industry research credit rating agency group 1 chris mei yu steven john

Industry Research

Credit Rating Agency

Group 1 Chris Mei Yu Steven John

Group 1CEP Industry Research:Credit Rating Agency

Independence assessment of a creditworthiness of a bond

The credit rating measures probability of timely repayment payment and interest of a bond

➢ AAA --- The highest investment grade ➢ BBB --- The lowest investment grade ➢ Below BBB--- Junk bond➢ E.g. Moody, Standard & Poor and Fitch rating

What is rating agency?


Why credit rating agency exist? Reduce asymmetry between lenders

and borrowers Enhance transparency and efficiency

in the fixed-income securities market


How are bond rated?

① Application form to rating agency by issuer or its agency either via telephone call or in writing

② Rating issuer's debt instruments for decades③ Doing several weeks before the issuance of

the bonds ④ Providing the documentations⑤ Present the credit worthiness agency at

rating agency's or issuer's office⑥ The rating is released to the issuer, a wire

service and a publication of full credit report


Elements determining the rating

Economic Factors Debt/Issue Structure Financial Factors Management/ Structure Factors Investment Policy and Practice Willingness to pay


Credit Rating Information

Bond Ratings

Very High Quality

High Quality

Speculative

Very Poor

Standard & Poor’s

AAA AA A BBB BB B CCC D

Moody’s

Aaa Aa A Baa Ba B Caa C

At tines both Moody’s and Standard & Poor’s have used adjustments to these ratings. Standard & Poor’s uses plus and minus signs; A+ is the strongest. A rating and A- the weakest, Moody’s uses a 1,2, or 3 designation--- with 1 indicating the strongest.


Bond Ratings Moody’s S&P Rating’s Meaning

Very High Quality

Aaa AAA Capacity to pay interest Principal is extremely strong Aa AA

High Quality A A Rating A has a strong capacity to pay interest and repay principal

Rating Baa and BBB have an adequate capacity to pay interest and repay principal

The changes are affected by economic conditions

BBa BBB

Speculative

(Junk Bonds)

Ba BB Respect to capacity to pay interest and repay principal in accordance with the terms of the obligation

Rating BB and Ba indicate the lowest degree of speculation

B B

Very Poor Caa CCC Rating CC and Ca indicate the highest degree of speculation

1) These are outweighed by large uncertainties or major risk exposures to adverse conditions

2) Rating C indicate reserving for income bonds on which no interest is being paid

3) Rating D is in default and payment of interest and/ or repayment of principal is in arrears

Ca CC

C C

D D


How credit rating agency makes money

Rating fees from corporations it rated

Consultant fees for credit risk management service


Moody’s Corporation

NYSE: MCO Revenue in 2002: $1.0billion No. of employees ≈ 2100

Moody’s Corporation

Moody’s Investors Service Moody’s KMV


Moody’s credit rating area

Corporate Finance Banking Sovereign (Nations) Structured Finance US Public Finance Funds


Corporate Finance

Investment Grading

Leveraged Finance

Syndicated Loan

Project Finance


Banking

Long-term deposit rating

Short-term deposit rating

Financial strength rating


Sovereign

Rating for foreign-currency bond

Rating for foreign-currency deposit


Structured Finance


US Public Finance

Rating on municipal bond


Managed Fund


Income sources

Revenue by Product (2002)

37%

22%15%

8%

9% 8%Structured Finance

Corporate Finance

Financial Institutions& Sovereign RiskPublic Finance

Research

MKMV


Annual Grwoth Rate (1997-2002)

31%

14% 14%

6%

21%

29%

0%

5%

10%

15%

20%

25%

30%

35%

StructuredFinance

CorporateFinance

FinancialInstitutions &

Sovereign Risk

Public Finance Research MKMV


End

industry research credit rating agency group 1 chris mei yu steven john

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