Credit Rating Agency: Moodys Investors Services - Research Paper Example

? Credit Rating Agency: Moody’s Investors Services of the of the Table of Contents Table of Contents 2 Introduction 3 Moody’s Investor Services 3 Objectives and functions 4 Functions in capital markets 5 Symbols used along with their explanation 6 Criteria of Awarding Symbols 8 International Bond Market and its Credit rating 10 Recent Development and its Implications 12 Conclusion 13 References 15 Introduction The credit rating agency is an agency or company, which performs the function of assigning the ratings related to the debtor’s ability of paying back the debt along with timely payment of interests. The agency may rate based on the creditworthiness of the issuer of the debt instruments or debt obligations and sometimes the service providers of the underlying debts (not individual customers). The debt instruments, which are normally rated by the credit rating agencies, include corporate bonds, government bonds, preferred stock, municipal bonds and also collateralized securities like collateralized debt obligations or mortgaged backed securities. The issuers of the obligations/securities might include companies, various special purpose related entities, local governments, states, nonprofit seeking organizations and/or sovereign nations. There are various credit rating agencies which provide credit ratings. The agency or company which has been selected in this project is Moody’s Investors Service. Moody’s Investor Services Moody’s Investors Services, also referred as Moody’s, is a bond credit rating business under the Moody’s Corporation (Moody’s Corporation, 2011; Bloomberg Businessweek, 2013). It provides financial research on the bonds which are issued by the government and commercial entities along with Fitch Group and Standard & Poor’s. It is considered as one among the Three Big Credit Rating Agencies. The agency ranks the creditworthiness of the borrowers by the implementation of one standardized rating scale used for measuring the expect loss of the investors in case of any default (Moody’s Corporation, 2013a). It rates the debt securities in various market segments associated with the commercial and public securities present in bond market. Objectives and functions Moody’s Investors Service business aims at providing credit ratings. It produces research for the government entities, corporations, and finance securities. The main objective of the business is helping the investors in assessing the credit risk. Moody’s Investors Service has set a goal of offering the best sought-after ‘credit’ opinions to all the sectors involved in the fixed income market. Moody’s Investors Services is one of the leading providers of the credit ratings and research & risk analysis. The expertise and commitment of the business contributes towards transparency and formation of integrated financial markets by means of protection of the integrity of credit. The ratings and analysis department of this business tracks debt of more than 115 different countries 10000 corporate issuers. 82000 finance obligations (structured). 22000 public finance issuance companies. These credit rating services provided by the business helps the investors in analyzing the credit risks related to the fixed income securities. The independent and accurate credit ratings as well as risk analysis contributes in the increase of efficiency in the fixed income markets and other related obligations like the insurance policies, derivative transactions etc, by means of offering independent and credible credit risk assessment guiding the investors (Moody’s Corporation, 2013b). ‘Moody’s default studies’ helps in validating the predictive ratings. The published research and investors briefings help in bringing in thousands or even more attendees every year and keeps the investors up to date with the rationale underlying the credit opinions. Functions in capital markets Closest competitors of Moody’s Investors Service are Fitch Group and Standard & Poor. These three companies are ranked as the top three credit rating agencies. However, the credit rating techniques of Moody’s Investors Service is different from the other two competitors. The business of Moody’s Investors Service has a vital role in the international capital markets because it helps in supplementary credit analysis of banks and various other financial institutions by assessing the credit risk of specific securities. The business has helped the investors in making their own judgments based on the credit ratings. It plays a vital role in controlling the rules and regulations of United States as well as other countries. In United States, the credit ratings are generally utilized in the rules and regulations of United Securities & Exchange Commission (USEC) for guiding a number of regulatory functioning. Moody’s Investor Services help in distinguishing the lower rated companies from the higher rated companies, so that it can be analyzed that which companies are selling their bond debt for the first time. The regulatory agencies use this credit rating method for reinforcing the ‘cliff’ and ‘pro-cyclical’ effects of the downgrades. Presently, Moody’s have permitted their analysts to be available to the journalists by issuing frequent public statements disclosing the credit conditions of the companies. Symbols used along with their explanation Long Term Ratings Ratings Long Term Ratings Aaa The obligations which are rated as Aaa are considered to have the highest quality and least credit risk. Aa The obligations which are rated as Aa are considered to have high quality and very little credit risk. A The obligations which are rated as A are generally considered as upper medium graded obligations and are subject to little credit risk. Baa The obligations which are rated as Baa have moderate credit risk. They are generally medium graded obligations and might possess specific speculative features or characteristics. Ba The obligations which are rated as Ba are considered to have speculative elements. These obligations are subjected to substantial amount of credit risk. B The obligations which are rated as B are subjected to high credit risk and are considered to be speculative in nature. Caa The obligations which are rated as Caa are subjected to extremely high credit risk and considered to have poor standing in the financial market. Ca The obligations which are rated as Ca are considered to be highly speculative and they are suspected to be very near to default associated with the prospect of the recovery of any principal amount as well as the interest. C This is the lowest grade in the credit rating system. The obligations which are rated as C are considered to be the lowest graded bonds which remain in default with very less prospect of any recovery of principal amount and interest. (Source: Moody’s Investors Services, 2009) Short Term Ratings Ratings Short term ratings P-1 The issuers or their supporting institutions, who are rated as P-1 or Prime 1 possess superior ability of repaying the short term debt obligations. P-2 The issuers or their supporting institutions, who are rated as P-2 or Prime 2 have strong or high ability of repaying the short term debt obligations. P-3 The issuers or their supporting institutions, who are rated as P-3 or Prime 3 possess acceptable ability of repaying back the short term debt obligations. NP The issuers or their supporting institutions, who are rated as NP or Non-Prime, are not categorized under the Prime rating Categories. (Source: Moody’s Investors Services, 2009) Criteria of Awarding Symbols Long Term ratings Moody’s long term ratings state their opinions linked with fixed income or relative credit risk obligations having the maturity period of one or more than year (IOSCO, 2003). The credit ratings address of the failure of any financial obligation. The ratings generally utilize ‘Moody’s Global scale” for reflecting the likeliness of any default as well as financial loss caused due to such default. Short term ratings Moody’s short term ratings represents opinions related to the ability of issuers in honoring various short term financial obligations. These ratings are assigned to the issuers or short term debt instruments, any short term program etc (White, 2010). These obligations have maturity period not exceeding 13 months. Medium Term ratings Moody’s also assigns long term ratings to the debt securities, which are issued from the MTN i.e. Medium Term Notes Programs along with the individual indicating ratings of these MTN programs themselves (Moody’s Investor Services, 2013a). Generally these long term ratings of debt securities are measured using general long term scale of Moody’s. The notes, which are issued under the MTN programs, have indicated ratings. They are generally rated according to the ratings implied to every ‘pari passu notes’ in these programs. The notes in these relevant programs are considered under medium term note ratings, provided that these notes are not exhibiting any of the features mentioned or listed below: The notes having features associated with the principal or interest of any credit performance to a third party are also called as credit linked notes. The notes that are allowed for negative principals or negative coupons. The notes having provisions, which could obligate investors in making any additional payment. Notes having provisions, which the subordinates claim. The notes having any of the above mentioned features will have rating of individual note different from the indicated rating pattern of the MTN programs. In case of the credit linked securities, the policy which Moody’s follow is going through the credit risk of the respective underlying obligor. The policy of the company in respect of the non credit obligations is that it rates the issuer’s ability regardless of the potential losses caused to the investors because of these non credit developments. The unrated notes that are issued under MTN programs are assigned with the NR i.e. Not-Rated symbol. The rating pattern of Moody’s Investors Services encourages the market participants in contacting with the company in order to rate and assess their credit risks. The ratings provide opinions related to the ability of meeting the long term, short term and medium term credits. This helps and guides the investors highly in taking their further investment decisions. International Bond Market and its Credit rating The international bond market comprises of trading with international bonds (Rajib, n.d.). The international bonds are mainly of two types: 1) Foreign Bonds and 2) Euro Bonds (C. T. Bauer College of Business, n.d.). Foreign Bonds: The bonds which are issued by the domestic companies in the foreign market are denominated normally in foreign currency are termed as foreign bonds. For example- German Company, Daimler, issues its bonds in the U.S. dollars. GM issues its bonds in pounds in United Kingdom and in Euros in Germany. Eurobonds: The bonds which are issued by any domestic corporation in the foreign market in such a currency, which does not include the currency of the foreign country, are termed as Euro bonds. For example- GM issues its bonds simultaneously in USD $ in United States as well as Europe (Eurobonds). These two markets (Foreign & Eurobond) always compete with each other. Bearer Bonds and Registered Bonds Bearer Bonds- Most of the Eurobonds are not registered and the issuing firm of such bonds does not keep track or record of the ownership. In this case, the possession of bonds acts as evidences of the ownership. Registered bond- The ownership is mainly recorded by either serial number or name. United States law needs United States bonds to get registered, both foreign bonds and domestic bonds. For sale of any bonds in the secondary market, new bond certificate issuance takes place. International Bond Regulation Foreign bonds must be issued in accordance to the security laws of the country, where the bonds are being issued. Yankee Bonds i.e. the foreign bonds issued in United States should meet all the legal requirements that have been framed for the U.S firms offering domestic bonds (For example- disclosure of all necessary information in prospectus; registration of the bond issuance with SEC etc.). Different types of Bonds Fixed rate bonds- These are bonds with fixed maturity date and fixed coupon rate, which are issued in dollars, pounds etc. The coupon payments are generally made annually as it becomes more convenient for the bond holder and less costly for the issuer. Euro Medium Term Notes (MTN’s) - these are medium term notes having a time period of 1 to 10 years, with fixed coupon rate. These bonds are generally issued on continuous basis whenever the MNC’s require credit. Floating Rate Notes- These are medium term bonds having semi-annual or quarterly floating coupon rate. These bonds have reduced risks as compared to the fixed rate bonds because of the reduced interest rate risks. Internal Credit Ratings Moody’s evaluate the creditworthiness of an international company on same criteria as used for domestic issues. Moody’s uses 19 categories of rating the creditworthiness of the firms. It uses 9 general categories and 3 specific categories (P1, P2, and P3). There are four topmost categories (Aaa; Aa; A and Baa) which are Investment Grade. The other categories fall under Speculative Grade. However, the international bond market is investment grade market (mostly) which includes big MNC’s having brand name recognition, excellent credit etc. Recent Development and its Implications Moody’s understands that the issuers generally want clear and timely responses to their queries or questions (Moody's Investors Service, 2013b). They have developed their rating procedure with the changing technology to enhance the safety of the investors in a better manner. The analytical team of the company strives to ensure to the investors and the companies their standings in terms of the credit issues. There are various ways in which the investors use these ratings, which in turn provides values to the issuers. The up-gradation in the rating procedure with time helps in many ways. For a large number of investors, the ratings act as critical element in the pricing of securities which is used as benchmark for planning their investment guidelines The institutions have been facilitated and they are now open to wide variety of securities investment from much wider array of companies having globally comparable and dependable opinion related to credit risk in their hands. Implications The credit opinions provided by Moody’s would help in wider accessibility to the capital. The credit opinions offered by the company are broadly disseminated and well understood by the institutional investors all throughout the world. This would help in making the issuer’s debt much more attractive to a wide range of highly potential buyers. The broad market accessibility gets translated into decreased funding costs mostly for the high rated issuing companies. The credibility would allow the rated issuers to get into the capital markets in a frequent manner and provide bigger offerings at much longer maturities. The upgraded ratings and research report provided by Moody’s Investors services would help in maintaining and stabilizing the investors’ confidence even during the period of market or economic stress. The reassurance provided by Moody’s rating and effective analysis of the situations would help in alleviating investors’ concern related to the investment risk. Conclusion Moody’s Investors Services’ credit rating business provides financial analysis on the bonds that are issued by commercial entities or the government (Moody's Investors Service, 2013c). It ranks or rates the creditworthiness of different borrowers by means of one kind of standardized rating scale. This scale measures the expected loss of the investors in case of any default. Moody’s Investors Service business produces research for corporations, the government entities and finance securities. The main objective of this agency is helping out the investors in the assessment of credit risk. It evaluates the creditworthiness of any international company in the same manner as used for domestic issues, where it rates in 19 categories for assessing the creditworthiness of the companies. It uses 9 general categories and 3 specific categories (P1, P2, and P3). Moody’s Investors Service cooperates with the issuers and provides timely responses to their queries or questions. Moody’s analysis team has developed the rating procedure with the changing technology for enhancing the safety of the investors in more appropriate manner. Recent developments along with the high level of reassurance provided by Moody’s rating would help in reducing the investors’ concern related to the investment risk. References Bloomberg Businessweek. (2013). Company overview of Moody's Investors Service, inc. Retrieved from http://investing.businessweek.com/research/stocks/private/snapshot.asp?privcapId=863057 C. T. Bauer College of Business. (n.d.). International bond market. Retrieved from http://www.bauer.uh.edu/rsusmel/7386/ln12.pdf IOSCO. (2003). Report on the activities of credit rating agencies. Retrieved from http://www.fsa.go.jp/inter/ios/20030930/05.pdf Moody’s Corporation. (2011). United States securities and exchange commission, form 10K. Retrieved from http://ir.moodys.com/secfiling.cfm?filingID=1193125-11-47974 Moody’s Corporation. (2013a). Who we are. Retrieved from http://ir.moodys.com/overview.cfm Moody’s Corporation. (2013b). Moody’s role in the capital markets. Retrieved from https://www.moodys.com/Pages/atc002.aspx Moody’s Investors Services. (2009). Moody’s rating symbols and definitions. Retrieved from https://www.moodys.com/sites/products/AboutMoodysRatingsAttachments/MoodysRatingsSymbolsand%20Definitions.pdf Moody’s Investor Services. (2013a). Ratings definitions. Retrieved from https://www.moodys.com/ratings-process/Ratings-Definitions/002002 Moody's Investors Service. (2013b). How to get rated. Retrieved from https://www.moodys.com/Pages/amr002001.aspx Moody's Investors Service. (2013c). About us. Retrieved from https://www.moodys.com/Pages/atc.aspx Rajib, P. (n.d.). International bond market: An introduction. Retrieved from http://www.nptel.iitm.ac.in/courses/110105031/pr_pdf/Module%2035.pdf White, J. L. (2010). Markets: The Credit rating agencies. Retrieved from: http://pubs.aeaweb.org/doi/pdf/10.1257/jep.24.2.211 Read More