1. Bond Ratings and Agencies
Di Tian
May/07/2013

2. AGENDA What are Bond Ratings? Bond Ratings graph
Who determines?
S&P Corporation
Bond Ratings graph
Why company want to have
bond ratings?
Who care Bond Ratings?
Ratings Adjustment?

3. What are Bond Ratings? Independent assessment
Market participants do not do their own credit analysis of a debt obligation
A grade given to bonds indicated the relative credit quality & risk
Ratings indicate the likelihood of the borrowed money being paid back
The higher the rating, the less likelihood of default, and the lower the interest rate the issuer needs to offer to sell all the bonds

4. Who determines Bond Ratings?
The major US credit rating agencies
Moody Investors Service
Standard & Poor Corporation
Fitch Ratings
They use the same letter grades and the same key criteria
But use various combination of upper and lower case letters

5. Standard & Poor Corporation
: Beginnings
Henry Varnum Poor founded Poor Co.1860
Publish and sell the financial products
of US railroads to buyers
: Merger & Development
“Xerox” developed copy machine in 60’s ← product killer
Poor Co. met financial problems
Standard Statistics merged with Poor Publishing and enters the age of computer automation
: Expanding Role in Global Markets
Indexes like the S&P 500
6,500 employees located in 22 countries
$5.00/per
2,500 copies of the first issue

6. What’s these ratings mean?
The highest grade bonds are AAA. Any grade lower than Triple B are said to be noninvestment grade bonds or junk bonds.
Typically, the corporate bond market can be divided into two sectors: the investment grade and noninvestment grade market.
First, Originally, they have AAA, AA, A and BBB. They want to distinguish in each group, then they developed AA+/AA-
Bonds in Default: Technique default: have missed payment on interest

7. In Default How many defaults @ each ratings?
How much additional each ratings?
Before go through default probabilities.

8. Default Probabilities
What is Coverage Level mean?
A high bond rating such as AAA indicates low credit risk to investor
Borrowing will be less costly for an issuer with higher rating
For each drop in ratings, bond issuers pay additional basis points (a basis point is 1/100 of a percentage point). When in millions, a few basis points can translate into thousands of dollars.

10. Example: BJ issues 30-year bond with a 10 million face value

11. Why its important to investors & issuers?
Indicate the risk of default for a particular bond investment
Influence the price and the yield of a bond
Issuers
The higher the rating, the lower their borrowing costs
Independent verification of their credit worthiness
They are a marketing tool that can be used to attract investors
Why company must pay to be rated in the bond ratings? (Why company want to have bond ratings?)
Higher ratings = lower cost of borrower money
Investors do not have information, they rely on rating companies
If not rated, what happened? Individual spend lots of time to do research, to check the financial sheet, management team……..

12. What factors effect bond ratings?
Ratings of bonds change over time
Financial performance
Debt ratio & current ratio
Economic Outlook
Tax base, employment & income
Regulatory Environment
Management Team
Ratings are much more likely to be downgraded:
Industrial accident or some regulatory change/ Recapitalization
Other reasons – Fallen Angels
Bond Issuer requests that a rating company determine a rating
Rating Company forms an analytical team that make decision based on the report of the analytical team.
The factors effects bond ratings are: see slide.

13. SUMMARY Bond ratings Three major agencies
Investment grade VS noninvestment grade market
Default Probability
Important to Investors & Issuers
Rating of bonds change over time

14. Thank You! Q&A
Fabozzi, Modigliani, and Jones, Foundations of Financial Markets and Institutions. Pearson Prentice Hall, 2010
Alan Probst, Local Government Specialist, UW-Extension Local Government Center, PPT in Financial Management Series Number 12 BONDS & BOND RATINGS
Mitchell Dietrich, Bond Ratings, 05/06/2013, online PPT