Credit Ratings Agencies

RECENT NEWS
Wall Street Journal  Mar 24  Comment 
President Dilma Rousseff got a big break when Standard & Poor’s maintained Brazil’s investment-grade credit rating, but Friday’s coming report on economic growth is expected to bring the embattled president bad news.
Mondo Visione  Mar 23  Comment 
The European Securities and Markets Authority has published guidelines regarding the information that is periodically submitted to ESMA by credit rating agencies.  The guidelines provide details of: the information CRAs should...
The Australian  Mar 16  Comment 
FOREIGNERS remain the most enthusiastic buyers of government debt thanks to Australia’s AAA credit rating.
NPR  Mar 13  Comment 
Insurers sometimes wrangle with patients and for months before paying a bill. A new six-month waiting period will give consumers time to resolve disputes and avoid having their credit ratings dinged.
Reuters  Mar 12  Comment 
India has pitched for a sovereign credit rating upgrade with Fitch Ratings, after announcing its budget last month, a senior finance ministry source said.
Yahoo  Mar 11  Comment 
General Motors Co’s (GM.N) decision this week to give back up to $10 billion to shareholders over the next two years will likely delay one of its important goals: achieving a top-tier credit rating that would benefit its growing auto finance...
Insurance Journal  Mar 11  Comment 
A.M. Best has downgraded the financial strength rating to B+ (Good) from B++ (Good) and the issuer credit ratings to “bbb-” from “bbb” of South Carolina Farm Bureau Mutual Insurance Co. and Palmetto Casualty Insurance Co. (together known...
guardian.co.uk  Mar 10  Comment 
Report on first year of City regulator’s oversight of sector finds text messages warning of home visits to vulnerable clients and illegal fees added to accounts The City regulator has uncovered a litany of unfair practices at payday lenders...
Reuters  Mar 9  Comment 
A leader of Brazil's Congress vowed on Monday not to let his party's feud with President Dilma Rousseff damage the economy or cause the country to lose its investment grade credit rating.
NPR  Mar 9  Comment 
The three major credit rating agencies reached an agreement with New York Attorney General Eric Schneiderman on Monday to change the way they handle errors on credit reports.




 

Definition: A credit ratings agency is a company that assigns credit ratings to institutions that issue debt obligations (i.e. assets backed by receivables on loans, such as mortgage-backed securities. These institutions can be companies, cities, non-profit organizations, or national governments, and the securities they issue can be traded on a secondary market.

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A credit rating measures credit worthiness, or the ability to pay back a loan. It affects the interest rate applied to loans - interest rates vary depending on the risk of the investment. A low-rated security has a high interest rate, in order to attract buyers to this high-risk investment. Conversely, a highly-rated security (carrying a AAA rating, like a municipal bond which is backed by stable government agencies) has a lower interest rate, because it is a low-risk investment. These low-risk bonds are available to a wide range of investors, whereas high-risk bonds cater to a narrow investing demographic.

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Companies that issue credit scores for individuals are usually called credit bureaus and are distinct from corporate ratings agencies.

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Big Three

The top three credit ratings agencies in the United States are:

In the wake of recent credit-market turmoil, some niche agencies are picking up market share or at least additional visibility. Among the niche agencies are DBRS and Egan-Jones. Cash loans australia

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Rating Grades

Each rating agency has developed its own system of rating sovereign and corporate borrowers. Fitch Ratings developed a rating system in 1924 that was adopted by Standard & Poor's. Moody's grading is slightly different. Moody's sometimes argues that their ratings embed a conceptually superior approach that directly considers not only the likelihood of default but also the severity of loss in the event of default.

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Long Term Credit Rankings?

Fitch Ratings and Standard & Poor's use a system of letter sliding from the best rating "AAA" to "D" for issuers already defaulting on payments.

  • Investment Grade
    • AAA  : best quality borrowers, reliable and stable without a foreseeable risk to future payments of interest and principal
    • AA  : very strong borrowers; a bit higher risk than AAA
    • A  : upper medium grade; economic situation can affect finance
    • BBB  : medium grade borrowers, which are satisfactory at the moment
  • Non-Investment Grade
    • BB  : lower medium grade borrowers, more prone to changes in the economy, somewhat speculative
    • B  : low grade, financial situation varies noticeably, speculative
    • CCC  : poor quality, currently vulnerable and may default
    • CC  : highly vulnerable, most speculative bonds
    • C  : highly vulnerable, perhaps in bankruptcy or in arrears but still continuing to pay out on obligations
    • CI  : past due on interest
    • R  : under regulatory supervision due to its financial situation
    • SD  : has selectively defaulted on some obligations
    • D  : has defaulted on obligations and S&P believes that it will generally default on most or all obligations
    • NR  : not rated


Moody's ratings follows a different system

  • Investment Grade
    • Aaa: Obligations rated Aaa are judged to be of the highest quality, with the "smallest degree of risk"
    • Aa1, Aa2, Aa3: Obligations rated Aa are judged to be of high quality and are subject to very low credit risk, but "their susceptibility to long-term risks appears somewhat greater".
    • A1, A2, A3: Obligations rated A are considered upper-medium grade and are subject to low credit risk, but that have elements "present that suggest a susceptibility to impairment over the long term".
    • Baa1, Baa2, Baa3: Obligations rated Baa are subject to moderate credit risk. They are considered medium-grade and as such "protective elements may be lacking or may be characteristically unreliable".
  • Non-Investment Grade
    • Ba1, Ba2, Ba3: Obligations rated Ba are judged to have "questionable credit quality."
    • B1, B2, B3: Obligations rated B are considered speculative and are subject to high credit risk, and have "generally poor credit quality."
    • Caa1, Caa2, Caa3: Obligations rated Caa are judged to be of poor standing and are subject to very high credit risk, and have "extremely poor credit quality. Such banks may be in default..."
    • Ca: Obligations rated Ca are highly speculative and are "usually in default on their deposit obligations".
    • C: Obligations rated C are the lowest rated class of bonds and are typically in default, and "potential recovery values are low".
  • Others
    • WR: Withdrawn Rating
    • NR: Not Rated
    • P: Provisional

Quick Quid

FHA Streamline Mortgage What this means to you if you are currently shpniopg for an FHA streamline refinance is that you need to ask the question “are you requiring a credit score for the FHA streamline program?” and expect many lenders to say “yes” .

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Recent developments

SInce the beginning of the credit crunch in early 2007 rating agencies have come under fire for their high ratings of mortgage backed securities (MBS) that did not reflect the financial stability of the borrowers. This has also reopened a discussion whether rating agencies, who get paid by borrowers for their rating, are not in a conflict of interest.

Description Moody\'s S&P Fitch
Maximum SafetyAaaAAAAAA
High gradeAa1AA+AA+
High gradeAa2AAAA
High gradeAa3AA-AA-
Higher medium GradeA1A+A+
Higher medium GradeA2AA
Higher medium GradeA3A-A-
Lower medium GradeBaa1BBB+BBB+
Lower medium GradeBaa2BBBBBB
Lower medium GradeBaa3BBB-BBB-
SpeculativeBa1BB+BB+
SpeculativeBa2BBBB
SpeculativeBa3BB-BB-
Highly SpeculativeB1B+
Highly SpeculativeB2BB
Highly SpeculativeB3B-
Substantially riskyCCC+CCC+
Substantially riskyCaaCCCCCC
May be in defaultCaCCCC
Extremely SpeculativeCCC
Income bonds - not paying interestCI
DefaultDDD
DefaultDD
DefaultDD
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