AAA BBBBB BCCC D Moody ’ s Aaa AaA BaaBa BCaa C At tines both Moody ’ s and Standard & Poor ’ s have used adjustments to these ratings. Standard & Poor ’ s uses plus and minus signs; A+ is the strongest. A rating and A- the weakest, Moody ’ s uses a 1,2, or 3 designation--- with 1 indicating the strongest.
Group 1 CEP Industry Research: Credit Rating Agency Bond RatingsMoody ’ sS&PRating ’ s Meaning Very High Quality AaaAAA Capacity to pay interest Principal is extremely strong AaAA High QualityAA Rating A has a strong capacity to pay interest and repay principal Rating Baa and BBB have an adequate capacity to pay interest and repay principal The changes are affected by economic conditions BBaBBB Speculative (Junk Bonds) BaBB Respect to capacity to pay interest and repay principal in accordance with the terms of the obligation Rating BB and Ba indicate the lowest degree of speculation BB Very PoorCaaCCC Rating CC and Ca indicate the highest degree of speculation 1)These are outweighed by large uncertainties or major risk exposures to adverse conditions 2)Rating C indicate reserving for income bonds on which no interest is being paid 3)Rating D is in default and payment of interest and/ or repayment of principal is in arrears CaCC CC DD
Group 1 CEP Industry Research: Credit Rating Agency How credit rating agency makes money Rating fees from corporations it rated Consultant fees for credit risk management service
Group 1 CEP Industry Research: Credit Rating Agency Moody ’ s Corporation NYSE: MCO Revenue in 2002: $1.0billion No. of employees ≈ 2100 Moody’s Corporation Moody’s Investors Service Moody’s KMV
Group 1 CEP Industry Research: Credit Rating Agency Moody ’ s credit rating area Corporate Finance Banking Sovereign (Nations) Structured Finance US Public Finance Funds
Group 1 CEP Industry Research: Credit Rating Agency Corporate Finance Investment Grading Leveraged Finance Syndicated Loan Project Finance
Group 1 CEP Industry Research: Credit Rating Agency Banking Long-term deposit rating Short-term deposit rating Financial strength rating
Group 1 CEP Industry Research: Credit Rating Agency Sovereign Rating for foreign-currency bond Rating for foreign-currency deposit
Group 1 CEP Industry Research: Credit Rating Agency Structured Finance
Group 1 CEP Industry Research: Credit Rating Agency US Public Finance Rating on municipal bond
Group 1 CEP Industry Research: Credit Rating Agency Managed Fund
Group 1 CEP Industry Research: Credit Rating Agency Income sources
Group 1 CEP Industry Research: Credit Rating Agency
Group 1 CEP Industry Research: Credit Rating Agency End