Credit Rating Agencies-Moody’s Ratingby Asst Prof S. Rebello

Asst Prof S Rebello

What is a rating?

A rating is Moody’s opinion of the credit quality of individual obligations or of an issuer’s general creditworthiness

Asst Prof S Rebello

What a rating is not…

Ratings are not recommendations to buy or sell, nor are they a guarantee that default will not occur.

Asst Prof S Rebello

What types of securities does Moody’s rate?

• bonds, • debentures, • asset-backed and mortgage-backed securities, • convertible bonds, • medium-term notes, • securities, etc.

Asst Prof S Rebello

What do credit ratings measure?

• Moody’s credit ratings represent a ranking of creditworthiness, or expected loss.

• While a rating summarizes the credit risk characteristics of an obligor or obligation,

• it is not a statement as to which obligors or obligations will default in the future.

• Rather, it is expected that lower rated entities and obligations will default, on average, at a higher frequency than more highly rated entities and obligations.

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MOODY’S RATING PROCESS

Asst Prof S Rebello

Meeting with Management• For a first-time rating, the initial rating meeting is generally held at a company's head

office location, and may last from a half day to a full day.• The Moody's analyst will discuss the meeting agenda with the issuer in advance of the

meeting • The rating meeting will generally focus on the following:

Background and history of the company/entity Industry/sector trends National political and regulatory environment Management quality, experience, track record, and attitude toward risk-taking Management structure Basic operating and competitive position Corporate strategy Financial position and sources of liquidity, including:-

1. cash flow stability and predictability 2. and ability to service debt obligations3. operating margin, and 4. a balance sheet analysis in terms of debt profile and maturity. Asst Prof S Rebello

How does a Moody’s rating committee work?

• Moody’s ratings are initially determined or subsequently changed through committee.

• The lead analyst frames the discussion, including offering the rating recommendation and its rationale.

• the committee includes a managing director or other designated individual and the lead analyst.

• Factors affecting the size of the committee may include – the size of the issuer, – complexity of the security, – geography, or whether a transaction of the type has ever been done before.

• The discussions of the committees are strictly confidential, and only Moody’s analysts may serve on a committee.

• Develops a conclusion in committee on the appropriate rating

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What sources of information do analysts use?

• Publicly available data, e.g., annual reports.• Prospectuses, offering circulars, offering memoranda, trust deeds, or

indentures of particular securities.• Market data, e.g., stock price trends, trading volume, data on bond price

spreads.• Economic data from industry groups, associations or bodies, such as the World

Bank.• Data from agencies, such as central banks, ministries, or regulators.• Books or articles from academic sources, financial journals, news reports.• Discussions with expert sources in industry, government, or academia.• Data that may come from meetings or conversations with the debt issuer. If

the data are confidential, Moody’s strictly observes this.

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External Rating Appeals• Before the credit rating decision is published the issuer

can make an appeal for new or additional information.• When a issuer makes an request to Moody’s to

reconsider the decision based on the new decision or additional information then such an appeal is known as External Appeal.

• When an External Appeal is made there will be a delay in publishing since Moody’s will assess the relevance and significance of the new information

• The new or additional information should be supported by the necessary documents.

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On-going basis

• Monitors the security on an ongoing basis to determine whether the rating should be changed, and informs the marketplace of Moody's actions.

• Moody's will meet with management at least annually, or more frequently

• The Moody's analyst will maintain regular contact with the issuer

Asst Prof S Rebello

Rating Process Timeline • Moody's rating process, from the time of the preliminary

discussion to the public release of the rating, takes approximately 60-90 days.

Treatment of Confidential Information • an issuer's trust in the confidential nature of the rating

relationship is an essential component of the rating process.

• Confidential information will not be publicly disclosed, but, if relevant, will be used in the formulation of the public rating opinion.

Asst Prof S Rebello

MOODY’S CREDIT RATINGSThe purpose of Moody's ratings is to provide investors with a simple system of gradation by which future relative creditworthiness of securities may be gauged.

TYPES OF

RATINGS

LONG TERM RATING SHORT TERM RATING

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LONG TERM RATING

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Short-Term Rating Scale

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AaaAaABaaBaBCaaNo Data available

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• Long-term Debt Ratings (maturities of one year or greater)• INVESTMENT GRADE• Aaa – highest rating, representing minimum credit risk• Aa1, Aa2, Aa3 – high-grade• A1, A2, A3 – upper-medium grade• Baa1, Baa2, Baa3 – medium grade• SPECULATIVE GRADE• Ba1, Ba2, Ba3 – speculative elements• B1, B2, B3 – subject to high credit risk• Caa1, Caa2, Caa3 – bonds of poor standing• Ca – highly speculative, or near default• C – lowest rating, bonds typically in default, little prospect for recovery of principal or

interest

Asst Prof S Rebello