Dr. Sat Parashar, PhD
Moody downgrades India’s rating is the news all over, as of June 2, 2020. If you have not been following the credit ratings by Moody and other credit rating agencies, you may sample here:
“We today upgraded Yes Bank long-term foreign currency issuer and foreign currency senior unsecured MTN programme ratings to Caa1 from Caa3 and (P) Caa1 from (P) Caa3 respectively,” Moody’s Investors Service said in a late evening statement. Accordingly, the credit outlook has also been changed to positive from negative. Mar 16, 2020
(Yes bank (India) had a virtual meltdown a week earlier. No surprise, upgrading from Caa3 to Caa1 is no significant mark- up, but upgraded sounded upgraded.)
Rating agency Moody’s has upgraded Pakistan’s outlook from “negative” to “stable”, a significant sign of stabilization vis-à-vis the country’s otherwise ailing economy. Dec 2, 2019
(Post- rating, IMF, Saudi Arabia and others had to provide loans to bail out Pakistan economy.)
One of the world’s leading credit rating agencies, Standard & Poor’s, has downgraded the United States’ top-notch AAA rating for the first time ever. S&P cut the long-term US rating by one notch to AA+ with a negative outlook, citing concerns about budget deficits. August 6, 2011
(Post- rating, since 2011, US Dollar has appreciated against Euro by almost 22%.)
Do you think Lehman Brothers which collapsed in 2008 (and others which got bailed out) had no credit rating agency covering them then?
What are these ratings?
These are opinions, not recommendations, offered to lenders about likelihood of default in repayment of principal and interest (and investors).
But you must be wondering, these credit rating agencies have been around over 100 years, and yet continuing with offering opinions and no recommendations.
It is smart! If you make recommendation. You can be pinned down if a lender or investor made decision based on your recommendation and suffers loss. But opinion is opinion. No Obligation. Neat Revenue.
Who pays for credit rating?
It is equally interesting. The issuer pays for the rating. Do you see any conflict of interest here?
How different is Baa3 from Baa2?
The following table indicates the long-term ratings consistent with different short-term ratings when such long-term ratings exist.
(Source: Moody’s Rating Symbols and Definitions, page 7/ 39.)
Hope you see how different is Baa3 from Baa2.
Moody Rates what?
Moody (and every other credit rating agency) provides credit rating for a variety of financial instruments and issuers. To know more about Moody’s ratings, you may please see Moody’s Rating Symbols and Definitions (total 39 pages).
Here below are given, for your quick reference, definitions of two ratings:
“Issuer Ratings are opinions of the ability of entities to honor senior unsecured debt and debt like obligations. As such, Issuer Ratings incorporate any external support that is expected to apply to all current and future issuance of senior unsecured financial obligations and contracts, such as explicit support stemming from a guarantee of all senior unsecured financial obligations and contracts, and/or implicit support for issuers subject to joint default analysis (e.g. banks and government-related issuers). Issuer Ratings do not incorporate support arrangements, such as guarantees, that apply only to specific (but not to all) senior unsecured financial obligations and contracts. While Issuer Ratings reflect the risk that debt and debt-like claims are not serviced on a timely basis, they do not reflect the risk that a contract or other non-debt obligation will be subjected to commercial disputes. Additionally, while an issuer may have senior unsecured obligations held by both supranational institutions and central banks (e.g., IMF, European Central Bank), as well as other investors, Issuer Ratings reflect only the risks faced by other investors.
Long-Term and Short-Term Financial Obligation Ratings
Long-term ratings are assigned to issuers or obligations with an original maturity of one year or more and reflect both on the likelihood of a default on contractually promised payments and the expected financial loss suffered in the event of default. Short-term ratings are assigned to obligations with an original maturity of thirteen months or less and reflect both on the likelihood of a default on contractually promised payments and the expected financial loss suffered in the event of default.”
What is the basis of rating?
Assessments, not measurements, based on multiplicity of financial and non- financial factors.
Why multiplicity of Factors?
It lends credibility as broad- based, comprehensive and objective exercise. But the outcome is a direct function of how accurately you identify explanatory factors with significant explanatory power, their measurement, weightage assigned to each, and the interpretation of findings. (The headings put by the publishing media on those credit opinions has its own role as very few people have time, these days, to read the body of the news. For most, news ends with the heading.)
Why International and not National Agency?
S&P, Moody and Fitch are the three leading international rating agencies. Their share is almost 95% of the international market.
Each country has its own credit rating agencies, normally backed by one of these three. India has CRISIL (since 1987), with S&P; and ICRA (since 1991), with Moody. There are others also. So, would you wonder why not CRISIL or ICRA or some other national provides this rating?
Creditworthiness is a function of issuer specific and general socio- legal- economic environmental factors. Local agencies may be expected to have better understanding of the local conditions.
WALL STREET AND THE FINANCIAL CRISIS: Anatomy of a Financial Collapse
United States Senate PERMANENT SUBCOMMITTEE ON INVESTIGATIONS Committee on Homeland Security and Governmental Affairs, Carl Levin, Chairman, Tom Coburn, Ranking Minority Member, WALL STREET AND THE FINANCIAL CRISIS: Anatomy of a Financial Collapse (April 13, 2011, page 5 & 6)
“Using case studies involving Moody’s Investors Service, Inc. (Moody’s) and Standard & Poor’s Financial Services LLC (S&P), the nation’s two largest credit rating agencies, the Subcommittee identified multiple problems responsible for the inaccurate ratings, including conflicts of interest that placed achieving market share and increased revenues ahead of ensuring accurate ratings.”
Dr. Sat Parashar, PhD is a Professor and Financial Advisor. He may be reached at [email protected]