Credit Ratings

Rating Fundamentals

Credit Ratings Are Expressions Of Opinion About Credit Risk

About the ability and willingness of an issuer, such as a corporation, state or city
government, to meet its financial obligations in accordance with the terms of those
obligations.
Of an issue, such as a bond or other debt obligation, and the relative likelihood that it
may default.

Ratings should not be viewed as assurances of credit quality or exact measures

of the likelihood of default.
Ratings denote a relative level of credit risk that reflects a rating agencys
carefully considered and analytically informed opinion as to the
creditworthiness of an issuer or the credit quality of a particular debt issue
Credit Ratings are Forward Looking and continually evolving
Credit Ratings are Intended to be Comparable across different sectors and
regions
Credit Ratings do not Indicate Investment Merit
Credit Ratings are not Absolute Measures Of Default Probability. In assigning
ratings, Rating Agencies rank orders issuers and issues from strongest to
weakest based on their relative creditworthiness and credit quality within a
universe of credit risk

Credit Rating Agencies

Credit rating agencies publish ratings and research about the
creditworthiness of issuers and the credit quality of specific debt
instruments
Despite general similarities among rating agencies, the types of issuers
and issues/securities they rate, the ways in which they assign their ratings
and what those ratings signify varies
Some major differences among rating agencies, which are explored in the
following sections of this module, include:
The methodologies/approaches they use in assessing risk
Their scope of coverage
The business models under which they operate

Rating Approaches
Analyst Driven
Model Driven

Payment Models
Issuer Pay
Subscription Model

Rating Scales
Credit rating symbols should provide a simple, efficient
way to communicate creditworthiness and credit
quality
Standard & Poors uses AAA, BB, or CC to
communicate relative credit risk, with AAA denoting
the strongest creditworthiness and C or D denoting
the weakest, or that a default has occurred
Standard & Poors typically expresses its opinion of
creditworthiness in terms of three components:
The long-term rating
The outlook on the long-term rating
The short-term rating, where applicable

Investment- & Speculative-Grade

Debt
Debt issues that are rated as having higher credit quality
are commonly referred to as investment-grade securities.
It identifies categories of issuers and issues with relatively
higher levels of creditworthiness and credit quality.
Market participants typically look to rating scales to determine
thresholds for investment-grade securities.

Those that are assessed to have a relatively lower credit

quality are often referred to as non-investment-grade, or
sometimes speculative grade, securities.
Generally used in reference to debt securities where the issue
or issuer currently has the ability to repay but faces
uncertainties, such as adverse business or financial
circumstances, which could increase the likelihood of default, or
failure to meet its financial obligations in accordance with the
terms of those obligations

Long-Term Ratings, Ratings Outlooks,

and Short-Term Ratings

Long Term Ratings

Standard & Poors long-term credit ratings range from a top rating of AAA, reflecting the
strongest credit quality, to D for debt issues that are actually in default and for issuers
who did not meet their financial obligations or have declared that they cannot do so.
The addition of pluses and minuses provides further distinctions within ratings that
range from AA to CCC.
Short Term Ratings
Standard & Poors long-term credit ratings range from a top rating of AAA, reflecting the
strongest credit quality, to D for debt issues that are actually in default and for issuers
who did not meet their financial obligations or have declared that they cannot do so.
The addition of pluses and minuses provides further distinctions within ratings that
range from AA to CCC.
Outlooks
Standard & Poors assigns outlooks, which may be positive, negative, stable, or
developing, to its long-term credit rate.
A positive outlook suggests that the issuers rating may be raised, while a negative
outlook indicates it may be lowered.
Outlooks typically have a six-month to two-year time frame and address trends or risks
with the potential.
Those that use the term developing describe unique situations where the effect of
future events is so uncertain that the rating could either be raised or lowered.

Rating Structured Finance Instruments

Ratings Type

Principal Analytical Considerations

Issuer Ratings
For Corporate Issuers

Current opinion of an entitys overall

Business risk profile: Country risk, industry condition,
creditworthinessits ability and willingness to
competitive position, business and geographic diversification
repay its financial obligations
management, regulatory environment and strategy

Credit risk assessment of issuer as a whole, but

Financial risk profile: Capitalization, leverage, earnings, funding, liquidity,
not of a specific debt issue
cash flow, risk management, and accounting

Other factors specific to the type of entity or its industry sector

For Government Issuers

Political stability and pressures

Economic structure and growth prospects

Wealth and demographics

Budgetary performance

Debt burden and management

Issue Ratings
For Corporate and Government Issues

Opinion of the credit quality of a specific financial

Credit risk of the issuer
obligation and issuers willingness and capacity to
The terms and conditions of the debt security and, if relevant, its
pay in accordance with term
legal structure

The relative seniority of the issue with regard to the issuers other
debt issues and priority of repayment in the event of default

The existence of external support or credit enhancements, such as

letters of credit, guarantees, insurance, and collateral. These
protections can provide a cushion that limits the potential credit
risks associated with a particular issue

Monitoring Credit Quality

Credit Ratings Can and Do Change Over Time

The reasons for the changes vary, and may be broadly related to overall changes in
the business environment, or they may be more narrowly focused on
circumstances affecting a specific industry, entity, or obligation, such as adverse
business results at a corporation or political instability facing a government.

Ongoing Surveillance- Surveillance activities may lead to:

Changing a rating outlook. This occurs when the Rating Committee determines that
there is a one-in-three potential for a ratings change based on trends or anticipated
risks that may affect creditworthiness for the coming 6 to 24 months.
Placing ratings on CreditWatch. This occurs when there is a one-in-two likelihood of
a rating change in the near term as a result of an event, a significant and
unexpected deviation from anticipated performance, or a change in criteria has
been adopted that necessitates a review of an entire sector or multiple issues.
Raising or lowering a rating.

Agencies consider a number of different factors in determining the type of surveillance

to perform on a particular rating. For example, the frequency and extent of surveillance
may depend on specific risk considerations that are relevant to an individual, a group,
or a class of rated entities. In addition, the regularity of surveillance may be related to
the timing and availability of financial and regulatory reporting, transaction-specific
performance information, and other new information from various sources.