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Bond Ratings

Bond Ratings. Jie Zhao. The Big Three. Moody’s Investors Service US-based 40% market share Standard & Poor’s Corporation US-based 40% market share Fitch Group Dual-headquartered 15% market share. The ratings provided extra voices of expertise and assessment for bond investors.

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Bond Ratings

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  1. Bond Ratings Jie Zhao

  2. The Big Three • Moody’s Investors Service • US-based • 40% market share • Standard & Poor’s Corporation • US-based • 40% market share • Fitch Group • Dual-headquartered • 15% market share

  3. The ratings provided extra voices of expertise and assessment for bond investors. The standard business model was for the ratings companies to sell their ratings to investors at that time.

  4. Major Changes • First major change (1930s) • A requirement that banks could not invest in bonds that were below ”Investment grade” • Second major change (early 1970s) • “Investors pay” model to an “issuers pay” model

  5. Summary of Corporate Bond Rating Systems and Symbols Prime High quality Upper medium grade Medium grade • http://www.bondsonline.com/Todays_Market/Credit_Rating_News_.php

  6. Risks and Factors Considered by Rating Agencies • Event Risk • Natural or industrial or regulatory changes • Takeover or corporate restructuring • Credit risk • The protections afforded to debt holders • The collateral available for the debt holders • The ability to make the contractual payments

  7. Risks and Factors Considered by Rating Agencies • Business risk • Associated with operating cash flows • Corporate governance issues • The ownership structure • The practices • Policies for financial disclosure • Financial risk • Traditional ratio analysis and other factors

  8. They are doing well. Problems?

  9. Reference: • http://www.cato.org/sites/cato.org/files/serials/files/regulation/2007/3/v30n1-3.pdf • http://dealbook.nytimes.com/2010/06/02/buffett-defends-how-rating-agencies-are-paid/ • http://www.forbes.com/fdc/welcome_mjx.shtml

  10. Q&A

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