Credit Ratings

CRISIL Ratings FAQs
1. What is a credit rating? 2. How does a credit rating agency differ from a credit bureau? 3. Is a credit rating a recommendation to invest in a debt instrument? 4. What is the difference between credit rating and equity research? 5. How does a credit rating differ from an audit? 6. How does a rating agency operate when issuers' disclosure levels are low? 7. Does a credit rating assure repayment? 8. Who pays for a credit rating? 9. If the issuer pays for the rating, how does a credit rating agency maintain its independence? 10. Who regulates a rating agency? 11. Is competition desirable in the credit rating industry? 12. How do investors benefit from a credit rating? 13. What do the various credit rating symbols mean? 14. Does the minus sign in a rating symbol have negative connotations relating to the issuer's performance or its debt-servicing capability? 15. What are Structured Obligation (so) ratings? Are they different from other credit ratings? 16. What is the validity period of a credit rating? 17. How are credit rating changes communicated? 18. Why do credit ratings change? 19. If a credit rating is downgraded, does it mean that a default is imminent? 20. Does the size of the rated debt obligation affect its credit rating?

1. What

is

a

credit

rating?

A credit rating represents the rating agency's opinion on the likelihood of a rated debt obligation being repaid in full and on time. A simple alphanumeric symbol is normally used to convey a credit rating. Top 2. How does a credit rating agency differ from a credit bureau? A credit rating agency provides an opinion relating to future debt repayments by borrowers. A credit bureau provides information on past debt repayments by borrowers. Top 3. Is a credit rating a recommendation to invest in a debt instrument? A credit rating is not a recommendation to buy, hold, or sell a debt instrument. A credit rating is one of the inputs used by investors to make an investment decision.

4. What

is

the

difference

between

credit

rating

and

equity

Top research?

Credit ratings are assigned to debt instruments, while equity research relates to equity shares. A credit rating is focused on the risk of non-payment, the primary variable in debt instruments. Equity research is focused on growth possibilities, for that is what drives equity valuations. 5. How does a credit rating differ from an Top audit?

A credit rating agency relies on a variety of information sources, including published annual reports. An audit process is designed to detect fraud or misrepresentation of information, whereas the credit rating process is not. 6. How does a rating Top agency operate when issuers' disclosure levels are low?

During a credit rating exercise, issuers provide rating agencies with confidential information and insights into business strategy that are not normally available in the public domain. As a policy, CRISIL does not assign credit ratings without issuer interaction, except when a previously rated instrument is outstanding or when a specific investor asks for a private exercise. In cases where CRISIL believes that the information is inadequate to assign a rating, it may not do so. Also, for rated clients, if subsequent information is not adequate, CRISIL may suspend the rating and inform the investors. Top 7. Does a credit rating assure repayment? A credit rating is not an assurance of repayment of the rated instrument. Rather, it is an opinion on the relative degree of risk associated with such repayment. This opinion represents a probabilistic estimate of the likelihood of default. Top 8. Who pays for a credit rating? Most credit rating agencies across the world use a revenue model where the issuer pays for the credit rating. Alternative revenue models (such as the one based on investor fees) pose numerous challenges in terms of ease and practicality of implementation that have not yet been overcome. Top 9. If the issuer pays for the rating, how does a credit rating agency maintain its independence? Although the issuer pays for the rating, the investor uses it. Like any other product or service, the 'value' of the rating depends entirely on the perceptions of the investor. Investor perceptions are based on the credibility of the past ratings assigned by each rating agency. (Please also refer to section - How CRISIL manages Conflict) Top 10.Who regulates a rating agency? The capital market regulator regulates rating agencies in most regions. In India, the capital markets regulator, the Securities and Exchange Board of India (SEBI), regulates the rating agencies in the country. 11.Is competition desirable in the credit rating Top industry?

Competition in the credit rating industry is desirable to meet the 'better service at a cheaper price' objective on an ongoing basis. However, it is essential to guard against some undesirable effects of competition, such as lax ratings or sub-optimal quality of research and analysis. Top 12.How do investors benefit from a credit rating? Credit ratings help investors facilitate comparative assessment of investment options, complement the investors' own credit analysis, and allow asset monitoring. Top 13.What do the various credit rating symbols mean? CRISIL uses simple alphanumeric symbols to convey credit ratings. CRISIL assigns credit ratings to debt obligations on three basic scales: the long-term scale, the short-term scale, and the fixed deposit scale. To illustrate, CRISIL's long-term credit rating scale and the description associated with each category on the rating scale is given below: Symbol (Rating category). AAA AA A BBB BB B C D Highest Safety High Safety Adequate Safety Moderate Safety Inadequate Safety High Risk Substantial Risk Default Description (with regard to the likelihood of meeting the debt obligations on time)

Top 14.Does the minus sign in a rating symbol have negative connotations relating to the issuer's performance or its debt-servicing capability? Plus and minus symbols are used to indicate finer distinctions within a rating category. The minus symbol associated with ratings has no negative connotations whatsoever. Top 15.What are Structured Obligation (so) ratings? Are they different from other credit ratings? Structured Obligation (so) ratings are ratings that are based on a 'credit enhancement' mechanism and/or a structured payment mechanism. A suffix in the form of '(so)' indicates the presence of non-credit risk in the form of risks associated with the instrument structure. Top 16.What is the validity period of a credit rating? Credit ratings are assigned either to specific instruments or to the general debt obligations of

issuers. CRISIL assigns credit ratings to debt obligations. A rating is valid until the rated debt obligation is fully paid. Top 17.How are credit rating changes communicated? Once a credit rating is assigned and published, CRISIL keeps the credit rating under surveillance until the instrument is fully repaid. The surveillance process may result in credit rating changes from time to time. All changes in CRISIL's credit ratings are communicated publicly through CRISIL's website (www.crisil.com) and media releases. Top 18.Why do credit ratings change? Credit ratings are assigned based on certain expectations and assumptions about variables that impact the issuer's performance. However, these variables can change, causing the rated entities' performance to deviate materially from expectations. This is reflected in their changed credit ratings. Top 19.If a credit rating is downgraded, does it mean that a default is imminent? Not necessarily. In most cases, a downgrade does not mean that a default is anticipated. All it indicates is that the risk associated with the debt obligation is relatively higher than what it was before the downgrade. Top 20.Does the size of the rated debt obligation affect its credit rating? No. What matters is the size of the total debt in the company, and not the amount that is sought to be rated.

Top

CRISIL Rating Process
CRISIL's ratings process is designed to ensure that all ratings are based on the highest standards of independence and analytical rigour.

From the initial meeting with the management to the assignment of the rating, the rating process normally takes three to four weeks. However, CRISIL has sometimes arrived at rating decisions in shorter timeframes, to meet urgent requirements. The process of rating starts with a rating request from the issuer, and the signing of a rating agreement. CRISIL employs a multi-layered, decision-making process in assigning a rating. A detailed flow chart of CRISIL's rating process is as below:

CRISIL Rating Process
CRISIL's ratings process is designed to ensure that all ratings are based on the highest standards of independence and analytical rigour.

From the initial meeting with the management to the assignment of the rating, the rating process normally takes three to four weeks. However, CRISIL has sometimes arrived at rating decisions in shorter timeframes, to meet urgent requirements. The process of rating starts with a rating request from the issuer, and the signing of a rating agreement. CRISIL employs a multi-layered, decision-making process in assigning a rating. A detailed flow chart of CRISIL's rating process is as below:

Definition: A credit ratings agency is a company that assigns credit ratings to institutions that issue debt obligations (i.e. assets backed by receivables on loans, such as mortgage-backed securities. These institutions can be companies, cities, non-profit organizations, or national governments, and the securities they issue can be traded on a secondary market. quickloans

A credit rating measures credit worthiness, or the ability to pay back a loan. It affects the interest rate applied to loans - interest rates vary depending on the risk of the investment. A low-rated security has a high interest rate, in order to attract buyers to this high-risk investment. Conversely, a highly-rated security (carrying a AAA rating, like a municipal bond which is backed by stable government agencies) has a lower interest rate, because it is a low-risk investment. These low-risk bonds are available to a wide range of investors, whereas high-risk bonds cater to a narrow investing demographic. same day loans Companies that issue credit scores for individuals are usually called credit bureaus and are distinct from corporate ratings agencies. money shop loans

Big Three
The top three credit ratings agencies in the United States are: Moody's Standard & Poor's Fitch Ratings In the wake of recent credit-market turmoil, some niche agencies are picking up market share or at least additional visibility. Among the niche agencies are DBRS and Egan-Jones. Cash loans australia paydayuk

Rating Grades
Each rating agency has developed its own system of rating sovereign and corporate borrowers. Fitch Ratings developed a rating system in 1924 that was adopted by Standard & Poor's. Moody's grading is

slightly different. Moody's sometimes argues that their ratings embed a conceptually superior approach that directly considers not only the likelihood of default but also the severity of loss in the event of default. payday advance

Long Term Credit Rankings?
Fitch Ratings and Standard & Poor's use a system of letter sliding from the best rating "AAA" to "D" for issuers already defaulting on payments. Investment Grade AAA : best quality borrowers, reliable and stable without a foreseeable risk to future payments of interest and principal AA : very strong borrowers; a bit higher risk than AAA A : upper medium grade; economic situation can affect finance BBB : medium grade borrowers, which are satisfactory at the moment Non-Investment Grade BB : lower medium grade borrowers, more prone to changes in the economy, somewhat speculative B : low grade, financial situation varies noticeably, speculative CCC : poor quality, currently vulnerable and may default CC : highly vulnerable, most speculative bonds C : highly vulnerable, perhaps in bankruptcy or in arrears but still continuing to pay out on obligations CI : past due on interest R : under regulatory supervision due to its financial situation SD : has selectively defaulted on some obligations D : has defaulted on obligations and S&P believes that it will generally default on most or all obligations NR : not rated

Moody's ratings follows a different system Investment Grade

Aaa: Obligations rated Aaa are judged to be of the highest quality, with the "smallest degree of risk" Aa1, Aa2, Aa3: Obligations rated Aa are judged to be of high quality and are subject to very low credit risk, but "their susceptibility to long-term risks appears somewhat greater". A1, A2, A3: Obligations rated A are considered upper-medium grade and are subject to low credit risk, but that have elements "present that suggest a susceptibility to impairment over the long term". Baa1, Baa2, Baa3: Obligations rated Baa are subject to moderate credit risk. They are considered medium-grade and as such "protective elements may be lacking or may be characteristically unreliable". Non-Investment Grade Ba1, Ba2, Ba3: Obligations rated Ba are judged to have "questionable credit quality." B1, B2, B3: Obligations rated B are considered speculative and are subject to high credit risk, and have "generally poor credit quality." Caa1, Caa2, Caa3: Obligations rated Caa are judged to be of poor standing and are subject to very high credit risk, and have "extremely poor credit quality. Such banks may be in default..." Ca: Obligations rated Ca are highly speculative and are "usually in default on their deposit obligations". C: Obligations rated C are the lowest rated class of bonds and are typically in default, and "potential recovery values are low".

Others WR: Withdrawn Rating

NR: Not Rated P: Provisional Quick Quid FHA Streamline Mortgage What this means to you if you are currently shpniopg for an FHA streamline refinance is that you need to ask the question “are you requiring a credit score for the FHA streamline program?” and expect many lenders to say “yes” . Quick Cash

Recent developments
SInce the beginning of the credit crunch in early 2007 rating agencies have come under fire for their high ratings of mortgage backed securities (MBS) that did not reflect the financial stability of the borrowers. This has also reopened a discussion whether rating agencies, who get paid by borrowers for their rating, are not in a conflict of interest.
Description Maximum Safety High grade High grade High grade Higher medium Grade Higher medium Grade Higher medium Grade Lower medium Grade Lower medium Grade Lower medium Grade Speculative Speculative Speculative Moody\'s S&P Fitch Aaa Aa1 Aa2 Aa3 A1 A2 A3 Baa1 Baa2 Baa3 Ba1 Ba2 Ba3 AAA AA+ AA AAA+ A AAAA AA+ AA AAA+ A A-

BBB+ BBB+ BBB BBB

BBB- BBBBB+ BB BBBB+ BB BB-

Highly Speculative Highly Speculative Highly Speculative Substantially risky Substantially risky May be in default Extremely Speculative Income bonds - not paying interest Default Default Default

B1 B2 B3 B

B+ B BCCC+ CCC+

Caa Ca C

CCC CCC CC C CI DDD DD D D CC C

Moodys

Moody's Corporation (NYSE:MCO) is a provider of credit services to the capital markets. Moody's provides risk assessment and research on debt and its issuer in virtually all global markets. Moody’s was one of four other companies which were Nationally Recognized Statistical Rating Organizations prior to a 2006 law abolishing that SEC-designated title (S&P, Fitch's, A.M. Best, and Dominion Bond Rating Service were the others). However, Moody's is still heavily entrenched in the financial world as a trusted provider of independent, objective ratings on creditworthiness, especially within the domestic capital markets. It

maintains ingrained services and brand, which arguably help insulate the company from heavy competitive entry to the field.

Business Overview
Moody’s began in the early 1900’s as a provider of financial data on a variety of stocks via a published manual. After the 1907 stock market crash forced the company out of business, founder John Moody soon re-entered the business by providing a simple, standard, and elegant analysis and opinion on a number of companies and issued securities. Within 15 years, the company covered substantially the entire bond market, and its ratings had themselves become a factor in the market. The company persevered through the Great Depression, eventually continuing an expansion into coverage of more areas of the financial world. Moody’s was purchased in the 1970’s by Dun & Bradstreet Corporation and eventually spun off from them in 2000 in a public stock offering.
Contents

1 Business Overview 1.1 Business & Financial Metrics[1] 1.2 Business Segments[2] 2 Trends & Forces 2.1 Subprime Lending Embarrassment 2.2 Credit Crisis 2.3 Government Regulation 2.4 Evolution of Global Capital Markets 2.5 Disintermediation 2.6 Availability of Information and Globalization 2.7 Government Monetary and Fiscal Policies 3 Competition 3.1 Major Competitors 4 References

Moody's offers standard ratings of a company's creditworthiness -- the likelihood that a loan extended to them will be repaid -- and opinions on both long-term and short-term obligations. Most of Moody's revenue comes from charging fees to companies seeking its objective rating. The company generates about 80% of its revenue from ratings, with the remainder from research and software.

Corporate and public finance issuers typically pay Moody's an ongoing fee to publish credit ratings on their entities in order to signal their own creditworthiness, and, thus, lower their cost of capital. The ratings are disseminated by means of press release to the public via electronic and print media. For ratings, longterm obligations may be considered either “investment grade” (Aaa, Aa1, Aa2, Aa3, A1, A2, A3, Baa1, Baa2, Baa3) or “speculative grade” (Ba1, Ba2, Ba3, B1, B2, B3, Caa1, Caa2, Caa3, Ca, C). Short-term obligations may be either Prime 1, 2, or 3 or else Not Prime (NP), representing decreasing ability to repay such obligations. Historically, these ratings have correlated with a company's likelihood of defaulting on its obligations to pay back debt, thereby validating the usefulness of such distilled, easy-to-use ratings. The company's services and ratings are considered indispensable for a company trying to raise money. A positive rating from Moody's allows a company to borrow money at much lower interest rates, lowering the company's cost of capital. Moody's ratings often play an important role in increasing market liquidity, as bond holders are more willing to lend money to a company that has Moody's imprimatur.

Business & Financial Metrics[1]
In 2009, Moody's earned $407.1 million in net income on $1.80 billion in total revenues. This represents a 11.8% decrease in net income and a 2.4% gain in total revenues from 2008. While the company spent $17.5 million on restructuring expenses throughout 2009, what really drove down net income was a 10.0% increase in operating expenses throughout the year. Aproximately 1/3 of revenue comes from subsidiary Moody's Analytics.

Business Segments[2]
Moody's operates through three segments: Research, Data, and Analytics (71.3% of total revenue): The RD&A segment is Moody's primary revenue generator. This is the segment that assigns credit ratings to various securities. RD&A charges fees to the issuers of every security it rates. In 2009, RD&A generated $413.6 million in revenue.

Risk Management Software (25.0% of total revenue): The RMS segment provides economic and risk management software for its client companies.
[3]

In 2009, RMS generated $145.1 in revenue.

Professional Services (3.6% of total revenue): This segment offers advising and training for better risk management to its customers. Packages and contracts are usually created on a case-by-case basis.
[4]

In 2009, the Professional Services segment generated $20.8 million in revenue.

Trends & Forces
Subprime Lending Embarrassment
Too put it bluntly, Moody's and the rest of the ratings agencies were grossly incompetent in their rating of collateralized debt obligations, structured investment vehicles, and mortgage backed securities . Their inability to correctly identify the inherent risk in these securitized debt instruments led to many investors believing they had purchased risk free cash flows. A great majority of these securities were rated AAA - the same debt rating as a treasury bond. As the New York Times pointed out during the first round of defaults, "When a security goes from AAA to junk within a few weeks, it does not inspire confidence in the rating process."
[5]

The lack of faith in Moody's and its peers was apparent when certain CDO's were trading at
[6]

10 cents on the dollar despite having a AAA rating. There has been much speculation regarding the regulation and transformation of this industry in the face of its devastating failures; at the same time, there is a legitimate counter-argument that the rating agencies were as bamboozled as the professional investors, and that what was lacking was transparency about these complex instruments.

Credit Crisis
The current credit market seizure is very detrimental to Moody's business. Considering the amount of business they do is directly related to new debt issues, a frozen credit market is the worst possible

environment. Revenue coming from its credit ratings service fell 37% to $298 million. This represents 69% of the total revenue for the quarter. This portion was much larger in previous quarters, over 80%.
[7]

This shows a fundamental shifting of its business model because of the slowdown in the credit markets. This is especially true in the U.S., where revenue from structured finance fell 69%. CEO Raymond McDaniel claimed that roughly $200-250 million of revenue from structured finance transactions is "just gone."
[8]

Moody's has already started to significantly downsize its workforce.

Government Regulation
In many countries, rating agencies have been or may become subject to numerous guidelines, restrictions, and standardized practices. Various nations may themselves also provide governmentbacked or operated rating services. This provides a formidable competitor in a number of regions or else makes it more difficult for a single ratings firm to distinguish itself in reputation or quality differential. In the face of the current crisis, there have been calls for the entry of government oversight into this industry. Senate Banking Committee Chairman Christopher Dodd has been apt to assign blame to the credit rating agencies for their misguiding of investors to inherent risks; all the while, collecting premiums for their services.
[9]

Evolution of Global Capital Markets
The world’s businesses need capital, and they often raise it through the issuance of debt. Those on the other end of the deal providing the capital rely on objective, trusted opinions to understand how much risk they are assuming and what may represent an appropriate interest rates. Moody’s provides such a service, and, as such, when more businesses need capital, more demand is generated for Moody’s ratings. The growth in the global issuance of rated debt has grown at a compound annual rate of approximately 23% since 2002, providing a tremendous tailwind for Moody’s. Capital markets have also become more complex and rapidly changing, providing both a challenge and an opportunity for the company. While increasing complexity and change makes it more difficult for Moody’s to provide reliable and consistent ratings, it also boosts the demand for ratings from investors, who face the same daunting task of analyzing complex securities and obligations. Increasing complexity is evidenced by the growth of structured finance products, which have grown 27% since 2002. Structured finance products typically involve an entity (corporation or government) using "safer" and more reliably credit-worthy assets such as accounts receivable as collateral for debt. Such a transaction enables the company to obtain a lower interest rate on issued debt by isolating the "safe" collateral asset from the company itself (the not-as-safe alternative). For instance, a company rated Baa3 overall by Moody's may be able to use its accounts receivable (a "safe" asset) to obtain an investment

grade (say Aaa1) rating on debt. The number of assets used in such transactions has increased in the past two decades. Whereas only around 20 asset classes were “packaged” for securitization in 1990, over 200 are currently, indicating greater scope of present-day capital markets. These structured obligations are typically highly complex and more specialized than standard issuances of corporations and governments and thus investors enjoy the benefit of a trusted, easily understood rating from Moody’s. The trends of general growth and increasing complexity in the global capital markets will likely continue worldwide. Markets continue to emerge, global economic expansion continues to fuel demand for capital and, hence, ratings, and firms and investors seek more and more sophisticated means of securitization of asset classes, which bring in more ratings fees for Moody’s. Moody’s continues to expand internationally to capitalize on these trends, though the majority of its revenue still comes from the United States, the world’s largest and most advanced capital market.

Disintermediation
Disintermediation refers to the trend of firms continuing to bypass the “middleman” of a financial intermediary (e.g. investment bank) to raise capital. In a typical transaction, a firm looking to raise money will hire a bank to underwrite the issuance of securities and find investors to purchase them. Each year, however, an increasing number of firms each year are simply doing it themselves to avoid the steep fees of banks (for example, Google took itself public). Moody’s benefits from disintermediation because the trend makes an objective rating of a company’s creditworthiness even more important to investors. Without a trusted financial intermediary to deal with, investors are even more sensitive to ratings, so firms looking to “go it alone” are more likely to use Moody’s services in order to obtain reasonable financing and attract investors.

Availability of Information and Globalization
Advances in technology, such as the Internet, have facilitated access to information about investments throughout the world. This trend has enabled firms to more readily raise money in foreign markets and investors to invest in foreign issuers. The globalization of the financial world also boosts demand for Moody’s services as it demands a credible and universal rating system by which issues from very different geographic regions can be compared. In a sense, Moody’s provides a convenient and trustworthy way for sizing up all opportunities and making sense of the vast amount of information flowing among market participants.

Government Monetary and Fiscal Policies
Governmental monetary policies affecting interest rates have substantial effects on the demand for debt. When interest rates are high, the cost of debt hampers its demand. This, in turn, means fewer ratings for Moody’s. Fiscal policies and government spending can also affect such demand by impacting budget surpluses or deficits and, hence, general economic growth or recession. For instance, in periods of general recession, businesses have less demand for capital. Moody’s has nevertheless demonstrated a consistent growth trajectory and is less affected in the long-run by changes in interest rates, government spending, and monetary policy based on its demonstrated top and bottom line growth for over 20 years.

Competition
Moody's and its largest competitors - particularly McGraw-Hill's S&P and Fitch - each enjoy competitive advantages and distinguished brand names in what may be considered an oligopoly with large barriers to entry and high switching costs for firms and investors. Such advantages have conferred tremendous pricing power and profitability on Moody's and S&P.

Major Competitors
]The company’s major competitors are Standard and Poor’s, Fitch, A.M. Best, and Dominion Bond Rating Services. A.M. Best is more focused and specialized within the insurance industry, and several smaller firms have created their own niches by specializing in a particular industry or type of issue

references
1. ↑ MCO 2009 10-K pg. 26 2. ↑ MCO 2009 10-K pg. 33 3. ↑ MCO 2009 10-K pg. 8 4. ↑ MCO 2009 10-K pg. 35 5. ↑ http://www.nytimes.com/2007/11/02/business/02norris.html?_r=1&ref=business&oref=slogin 6. ↑ The Economist 7. ↑ Moody's 1st Quarter 2008 Release 8. ↑ http://www.bloomberg.com/apps/news?pid=20601103&sid=ajbCLW7ZFBik&refer=us 9. ↑ Bloomberg

S&p McGraw-Hill Companies, Inc. (NYSE: MHP) is a global information services provider doing business in the education, financial services, and business information markets. The company does everything from selling textbooks to providing credit ratings and even operates television stations. Operating in three distinct segments – Education, Financial Services, and Information & Media – the company has several strong brand names in McGraw Hill Publishers, Standard & Poor’s, J.D. Power & Associates, and formerly BusinessWeek (which was officially sold to Bloomberg L.P.). In FY 2010, McGraw-Hill's revenue was $6.1 billion.
[1]

Company Overview
Business Segments
McGraw-Hill operates under three main business segments: Financial Services (44% of revenue): Operating as Standard & Poor’s, McGraw-Hill’s Financial Services segment offers fee-based standardized credit ratings, research, and analysis of fixed income securities and debt instruments. Firms often depend on such ratings to lower their cost of capital and provide liquidity, since investors associate with the trusted S&P ratings system. This division is the largest revenue unit of the company and generates a disproportionately high operating profit as well. This segment has several tailwinds and competitive advantages through its operations as Standard & Poor’s, including increasingly large and complex worldwide capital markets in which market participants demand trusted, reliable, distilled information, and ratings on trillions of dollars worth of securities and financial obligations.
Contents

1 Company Overview 1.1 Business Segments 2 Business Growth 2.1 FY 2010 (ended December 31, 2009)[1] 3 Trends and Forces 3.1 Evolution of Global Capital Markets 3.2 The Internet's Effect on Print Media 4 Comparison to Competitors 5 References

Education (40% of revenue): The Education segment consists of McGraw-Hill Publishers, which publishes educational textbooks and sells them to elementary, high school, public and private universities, professional, international, and adult educations markets. The segment generates the second most in revenue, but it is much less profitable than Financial Services. It enjoys the bulk of a moderately lucrative $800 million textbook publishing industry. With high school and college enrollment rates increasing, McGraw-Hill stands to benefit from long-term societal trends toward higher education, though it is subject to short-term changes in state-wide book adoption rates. Information & Media (16% of revenue): The Information & Media segment is geared towards providing information and transparency to industries. The company's JD Power & Associates (JDPA) is a leading provider of industry data, customer satisfaction surveys, rankings, and marketing information in the automobile industry, which comprises 70% of JDPA’s revenue. JDPA has been building a portfolio to cover additional industries, including finance, insurance, and homebuilding; collectively, these generate the remaining 30% of JDPA revenue. The company also owns Platts, the leading information provider for the energy and metals market. In addition to operating business-tobusiness publications, this segment controls the company's television broadcasting of several ABC affiliate stations. The segment suffers from the lowest operating margins of MHP’s divisions, and like many consumer cyclical and advertising reliant mediums, has seen eroding margins and stiff competition from the Internet as circulation decreases and advertisers leave.

Business Growth
FY 2010 (ended December 31, 2009)[1]
Net revenue increased 3.6% to $6.2 billion. Net income increased 13% to $730 million.

Trends and Forces
McGraw-Hill is in essence a provider of information through a variety of mediums and in a number of fields. Positive trends such as continued strong demand for information, population growth, college enrollment, globalization, financial sector expansion, and technology all provide tailwinds for the company.

Evolution of Global Capital Markets
Businesses of the world need capital, and they often raise it through the issuance of debt. Financial services companies that provide this capital rely on objective, trusted opinions to understand how much risk they are assuming and what may represent an appropriate interest rate. McGraw-Hill’s Standard & Poor’s provides such a service, and an increase in businesses capital needs correlate with a rise in

demand for S&P’s ratings. The growth in the global issuance of rated debt has grown at a compound annual rate of approximately 23% since 2002, providing a tremendous tailwind for S&P.

Capital markets have also become more complex and rapidly changing, providing both a challenge and an opportunity for the company. While increasing complexity and change makes it more difficult for S&P to provide reliable and consistent ratings, it also boosts the demand for ratings from investors, who face the same daunting task of analyzing more complex securities and obligations. Complex structured finance products typically involve an entity (corporation or government) using "safer" and more reliably creditworthy assets such as accounts receivable as collateral for debt. Such a transaction enables the company to obtain a lower interest rate on issued debt by isolating the "safe" collateral asset from the company itself (the less safe alternative). For instance, a company rated B by S&P may be able to use its accounts receivable to obtain an A investment grade rating on debt. The number of assets used in such transactions has increased in the past two decades. Whereas only around 20 asset classes were “packaged” for securitization in 1990, over 200 are currently available. Structured obligations are typically highly complex than standard issuances of corporations and governments, and as a result, investors enjoy the benefit of a trusted, easily understood rating from S&P. The trends of general growth and increasing complexity in the global capital markets will likely continue worldwide. Markets continue to emerge, global economic expansion continues to fuel demand for capital and, as a result, firms and investors seek more sophisticated means of securitizing asset classes, which in turn bring in more ratings fees for S&P. S&P continues to expand internationally to capitalize on these trends, though the majority of its revenue still comes from the United States, the world’s largest and most advanced capital market.

The Internet's Effect on Print Media
Over the past decade, print publications have suffered a vicious cycle of decline. New, cheaper, easier-toaccess mediums, most notably the Internet, have led to lower generally lower circulation and readership of traditional publications like magazines, newspapers, and other periodicals. As this happened, advertisers simultaneously began leaving or paying less for exposure. These compounding factors have produced eroding margins and declining profits for many companied depending on revenue from traditional media advertising. McGraw-Hill’s Information & Media segment has suffered much the same fate, though it has seen top-line growth through acquisition (such as JDPA). However, the company has also been able to capitalize on technological innovation by introducing new products itself. The company's Information & Media division, along with competitors, has moved towards building out their own Internet properties and expand its online presence. The low barriers to entry and extreme competition for viewership on the Internet may likely lead to permanently lower margins. The broader impact of the Internet on McGraw-Hill's business may have a generally positive net effect. These advances have facilitated the flow and accessibility of information about investments available throughout the world. The globalization of the financial world boosts demand for S&P’s services as it practically necessitates a credible rating system to compare different geographic regions on a standard scale. S&P provides a convenient and trustworthy way for sizing up all opportunities and making sense of the vast amount of information flowing among market participants.

Comparison to Competitors
The company maintains market share dominance in its two largest segments, Education and Financial Services, each of which have a number of formidable competitors. The most notable competitors by segment are: Education: Houghton Mifflin, Pearson, Reed Elsevier Financial Services:Moody's (MCO), Fitch, A.M. Best, Dominion Bond Rating Service Information & Media: Most business publication or online media (e.g., Dow Jones (DJ), and any consumer satisfaction market research firms

References
1. ↑
1.0 1.1

MHP 2010 10-K "Consolidated Statement of Income" pg. 41

Credit Rating Agency Performance Needs Improvement
Posted by Terri Eyden on Jan 17 2013 01299 printer friendly

By Curtis C. Verschoor, CMA
Recent developments indicate the need for greater and more effective oversight of credit rating agencies (CRAs). In the fallout from the financial crisis of 2008-2009, a debate arose regarding the culpability of CRAs in creating or contributing to the crisis. Several years later, their performance and reliability are still being called into question. Much of the cause of their poor performance may be because they have operated for many years without either adequate governmental or self-regulation.

Strengthening the oversight of CRAs has proceeded more rapidly in Europe. In May 2012, the European Commission (EC) published four technical standards developed by the European Securities and Markets Authority (ESMA). The standards address how the ESMA will assess credit rating methodologies and the information CRAs have to submit to the ESMA in specific time intervals in order to supervise compliance. According to the European Union (EU) release, the four standards "will ensure a level playing field, transparency, and adequate protection of investors across the Union and contribute to the creation of a single rulebook for financial services." In October 2012, the EC published rules enabling the ESMA to impose fines on CRAs. The regulatory document includes a list of infringements that may trigger fines.

In the United States, regulation of CRAs has rested with the Securities and Exchange Commission (SEC) and has proceeded much more slowly. A few years after Congress passed the Sarbanes-Oxley Act of 2002, it enacted the Credit Rating Agency Reform Act of 2006, which gave the SEC authority to implement rules for registration, recordkeeping, financial reporting, and oversight of CRAs. The overall strategy for dealing with CRAs has been to reduce investor reliance on credit ratings rather than improve the quality and reliability of the ratings themselves.

The adopting release for CRA rules under the Dodd-Frank Act of 2010 included a requirement for each federal agency to review how its existing regulations rely on credit ratings as an

assessment of creditworthiness. At the conclusion of the review, each agency was required to replace those references with alternative standards. Pursuant to this mandate, in July 2011 the SEC adopted final rules eliminating most of the previously required credit rating information in public offerings of debt securities using short-form or shelf registrations.

Some of the rationale for reducing reliance on credit ratings is contained in the cost/benefit analysis section of the SEC's July adopting release, which states that issuers of debt securities "will benefit from not having to incur the associated costs of obtaining a credit rating to the extent that they decide not to obtain a credit rating for other uses. As a result, these rules could lessen the bargaining power rating agencies have with issuers, potentially lowering the cost of obtaining ratings." Saving money for securities issuers rather than protecting investors is contrary to the basic mission of the SEC.

The adopting release further notes, "The removal of a provision in our forms requiring the use of a credit rating to establish eligibility for a type of registration generally reserved for widely followed issuers obviates a market externality that may have constituted a barrier to entry to potential competitors seeking to develop alternative methods of communicating creditworthiness to investors . . . [and therefore] may increase competition in the financial services sector." These stated benefits seem limited, obscure, and problematic.

It has been suggested that development of CRA regulations that would benefit investors the most would occur if the SEC mandated professionalizing the entire practice of issuing credit ratings. A white paper published in April 2009 by the Council of Institutional Investors advocated the formation of a Credit Agency Oversight Board. With considerable input from the financial services industry, the SEC should set specific "generally accepted" standards for the process of performing the analysis necessary to express a credit opinion and how that opinion should be expressed. This is similar to the guidance that the SEC and Public Company Accounting Oversight Board (PCAOB) provide for independent audit firms.

Other reminders also have been offered. In a newsletter discussing CRAs, the law firm Skadden, Arps, Slate, Meagher & Flom notes that Dodd-Frank requires the SEC to prescribe ethical governance standards having adequate controls for CRAs that ensure quality and provide assurance that the controls are effective. Dodd-Frank also provides for sanctions when such standards are not followed. And Gretchen Morgenson wrote in The New York Times that the SEC should also begin to enforce the Dodd-Frank requirement that CRAs be subject to the same liability exposure as other experts, such as lawyers and independent auditors.

The tendency of the SEC to take the side of securities issuers rather than investors is further illustrated in an SEC staff report issued in September 2012 in accordance with a Dodd-Frank requirement to study the benefits of credit rating standardization. Citing the reasoning of commentators, the report recommends that the Commission not take further action at this time to: 1. standardize credit rating terminology so that all credit rating agencies issue credit ratings using identical terms; 2. standardize the market stress conditions under which ratings are evaluated; 3. require a direct quantitative correspondence between credit ratings and a range of default probabilities and loss expectations; and 4. standardize credit rating terminology across asset classes so that named ratings correspond to a standard range of default probabilities and expected losses. The report states that it would be more efficient to focus on the rulemaking initiatives mandated under the Dodd-Frank Act. "In passing the Dodd-Frank Act, Congress noted that credit ratings applied to structured financial products proved inaccurate and contributed significantly to the mismanagement of risks by financial institutions and investors," said then SEC Chairman Mary L. Schapiro. "Our proposed rules are intended to strengthen the integrity and improve the transparency of credit ratings." Unfortunately, little progress has been made toward the release of final rules under the massive 519-page rule proposal issued in May 2011. Among others, public accounting firms objected to a requirement for disclosure concerning third-party due diligence reports for asset-backed securities, arguing that results of such "agreed-upon procedures" engagements are intended to be confidential.

One Dodd-Frank requirement for CRAs that has been implemented concerns examining how well each CRA complies with its own policies and procedures. The second annual SEC staff report issued in November 2012 contained a sixteen-page summary of "essential" findings, some that could later be considered "material regulatory weaknesses" by the SEC as a whole. For example, the report notes that "one of the larger [CRAs] appears to have changed the method for calculating a key financial ratio in rating certain asset-backed securities, but failed for several months to publicly disclose the change and its effects on the ratings, and continued to incorrectly reference the previously used method in its published rating reports. It also failed to provide sufficient disclosure about the method used to calculate such ratio in its published rating methodology applicable to these securities." Such language certainly diminishes an investor's trust in the reliability of credit ratings and suggests that one of the causes of the financial crisis of 2008 is still present.

The SEC staff report also states that "it appears the [large CRA] did not consistently apply its rating methodology and failed to follow certain internal rating policies and procedures with respect to these securities, including the policy regarding the use of models, in assigning initial ratings to, and performing surveillance on, these asset-backed securities. The Staff found that this [CRA] appeared to have weak internal supervisory controls and lacked transparency over

the process of rating these asset-backed securities. The Staff is also concerned that this [CRA] may have been influenced by market share and business considerations in its application of the methodology used to rate asset-backed securities." This is a very troubling report.

Issuance of final rules to implement the requirements of Dodd-Frank for CRAs mandates a majority vote of the SEC, so Schapiro's departure December 14, 2012, left the Commission in a deadlocked position with two members of each political party. This may make it difficult for the SEC to pass any final rules until a new commissioner is named and receives Senate confirmation.

Some observers believe that the proposed rules to implement the Dodd-Frank requirements do not go far enough. A thirty-four-page comment letter on the proposed rules, dated August 8, 2011, and submitted by the Consumer Federation of America and the 250 groups represented by Americans for Financial Reform, states: "As currently drafted the proposed rules offer little hope of making significant progress on addressing the deep-rooted problems with credit ratings that were revealed by the financial crisis."

Further, CRAs soon may face increased legal proceedings and actions. An Australian court has become the first in the world to find a ratings agency liable for issuing AAA ratings on junk derivatives. This decision may pave the way for possible new claims in the UnitedStates and elsewhere. The court found that Standard & Poor's (S&P) was partially liable for A $30 million (US$31.3 million) in losses sustained by purchasers of a complex, structured, synthetic investment product known as a Constant Proportion Debt Obligation (CPDO), which it rated as virtually risk free at AAA. According to an article published November 17, 2012, by global law firm DLA Piper, "S&P was found to have used unjustified and unreasonably optimistic assumptions for some of its inputs for the modeling of the CPDOs' performance, which produced the AAA rating. Had they been eliminated or properly stress-tested, the modeled performance of the CPDOs would have changed from AAA to subinvestment grade (i.e., below BBB)."

The securities markets operate on the basis of trust that the information provided to investors is presented fairly. Without effective oversight of the agencies providing assurance of the creditworthiness of debt instruments, these markets will not be able to operate effectively. Professionalization of the CRA industry is the most efficient way to bring about this outcome.

About the author:

Curtis C. Verschoor, CMA, is a member of the IMA Committee on Ethics. He is Emeritus Ledger and Quill Research Professor at the School of Accountancy and MIS, and an honorary Senior Wicklander Research Fellow in the Institute for Business and Professional Ethics, both at DePaul University, Chicago. Verschoor is also a research scholar in the Center for Business Ethics at Bentley University in Waltham, Massachusetts. He was selected by Trust Across America as one of North America's Top Thought Leaders in Trustworthy Business Behavior2012. His e-mail address is [email protected].

©

2012 by the Institute of Management Accountants (IMA®), www.imanet.org; reprinted with permission.

For guidance in applying the IMA Statement of Ethical Professional Practice to your ethical dilemma, contact the IMA ethics helpline at (800) 245-1383 in the United States or Canada. In other countries, dial the AT&T USADirect access number followed by the above 800 number. Tags SEC Dodd-Frank Congress Articles by Curtis C. Verschoor Guest article Credit rating agencies Financial Crisis

What Credit Ratings Are & Are Not
Credit Ratings Are Expressions Of Opinion About Credit Risk
Credit ratings are opinions about credit risk published by a rating agency. They express opinions 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. Credit ratings are also opinions about the credit quality 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. Rather, ratings denote a relative level of credit risk that reflects a rating agency‘s carefully considered and analytically informed opinion as to the creditworthiness of an issuer or the credit quality of a particular debt issue.

A Matter of Opinion
Standard & Poor‘s ratings opinions are based on analysis by experienced professionals who evaluate and interpret information received from issuers and other available sources. Unlike other types of opinions, such as, for example, those provided by doctors or lawyers, credit rating opinions are not intended to be a prognosis or recommendation. Instead, they are primarily intended to provide investors and market participants with information about the relative credit risk of issuers and individual debt issues that the agency rates. Standard & Poor‘s public ratings opinions are also disseminated broadly and free of charge to recipients all over the world on www.standardandpoors.com

Credit Ratings Are Forward Looking And Continually Evolving
While a key component of credit rating analysis is the evaluation of historical data, ratings opinions are designed to be forward looking. In other words, ratings take into account not only the present situation but also the potential impact of future events on credit risk. For example, in assigning its ratings, Standard & Poor‘s factors in anticipated ups and downs of business cycles in specific industries as well as trends and events that can be reasonably anticipated. At the same time, ratings are not static. Rating opinions may change if the credit quality of an issue or issuer alters in ways that were not expected at the time a rating was assigned. For instance, the acquisition or divestiture of a line of business, a change of policy by a government, or erosion in the credit markets that was not foreseen may result in an adjusted rating that reflects this new information.

Credit Ratings Are Intended To Be Comparable Across Different Sectors and Regions
Standard & Poor‘s uses the same rating scale across the structured finance, corporate, and government sectors. This rating scale is designed to provide a common language for comparing creditworthiness, regardless of the type of entity or assets underlying the debt instrument or the structure of the financial obligation. This approach is in keeping with Standard & Poor‘s goal of providing credit ratings that are reasonably comparable measures of credit quality. This means, for example, in assigning ‗A‘ ratings to asset-backed securities, manufacturing firms, or local governments, Standard & Poor‘s intends to connote an opinion that they have a comparable level of credit risk. Standard & Poor‘s believes that, over the long term, comparable credit opinions are likely to result in reasonably similar average default rates for each rating category across sectors, regions and asset classes. However, as demonstrated in historical studies, default rates in each rating category can fluctuate and such fluctuations are to be expected in the future.

Credit Ratings Do Not Indicate Investment Merit
Standard & Poor‘s credit ratings are not intended to indicate the value, suitability, or merit of an investment. They are opinions of credit quality and, in some cases, the expected recovery in the event of default. Credit ratings do not measure performance factors, such as market value or price fluctuations, and they do not address, explicitly or implicitly, whether:

      

Investors should buy, sell, or hold rated securities A particular rated security is suitable for a particular investor or group of investors A security is appropriate for an investor‘s risk tolerance The expected return of a particular investment is adequate compensation for the risk it poses The price of a security is appropriate given its credit quality There is, or will be, a ready liquid market in which the security may be bought or sold The market value of the security will remain stable over time

While credit quality is an important consideration in evaluating an investment, it cannot serve as the sole indicator of investment merit. In evaluating an investment purchase, investors should consider a wide range of factors, including the current make-up of their portfolios, their investment strategy and time horizon, their tolerance for risk, and an estimation of the security‘s relative value in comparison to other securities they might choose. By way of analogy, while reliability may be an important factor in identifying automobiles that drivers will consider owning, it is not typically the single criterion on which drivers base their purchase decisions. While the initial credit rating assigned to a debt issue, and any subsequent changes to that rating, may affect the price an investor is willing to pay for that debt issue, credit ratings are just one of many factors that the marketplace considers when evaluating debt securities.

Credit Ratings Are Not Absolute Measures Of Default Probability
Standard & Poor‘s credit ratings are not exact measures of the probability that a certain issuer or issue will default but are instead expressions of the relative credit risk of rated issuers and debt instruments. In assigning ratings, Standard & Poor‘s rank orders issuers and issues from strongest to weakest based on their relative creditworthiness and credit quality within a universe of credit risk. To link any rating to precisely expected default rates would imply a degree of scientific accuracy that the rating process is not intended to provide or deliver.

For example, if the transition and default studies performed by Standard & Poor‘s indicate that the annual average default rate of 'BBB' issues was 0.30% historically, this does not mean that a 'BBB' rating is a mathematical prediction of a 0.30% default probability. If a particular set of 'BBB' rated issues suffer a 0.60% default rate, it does not mean those ratings were somehow wrong or inaccurate. In fact, default rates for a specific rating category may fluctuate over time as a result of industry disruptions and economic cycles.

Credit Rating Agencies: What they Do & How They Differ
Rating Agencies Evaluate Credit Risk
As a group, 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 rating agencies limit their work to specific regions, sectors, and/or asset classes, while others maintain global coverage and provide ratings across all sectors and asset classes. 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

Some credit rating agencies, including major global agencies like Standard & Poor‘s, are publishing and information companies that evaluate the credit risk of issuers and individual debt issues. They formulate and disseminate their opinions for use by investors and other market participants who may consider credit risk in making their investment and business decisions. Partly because rating agencies are not directly involved in capital market transactions, they have come to be viewed by both investors and issuers as impartial, independent providers of opinions on credit risk. While investors and other market participants are also capable of analyzing credit quality, rating agencies can generally perform credit analyses more efficiently and economically than other firms because they specialize in that activity and devote substantial resources to it.

Standard & Poor’s: A Major Global Rating Agency
Standard & Poor‘s is a financial publishing, media, and information company with deep roots in those business segments. It applies many of the same principles that financial newspapers and magazines do in order to preserve their journalistic independence and integrity. The credit analysis performed by Standard & Poor‘s analysts is in some ways similar to the credit analysis that analysts at banks or other financial institutions perform. However, rating analysts sometimes have access to confidential information that is provided by issuers, or investment bankers/arrangers, of structured finance transactions as part of the rating process. Standard & Poor‘s also gains a valuable perspective from working on a wide range of credit ratings throughout the world. Standard & Poor‘s performs independent evaluation and reporting of credit risk, and is not otherwise involved in capital market transactions. As a result, Standard & Poor‘s credit ratings, which are assigned based on transparent criteria, have long been utilized by capital market participants.

The Origin Of Standard & Poor's Credit Ratings
Standard & Poor‘s Ratings Services traces its history back to 1860, the year that Henry Varnum Poor published the History of Railroads and Canals of the United States. Poor was concerned about the lack of quality information available to investors and embarked on a campaign to publicize details of corporate operations. Standard & Poor‘s has been publishing credit ratings since 1916, providing investors and market participants worldwide with independent analysis of credit risk.

Rating Methodologies / Approaches

Rating agencies use different approaches in forming and publishing their opinions about credit risk. Some agencies use analysts, some use mathematical models, and some use a combination of the two. As rating agency models differ with regards to their criteria, processes, and ratings definitions, users of ratings should consider such differences if they are using credit ratings as benchmarks. Analyst-Driven Credit Ratings Credit rating agencies, such as Standard & Poor‘s, that use the analyst-driven approach employ analysts to evaluate and express an opinion on the relative creditworthiness of issuers and the relative credit quality of debt issues. In rating an issuer, such as a corporation or municipality, analysts conduct a review of the financial performance, policies, and risk management strategies of that issuer as well as of the business and economic environment in which the issuer operates. In addition to evaluating financial data, credit analysts typically weigh qualitative information, such as long-term strategies, as they assess the issuer‘s ability and willingness to meet its financial obligations in a timely manner. Rating agencies that use the analyst-driven approach often employ analysts with experience in evaluating the relative credit risk of an entity or security. In addition to their experience with and understanding of the credit markets, analysts are trained to think critically and to evaluate complex business, financial, and accounting issues. Many analysts also bring to bear specializations in specific industry segments and transaction structures in evaluating credit risks attributes. Model-Driven Credit Ratings A small number of rating agencies use the model-driven approach, focusing more exclusively on quantitative data that they incorporate into a mathematical model to produce their ratings, which are generally point-in-time assessments. For example, an agency using this approach to assess the creditworthiness of a bank or financial institution evaluates that entity‘s asset quality, funding, and profitability based on figures that appear in that entity‘s financial statements and regulatory filings. The mathematical formulas used to measure creditworthiness are often proprietary and highly complex.

Standard & Poor's Analyst-Driven Rating Process

Global vs. National Ratings Agencies
Some rating agencies focus only on issuers and issues within a specific country or region, while others provide a global perspective. Global credit rating agencies, such as Standard & Poor‘s, publish ratings and research about the creditworthiness of issuers and the credit quality of debt issues around the world. By applying

standardized rating criteria on a global basis, Standard & Poor‘s ratings provide a benchmark for assessing the relative credit quality of issuers and instruments. These global scale ratings may be useful to institutional investors who seek geographic diversification in their debt investments while at the same time adhering to internal investment guidelines that require a global benchmark. National rating agencies can provide a frame of reference different from that of global agencies by concentrating on a particular country and a smaller universe of securities. For example, while global agencies may consider national economic and political risk in their ratings, national agencies may employ a country-specific rating scale. The national scale may be helpful in comparing the relative risk of securities issued in a single country. Global rating agencies may also offer country-specific scales in addition to their global scale ratings, as Standard & Poor‘s does.

The Origin Of Standard & Poor's Credit Ratings
Standard & Poor‘s Ratings Services traces its history back to 1860, the year that Henry Varnum Poor published the History of Railroads and Canals of the United States. Poor was concerned about the lack of quality information available to investors and embarked on a campaign to publicize details of corporate operations. Standard & Poor‘s has been publishing credit ratings since 1916, providing investors and market participants worldwide with independent analysis of credit risk.

History of Standard & Poor's Credit Rating Services
The following timeline provides milestones in Standard & Poor‘s ratings history and global expansion: 1868 Henry Varnum Poor publishes a 200-page book containing operational and financial details on more than 120 railroad and canal companies

1916

First credit ratings on corporate bonds and sovereign debt

1941

First ratings on municipal bonds

1971

First financial strength ratings on insurance companies

1973

First ratings on long-term debt of bank holding companies

1974

First ratings (non sovereign) issuers located outside the United States

1975

First ratings on mortgage-backed securities

1984

Began opening European offices

1984

First ratings on fixed income bond and money market funds

1985

First ratings on commercial mortgage-backed securities (CMBS), and asset backed securities (ABS) (made up of equipment leases, student loans, and other consumer obligations)

1986

Opened office in Japan

1989

First ratings on collateralized debt obligations (CDOs)

1990

Opened office in Australia, through acquisition of Australian Ratings

1993

Opened offices in Canada and Mexico, through acquisition of CAVAL

1994

Opened office in Hong Kong

1995

First ratings on bank loans

1996

First ratings on catastrophe bonds

1997

Opened offices in Argentina (through acquisition), Brazil, and Taiwan

1997

First ratings on synthetic CDOs

1998

Opened office in Russia

2003

Introduced recovery ratings

2004

Opened office in China

2005

Investment in India (majority investment in CRISIL Ratings)

2008

Opened offices in Dubai, South Africa, and Israel (through the acquisition of Maalot)

How Agencies Are Paid For Their Services
Credit rating agencies use different business models to generate revenue for the services they provide. One is known as the issuer-pay model and the other as the subscription model. Issuer-Pay Model

Under the issuer-pay model, which is the business model used by Standard & Poor‘s, rating agencies charge issuers and structured finance arrangers a fee for providing credit ratings. As part of the rating process, these rating agencies obtain from issuers, and incorporate into their opinions of credit quality, information that might otherwise be unavailable to investors and other market participants. Since the issuer pays for the ratings, the agencies can make the ratings widely available to the market free of charge. Critics of the issuer-pay model maintain there is a potential conflict of interest when rating agencies receive payment from the issuers whose securities they are evaluating. Subscription Model Some credit ratings agencies use a subscription model and charge investors and other market participants a fee for access to their agencies‘ ratings. Proponents of this model maintain that because these agencies are paid primarily by investors rather than issuers, they are therefore not subject to any conflict of interest in their assessment of credit risk. Critics of this model, however, point out that large investors who subscribe to a rating service, especially sizable investors such as hedge funds who have long and short positions in a variety of securities, may exert an undue influence on the agency‘s rating results since it is in the investors‘ interest to have the ratings support their investment strategy. Furthermore, critics of the subscription model assert that the ratings are available only to paying subscribers, who are generally large institutional investors. In addition, rating agencies using the subscription model may have more limited access to issuers. Information from management can be helpful when providing forward looking ratings.

How Standard & Poor’s Manages Potential Conflicts of Interest
To protect against potential conflicts of interest when paid by the issuer, Standard & Poor‘s has established a number of safeguards. These measures include, for example, a clear separation of function between those who negotiate the business terms for the rating assignment and the analysts who conduct the credit analysis and provide the rating opinion. This separation is similar in concept to the way newspapers distinguish their editorial and advertising sales functions, since they report on companies from which they may also collect advertising fees. Another safeguard is the committee process that limits the influence any single person can have on Standard & Poor‘s ratings opinions. The role of the committee is to review and assess the analyst‘s recommendation for a new rating or a rating change as well as to provide additional perspectives and checks and balances regarding adherence to the agency‘s rating criteria. While Standard & Poor‘s maintains a business relationship with the issuers and arrangers of the debt securities it rates, it has policies against structuring an instrument for an arranger or issuer, or consulting with these entities on how to do so. Also, by adhering to clearly defined standards and making its rating criteria transparent, Standard & Poor‘s reduces the risk that credit ratings will be influenced by individual issuers or other parties.

Who Uses Credit Ratings & Why
Ratings & The Capital Markets
While Standard & Poor‘s opines and reports on, but does not participate in, capital market transactions, the ratings opinions that it provides may impact the capital markets and the decisions of market participants.

For example, credit ratings may play a useful role in enabling corporations and governments to raise money in the capital markets. Instead of taking a loan from a bank, these entities sometimes borrow money directly from investors by issuing bonds or notes. Investors purchase these debt securities, such as municipal bonds, expecting to receive interest plus the return of their principal, either when the bond matures or as periodic payments. Credit ratings may also facilitate the process of issuing and purchasing bonds and other debt issues by providing an efficient, widely recognized, and long-standing measure of relative credit risk. Investors and other market participants may use the ratings as a screening device to match the relative credit risk of an issuer or individual debt issue with their own risk tolerance or credit risk guidelines in making investment and business decisions. For instance, in considering the purchase of a municipal bond, an investor may check to see whether the bond‘s credit rating is in keeping with the level of credit risk he or she is willing to assume. At the same time, credit ratings may be used by corporations to help them raise money for expansion and/or research and development as well as help states, cities, and other municipalities to fund public projects. While not an indication of investment merit, credit ratings signal Standard & Poor‘s opinion of the perceived risk of a particular debt issue. The greater the credit risk, the higher return investors may expect for assuming that risk. For this reason, credit ratings may be used by both issuers and investors when a debt issue is first issued in the primary markets, and may continue to be used by investors who trade securities in the secondary markets.

Bond/Note Issuance Flowchart

Issuing Debt to Raise Capital
To raise money, corporations and governments may turn to the capital markets instead of borrowing the funds they need from a bank. The markets enable them to borrow money directly from investors by issuing debt, such as a note or a bond. Investors purchase the bonds and expect to receive interest on the par amount of the bond plus a return of the principal either as periodic payments or when the bond matures. The bond details these repayment terms, which can last over several years.

Investors
Investors most often use credit ratings to help assess credit risk and to compare different issuers and debt issues when making investment decisions and managing their portfolios. Individual investors, for example, may use credit ratings in evaluating the purchase of a municipal or corporate bond from a risk tolerance perspective. Institutional investors, including mutual funds, pension funds, banks, and insurance companies often use credit ratings to supplement their own credit analysis of specific debt issues. In addition, institutional investors may use credit ratings to establish thresholds for credit risk and investment guidelines.

A rating may be used as an indication of credit quality, but investors should consider a variety of factors, including their own analysis.

Intermediaries
Investment bankers help to facilitate the flow of capital from investors to issuers. They may use credit ratings to benchmark the relative credit risk of different debt issues, as well as to set the initial pricing for individual debt issues they structure, and to help determine the interest rate these issues will pay. Investment bankers and entities that structure special types of debt issues may look to a rating agency‘s criteria when making their own decisions about how to configure different debt issues, or different tiers of debt. Investment bankers may also serve as arrangers of special debt issues. In this capacity, they establish special entities that package assets, such as retail mortgages and student loans, into securities, or structured finance instruments, which they then market to investors.

Issuers
Issuers, including corporations, financial institutions, national governments, states, and cities and municipalities, use credit ratings to provide independent views of their creditworthiness and the credit quality of their debt issues. Issuers may also use credit ratings to help communicate the relative credit quality of debt issues, thereby expanding the universe of investors. In addition, credit ratings may help issuers anticipate the interest rate to be offered on their new debt issues. As a general rule, the more creditworthy an issuer or an issue is, the lower the interest rate the issuer would typically have to pay to attract investors. The reverse is also true: an issuer with lower creditworthiness will typically pay a higher interest rate to offset the greater credit risk assumed by investors.

Businesses & Financial Institutions
Businesses and financial institutions, especially those involved in credit-sensitive transactions, may use credit ratings to assess counterparty risk, which is the potential risk that a party to a credit agreement may not fulfill its obligations. For example, in deciding whether to lend money to a particular organization, or in selecting a company that will guarantee the repayment of a debt issue in the event of default, a business may wish to consider the counterparty risk. A credit rating agency‘s opinion of counterparty risk can therefore help businesses analyze their credit exposure to financial firms that have agreed to assume certain financial obligations and to evaluate the viability of potential partnerships and other business relationships.

The ABCs of Rating Scales
A Simple, Efficient Way to Communicate Creditworthiness
Standard & Poor‘s credit rating symbols provide a simple, efficient way to communicate creditworthiness and credit quality. Its global rating scale provides a benchmark for evaluating the relative credit risk of issuers and issues worldwide. The ratings serve as a type of shorthand for communicating opinions about credit quality to investors and other market participants. Standard & Poor‘s 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. The rating symbols provide a simple way to communicate opinions about creditworthiness. While a rating scale itself is relatively straightforward—for example, a bond rated ‗AAA‘ signals higher credit quality than a bond rated ‗BB‘—the assumptions, considerations, and judgments that help to form a rating opinion are different and complex. This complexity results in part from different types of risk factors informing the analysis that range, for example, from a particular issuer‘s financial performance and the competitive environment in which it operates to the structure or details of a particular issue. In addition, the rating process factors in events that may occur in the foreseeable future and are likely to affect the credit risk of a particular issuer or issue. Over time, the overall performance of Standard & Poor‘s ratings has helped to establish its rating scale as a good benchmark of relative credit risk. This in turn, has enabled investors and market participants to use ratings as a benchmark and as a second opinion when performing their own analysis. Standard & Poor‘s 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

Opinions Reflected By S&P's Ratings

Ratings Definitions

View the complete list of Standard & Poor’s Ratings Definitions and a related article on Understanding Standard & Poor’s Ratings Definitions Investment- & Speculative-Grade Debt
Debt issues that are rated as having higher credit quality are commonly referred to as investmentgrade 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. The term ―investment grade‖ initially identified debt securities that bank regulators and market participants viewed as suitable investments for institutions such as banks, insurance companies, and savings and loan associations. Today, however, the term is used more broadly in the investment community to identify 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. In contrast, the term ―non-investment-grade‖ is 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 & Poor‘s 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‘. For example, a ‗AA+‘ rating indicates a higher level of creditworthiness than a ‗AA‘ rating, while a ‗AA–‘ would indicate lower creditworthiness than a ‗AA‘ rating. Outlooks Standard & Poor‘s assigns outlooks, which may be ―positive,‖ ―negative,‖ ―stable,‖ or ―developing‖, to its long-term credit rate. A positive outlook suggests that the issuer‘s 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, but not the certainty, of raising or lowering a credit rating sometime over the next two years. Outlooks that use the term ―stable‖ indicate that a change is unlikely, though that opinion is not a comment on the stability of the issuer‘s financial performance. 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. When an event, unexpected change or criteria change occurs that is likely to cause a ratings change in the near term, Standard & Poor‘s places the rating on CreditWatch, which replaces the outlook on that rating. Short-Term Ratings Short-term ratings express opinions about the creditworthiness of an issuer or the credit quality of a debt issue in the near future. As a general rule, short term ratings are used for issues that have maturities of one year or less, such as commercial paper. Long-term ratings are assigned to issues with maturities that are generally more than one year, such as 10-year term bonds or bank loans, or even medium term notes which usually have maturities of 3 to 5 years. The short-term ratings scale, which has fewer grades than the long-term scale, ranges from ‗A-1+,‘ representing extremely strong ability to meet obligations, to ‗D,‘ which indicates payment default. The long- and short-term ratings are generally linked to one another: If an issuer‘s long-term credit rating is downgraded, the short-term rating may be downgraded as well. Since there are fewer short-term rating grades, each short-term rating corresponds to a band of long-term ratings. For instance, the ‗A1‘ short-term rating generally corresponds to the long-term ratings of ‗A+‘, ‗A‘, and ‗A-‗.

Standard & Poor's Rating Correlation Scales

Recovery Ratings
Some credit rating agencies also incorporate into their ratings opinions the potential for recovery, which is an opinion about the amount that investors may recover in the event of default. Rating agencies that assess recovery consider the percentage of the instrument‘s outstanding principal that an investor can expect to receive back. When used as a rating factor, recovery prospects are an important component in evaluating credit quality, particularly in the evaluation of non-investmentgrade debt. To address the market‘s need for recovery information, Standard & Poor‘s began assigning recovery ratings in 2003 and the use of these ratings continues to evolve. As of 2008, such recovery ratings were assigned by Standard & Poor‘s to secured and unsecured debt of speculative-grade corporate issuers in the U.S., Western Europe, and certain other countries. These ratings provide a forward-looking analysis based on issuer-specific and deal-specific data, and express Standard & Poor‘s opinion regarding prospective loss on debt issues in the event of default. Risk factors include how the debt is structured, the relationship among creditors, the jurisdiction, and how a default would affect the value of the assets. Standard & Poor‘s recovery ratings use a scale of 1 to 6 rather than the letter ratings and express an opinion about the percentage of principal and unpaid accrued interest that investors may expect to receive in the case of default. The opinion is based on a number of different factors, including the rights that investors and/or creditors may have to specific assets, the potential liquidation value of the entity‘s assets, and the result of formal bankruptcy proceedings or informal out-of-court restructuring. The recoveries themselves may be in cash, debt, or equity securities of a reorganized entity, or some combination of the three. The recovery rating scale forms the basis for adjusting the credit rating of an issue up or down relative to the credit rating of the issuer.

Recovery Ratings Scale & Issue Rating Criteria

Other Standard & Poor’s Rating Scales
Standard & Poor‘s provides a number of additional ratings scales, including but not limited to: Principal Stability Fund Ratings (for money market funds), Fund Credit Quality Ratings and Fund Volatility Ratings (for bond funds) and Financial Strength Ratings (for insurance companies). While Standard & Poor‘s is a global rating agency, it also provides more than a dozen country-specific national scales for countries, including Mexico, Russia, Kazakhstan, and Argentina, among others. Market participants within those countries may use these rating scales to assess the relative creditworthiness of issuers and debt issues in a given country in comparison only to other issuers and debt issues within that same country. These national scale ratings generally use Standard & Poor's

rating symbols with the addition of a prefix to denote the country—for example, ‗AAmx‘ signifies a ‗AA‘ rating on the Mexican national scale.

Process For Rating Issuers & Issues
Rating Issuers & Issues
Credit rating agencies assign ratings to issuers, including corporations, governments, and public finance entities, that may or may not issue debt securities, as well as to specific issues, such as bonds, notes, and structured finance instruments. Credit rating agencies use their own proprietary rating methodologies for evaluating the creditworthiness of issuers and the credit quality of debt issues. Standard & Poor‘s, assigns and publishes ratings at the request of the corporations, governments, or structured finance arrangers, and in some cases will also issue ratings without request. Standard & Poor‘s maintains policies and procedures to protect the integrity of the analytic process. The ratings that Standard & Poor‘s assigns are based on transparent, publicly available criteria. Standard & Poor‘s provides a rating only when there is adequate information for analysts to perform the qualitative and quantitative evaluations that enable them to form an opinion of credit quality. In addition, each Standard & Poor‘s rating is determined by a rating committee rather than by a single person. This practice is one of the many checks and balances incorporated into the rating process. Standard & Poor‘s analysts are not compensated based on the revenue generated by the ratings that they work on, nor do they negotiate fees for such ratings. Similarly, Standard & Poor‘s client business managers, who deal with commercial matters such as pricing, contract negotiations, and maintaining client relationships, do not participate or vote in rating committees. Standard & Poor‘s rating process is generally similar for all issuers, including corporations, governments, and financial institutions, though there are some differences, including with respect to rating structured finance instruments. These differences involve the way the process is initiated and conducted, the rating criteria and assumptions that apply, as well as the specific kinds of information that analysts review, particularly the details of the debt issue itself, which are further discussed within this section. Rating an Issuer To assess the creditworthiness of a corporate or government issuer, Standard & Poor‘s concentrates on the attributes evidencing the issuer‘s ability and willingness to repay its obligations in full and in accordance with their terms. To form that opinion, agency analysts weigh a broad range of business and financial attributes relevant to that issuer that may influence the issuer‘s ability to repay. For example, credit rating analysis of a corporate issuer typically considers many financial and non financial factors, both qualitative and quantitative. These include, to name only a few: economic, regulatory, and geopolitical influences; management and corporate governance attributes; key performance indicators; competitive trends; product-mix considerations; R&D prospects; patents rights; and labor relations. Standard & Poor‘s uses interactive, qualitative analysis and its analysts typically engage in a dialogue with the issuer‘s management to obtain additional information and insight about the issuer‘s current position and future plans. In most cases, once Standard & Poor‘s has rated an issuer, it tracks, or conducts surveillance of, that issuer over time. Standard & Poor‘s may adjust the issuer‘s rating if the issuer‘s credit risk profile changes in key risk factors, such as market conditions, business prospects and capitalization. Rating an Issue In rating an individual issue, Standard & Poor‘s evaluates its credit quality and likelihood of default based on current information furnished by the issuer or obtained from other reliable sources. Key considerations include:

 

The issue‘s terms and conditions and, if relevant, its unique legal structure Relative seniority of the issue with regard to the issuer‘s other debts and priority of repayment in the event of default



The existence of external support or credit enhancements (including mechanisms such as letters of credit, guarantees, insurance, and collateral, which are protections designed to limit the potential credit risks associated with a particular issue. Enhancements are a key factor in analyzing structured finance instruments).

In the case of corporate and government issues, the process typically begins with an evaluation of the creditworthiness of the issuer before assessing the details and credit quality of a specific issue. Rating Structured Finance Instruments With most structured finance instruments, the issuers are special-purpose entities (SPEs) which are created solely to accumulate and finance pools of assets by selling securities to investors. In forming its opinion of a structured finance instrument, Standard & Poor‘s evaluates, among other things, the potential risks posed by the instrument‘s legal structure, the credit quality of the assets the SPE holds, and the anticipated cash flow of these underlying assets, as well as credit enhancements that provide added protection against default to some or all of the securities. For more information see Process For Rating Structured Finance Instruments

Standard & Poor's Analyst-Driven Rating Process

Typical Process For a New Corporate or Government Rating
    
Contract. The issuer requests a rating and signs an engagement letter. Pre evaluation. Standard & Poor‘s assembles a team of analysts to review pertinent information. Management meeting. Analysts meet with management team to review and discuss information. Analysis. Analysts evaluate information and propose the rating to a rating committee. Rating committee. The committee meets to review and discuss the lead analyst‘s rating recommendation and presentation, including the full analysis and rating rationale, and then votes on the credit rating.



Notification. Standard & Poor‘s generally provides the issuer with a pre-publication rationale for its credit rating for fact-checking and accuracy purposes. Standard & Poor‘s may allow for an appeal only if the issuer can provide new and significant information to support a potentially different rating conclusion.



Publication. Standard & Poor‘s typically publishes a press release announcing the rating and posts the public rating on www.standardandpoors.com.

Ratings Require Adequate and Reliable Information
Standard & Poor‘s may decide not to rate an issue or issuer, or withdraw an existing rating, if it concludes that there is not adequate, timely or reliable information to form an opinion on the creditworthiness of an issuer or the credit quality of a specific issue.

Rating Corporate and Government Issuers & Issues
Request For corporate, financial institution, or government issuers, Standard & Poor‘s rating process is typically initiated when the issuer or its representative requests a rating for a particular debt issue. A Standard & Poor‘s client business manager (CBM) typically responds to the issuer‘s request and enters into an agreement to rate the issuer and/or issue. All commercial matters are handled by the CBM and the terms and conditions are not negotiable. When a new corporate or government issuer engages Standard & Poor‘s to provide a credit rating on an upcoming debt issue, the agency generally assigns a rating to the issuer, called an Issuer Credit Rating (ICR), which reflects an entity‘s overall capacity to meet its financial obligations in accordance with their terms. The agency then assigns ratings to the issuer‘s specific debt securities. Standard & Poor‘s typically rates all publicly offered debt securities issued by a rated corporate or government entity, including those securities issued in different countries. For various reasons, including guarantees, insurance, prospects for recovery, etc., Standard & Poor‘s may rate an issue higher or lower than the rating assigned to the issuer itself. Standard & Poor‘s Public Finance Ratings Group, typically issues ratings that are issue-specific (e.g., general obligation notes, revenue bonds, school district bonds, or bonds to fund projects), as opposed to ICRs.

S&P's Risk Factors

The Initial Rating Process

The initial rating process for corporate, government, and financial entities typically takes four to six weeks to complete, but can run longer or shorter. This initial process begins when the contract is signed and generally ends with the publication of the rating. The rating process consists of several discrete steps, as shown in Standard & Poor‘s Typical Process For a New Corporate or Government Rating and typically includes a series of ongoing information exchanges between the rating agency and the issuer. These interactions enable Standard & Poor‘s to gather the information it needs to conduct its evaluation and form its rating opinion. The Analytical Team & Rating Committee Standard & Poor‘s assigns a lead analyst and generally a backup analyst to begin the rating process. Standard & Poor‘s selects the analysts for each rating assignment based on their knowledge of and experience with a particular issuer, sector, industry, or the type of debt obligation being issued. To strengthen the evaluation process, Standard & Poor‘s appoints a committee of generally five members, including the lead and backup analysts. The role of the committee is to review and assess the lead analyst‘s rating recommendation for a new rating or a ratings change, to provide additional perspectives in the analysis, to provide checks and balances against conflicts and undue influence, and to provide consistent application and adherence to the ratings criteria. For repeat issuances, outlook changes, CreditWatch placements and certain other instances, the committee may be smaller, but an individual analyst can never make such a ratings decision on his or her own. Committee members are chosen for their particular areas of expertise, which might include, for example, accounting or risk management. If the issuer is an international corporation, the committee may include analysts who are familiar with the regions and markets in which the issuer operates. In addition, Standard & Poor‘s appoints a committee chairperson who is responsible for overseeing the committee process and making sure that the relevant criteria are applied consistently. Pre evaluation. Prior to meeting with the issuer‘s management, the analysts examine the issuer‘s publicly reported financial information and any other relevant information provided by the issuer. This pre evaluation helps analysts identify and define additional information needed from the issuer as well as specific matters the issuer should be prepared to address at the management meeting. Management meeting. The purpose of the management meeting, which is generally attended by the issuer‘s relevant senior executives, is to enable Standard & Poor‘s analysts to probe pertinent information in greater detail, including public information as well as other information that may be provided by the issuer. The discussion usually takes place in person at the issuer‘s offices, but in some cases can take place at Standard & Poor‘s offices, over the phone, or a combination of all of these. At the conclusion of the meeting, Standard & Poor‘s will outline the committee process and provide an indication as to how long the process may take. However, the meeting may result in a request for clarification, for additional information, or for continuing dialogue. Analysis. For corporate and government ratings, analysts typically begin their evaluation by assessing the business and financial risk profiles of the issuing entity (as summarized within the Key Analytical Considerations table below). Analysts also consider comparisons to similar entities, as such comparisons help inform the analysts‘ views of the entity in relation to its peers. In evaluating the financial profile of a corporate or financial entity, for example, Standard & Poor‘s analysts may first examine the company‘s financial statements, including an evaluation of its accounting practices, focusing on any unusual treatments or underlying assumptions. To further assess a corporation‘s overall strengths and weaknesses, the analysts use a number of financial ratios, including those that evaluate profit margins, leverage, and cash flow sufficiency. Analysts may also take into account items that do not appear on a corporation‘s balance sheet, such as leases and pension liabilities that can have an impact on the company‘s creditworthiness. In many cases, financial risk factors that are unique to a specific type of issuer or issue play an important role in financial analysis. For example, in analyzing the capital adequacy of international financial institutions, Standard & Poor‘s may make adjustments to the issuer‘s reported assets to incorporate Standard & Poor‘s view of risk levels for each of the issuer‘s distinct business lines and for the specific regions the issuer operates within. In evaluating a government entity, analysts use essentially the same process, though the specific risk factors they consider differ slightly. For example, analysts focus on the economic base rather than business risk, as well as on any potential instabilities or political pressures that may affect the entity‘s creditworthiness. Committee evaluation. The lead analyst presents his or her assessment to the committee, which discusses, questions, and debates the analyst‘s conclusions and evaluation of certain risk factors. The

final rating assigned by the committee is primarily determined by applying the rating criteria to the information that the analysts have collected and evaluated. However, rather than providing a strictly formulaic assessment, Standard & Poor‘s factors into its ratings the perceptions and insights of its analysts based on their consideration of all of the information they have obtained. This process helps the committee to form its opinion of an issuer‘s overall ability to repay obligations in accordance with their terms. The committee reviews and discusses the internal report presented by the lead analyst. This internal document summarizes the main analytical factors and outlines the rationale for the long-term rating, outlook, and short-term rating for a specific issuer. The committee analyzes each subcategory of credit risk, such as an entity‘s business and financial risk profiles, and comments on particular strengths and weaknesses that affect the entity‘s rating. The final report summarizes the main expectations that were factored into the rating and notes the conditions that might lower or raise the rating in the future. Notification of issuer. Standard & Poor‘s generally notifies the issuer of the rating and outlook, and provides a rationale for the major factors supporting the rating. If an issuer disagrees with the rating conclusion, Standard & Poor‘s may allow for an appeal only if the issuer can provide new and significant information to support its point of view. If an appeal is granted, Standard & Poor‘s will reconvene the committee, review the new information, and vote again on the rating. Publication. For public ratings, in most cases, Standard & Poor‘s publishes a press release announcing the final rating along with the rationale, distributes it to the media, and posts it on www.standardandpoors.com. To verify that the factual information is correct and that no confidential information has inadvertently been disclosed, Standard & Poor‘s may provide the issuer with a copy of its report for a review prior to releasing it to the public. However, if the rating is provided on a private basis, the rating is not published. Key Analytical Considerations In rating corporate, government, and financial entities and issues, Standard & Poor‘s evaluates a broad range of business, financial, and entity-specific risk factors to develop the clearest and most comprehensive assessment of that entity‘s creditworthiness. The following table summarizes the key analytical factors that go into determining those ratings:

Ratings Type

Principal Analytical Considerations

Issuer Ratings

For Corporate Issuers



Current opinion of an entity‘s overall creditworthiness—its ability and willingness to repay its financial obligations



Business risk profile: Country risk, industry condition, competitive position, business and geographic diversification, management, regulatory environment and strategy



Credit risk assessment of issuer as a whole, but not of a specific debt issue



Financial risk profile: Capitalization, leverage, earnings, funding, liquidity, 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

  
Issue Ratings

Wealth and demographics Budgetary performance

Debt burden and management

For Corporate and Government Issues



Opinion of the credit quality of a specific financial obligation and issuer‘s willingness and capacity to pay in accordance with term

  

Credit risk of the issuer

The terms and conditions of the debt security and, if relevant, its legal structure The relative seniority of the issue with regard to the issuer‘s 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

Process For Rating Structured Finance Instruments - Key Differences Highlighted
While generally similar to the process used for rating corporate and government issues, the rating process for structured finance instruments differs in some key respects. For example, the analysis in structured finance generally concentrates on the instrument to be issued, rather than starting with an evaluation of the issuer, as is the case with corporate ratings. In addition, rating structured finance instruments typically involves a different kind of dialogue between analysts and arrangers than does rating corporate or government issues. Typically, in a structured finance transaction, an arranger has a desired rating outcome and will attempt to assemble a pool of underlying assets and structure the transaction to meet the rating agency‘s published criteria. There is typically some interaction during the ratings process between the arranger and Standard & Poor‘s regarding the application of S&P‘s criteria as it relates to the composition of the pool of assets and the structure of the transaction. The fact that arrangers may alter the structure of their instruments to meet an agency‘s rating criteria has led some critics to question whether rating analysts are in essence serving as advisors for structured finance transactions. Standard & Poor‘s ratings analysts do not structure transactions or provide consulting or advisory services to arrangers, originators, or other parties involved in structured finance. Standard & Poor‘s analysts do not tell an arranger what it should or should not do. It is important to recognize that Standard & Poor‘s arrives at structured finance ratings through the use of criteria and methodologies that are publicly available to all investors and market participants. The Initial Ratings Process for Rating Structured Finance Instruments Request. The process typically starts with an inquiry from the originator of the assets to be securitized or from the arranger of the transaction. While a member of the analytical team may receive a request directly, all ratings request are referred to a Standard & Poor‘s client business manager (CBM), who handles the commercial matters. The CBM responds to the rating inquiry and generates the ratings engagement letter. Pre evaluation. An analyst is assigned as the primary analysts (PA), who coordinates all analytical matters. Typically, the PA starts with a review of the preliminary information provided by the originator or arranger regarding the assets it proposes to securitize and the proposed terms and conditions of the securities to be issued. The PA typically discusses with the originator or arranger the

transaction type and parameters, criteria applicable to the transaction, timing of transaction documents, and cash-flow models when appropriate. Based on this dialogue, the originator or arranger may decide not to proceed with the rating. By the same token, Standard & Poor‘s may decide at this point not to move forward with the rating if it believes there is not sufficient or reliable information on which to form an opinion of the credit quality of the assets, or if the structure is not well defined. Analysis. The full analytical process generally begins when the PA is notified by his or her analytical manager that the CBM has received the signed engagement letter. Typically, the PA conducts the evaluation and often works with a backup analyst and others who have previously evaluated similar assets or transactions, including collateral and quantitative analysts where appropriate. To supplement the information previously received, the analyst may ask for more specific information relating to the assets and/or the transaction. The analyst completes his or her evaluation of the principal analytical considerations (as summarized within the Key Analytical Considerations table), which usually include both the use of quantitative models and consideration of qualitative factors. For a typical transaction, the analytical process includes the following steps:

    

Review of the originator and/or servicer/manager of the assets Collateral analysis Cash flow analysis Review of legal documents Rating committee recommendation

There are specific points at the conclusion of the above noted analytical steps at which the Primary Analysts will provide feedback to the originator or arranger on the results of the analytical reviews. At these points, the originator or arranger may decide to (a) move forward, (b) reconfigure the collateral pool or terms of the transaction and ask for a review of the alternative structure, or (c) decide to cancel the transaction. As noted above:



Standard & Poor‘s may decide not to move forward with the rating if it believes there is not sufficient or reliable information on which to form an opinion of the credit quality of the assets, or if the structure is not well defined.



Standard & Poor‘s ratings analysts do not structure transactions and do not tell an arranger what it should or should not do.

Rating Committees. The primary analyst forms an initial opinion as to the credit quality of the instruments and recommends the proposed ratings in a meeting with the rating committee. The rating committee, notification and publishing processes are generally the same for structured finance as they are for rating corporate and government entities as described on this site [Typical Process For A New Corporate Or Government Rating]. However, in cases of public ratings, where a presale report is published, Standard & Poor‘s may hold two rating committees. If a preliminary rating committee is held, a preliminary rating will be voted on and published along with a presale report. Even if a preliminary rating committee is held, the final rating is determined by a Final Rating Committee. As with corporate and government ratings, an internal report is prepared that serves as the basis of the rating recommendation for the rating committee‘s decision.

What are Structured Finance Instruments?
Some debt securities are created through a process known as securitization. In essence, a typical securitization involves bundling or pooling of individual financial assets into a structured vehicle and the sale of separate debt instruments, often with distinct priorities or cash flow allocations, to investors. Rather than

owning a bond that depends on a corporation or government for payment, investors in typical securitized debt instruments have rights to a portion of the cash flows generated by the pool of underlying assets. The most common assets are mortgage loans, auto loans and leases, credit card receivables, trade receivables, bank loans, and corporate bonds, but many other financial assets that generate a cash repayment stream can be securitized.

Creation of Structured Finance Instruments
Securitization is the technique for creating structured finance instruments, such as residential mortgagebacked securities (RMBS) and collateralized debt obligations (CDOs). The formulation of these instruments typically involves three parties: an originator, an arranger, and a special-purpose entity (SPE) that issues the securities. • The originator is generally a bank, lender, or a financial intermediary who either makes loans to individuals or other borrowers or purchases the loans from other originators. • The arranger, which may also be the originator, is typically an investment bank or other financial services company that pools the underlying loans into an SPE, which in turn sells its own marketable debt instruments. • The special-purpose entity (SPE), generally created by the arranger, finances the purchase of the underlying assets by selling debt instruments to investors. The investors, who can select a level of risk they prefer, are typically repaid with the cash flow from the underlying loans or other assets owned by the SPE. The process of stratifying a pool of undifferentiated risk into multiple classes of debt instruments with varying levels of seniority is called tranching. Investors who purchase the senior tranche, with the highest quality debt and typically the lowest interest rate, are generally repaid first from the cash flow of the underlying assets. Holders of the next-lower tranche, which would typically pay a somewhat higher rate, are paid second, and so forth. Investors who purchase the lowest tranche ordinarily have the potential to earn the highest interest rate the transaction offers, but they also assume the highest risk. Many structured finance transactions incorporate credit enhancements, which are committed resources that can make up for, or cushion, shortfalls in principal and interest receipts on the underlying assets. Credit enhancements are typically in the form of external support and/or internal enhancements, such as insurance or over collateralization.

Creation Of Structured Finance Instruments

Availability of Standard & Poor’s Criteria
Standard & Poor‘s criteria are available to all third parties, originators or arrangers, and investors. In the case of unusual or novel structured finance transactions, Standard & Poor‘s may publish its views in presale reports on its website, except in the case of confidential ratings. To view Standard & Poor‘s updated criteria, visit www.standardandpoors.com.

Ratings Type

Principal Analytical Considerations

Structured Finance Ratings (on Cash Flow Securities)

  

Opinion of credit quality of a structured finance instrument Issuer is typically a limited or special-purpose entity (SPE) Creditworthiness is limited to the

  

Cash flow expected to be generated by the underlying assets Variability of the future performance of the underlying assets Additionally committed resources that can make up for, or cushion, shortfalls in principal and interest receipts on the underlying assets, typically in the form of external support and/or internal credit enhancements, such as insurance or over collateralization

capacity to repay securities from the cash flow generated by or liquidation of the underlying assets and committed sources



Also considers guarantors, insurers,

or other forms of credit enhancement

 

Practices, policies, and procedures of originators and servicers Legal structure of the securities issued, including payment and servicing structure,



Ratings are typically provided for each tranche issued in a transaction, depending on overall structure of the transaction

and documentation related to creation of the issuing special purpose entity (SPE)

Note: The above addresses the most common structured finance instruments. Standard & Poor‘s also provides ratings on other types of structured finance instruments. For more information on the related criteria, please refer to the Criteria & methodologies section of Standard & Poor‘s public web site

Monitoring Credit Quality
Credit Ratings Can and Do Change Over Time
Credit ratings for issuers and individual issues are not static but 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. As a result, Standard & Poor‘s monitors, reevaluates, and if appropriate, seeks to adjust, its ratings based on the best available information. Standard & Poor‘s credit ratings are meant to be forward-looking opinions of the creditworthiness of issuers and credit quality of issues. As such, to the extent possible, they factor in conditions that are likely to affect credit risk, such as the anticipated ups and downs in the business cycle. At the same time, prospective opinions are not an exact science and, while ratings are intended to be forwardlooking, they should not be construed as assertions of absolute default probability but rather as relative indications of credit risk. Among other things, business cycles can vary considerably in duration and magnitude, making their impact on credit quality difficult to assess in advance with certainty. Equally important, credit ratings and criteria are intended to evolve over time to reflect new and sometimes unanticipated situations. Standard & Poor‘s may change or ―transition‖ (i.e., upgrade or downgrade) its previously issued ratings to signify a higher or lower level of creditworthiness of an issuer or credit quality of an issue.

Surveillance: Tracking Credit Quality
After issuing a credit rating, Standard & Poor‘s typically tracks developments that might affect the credit risk of an issuer or issue. The goal of this surveillance is to maintain a current rating by identifying matters that may result in either an upgrade or a downgrade of the rating. Such matters could include changing industry trends, issuer performance, credit enhancements, or other credit risk factors. Analysts review ratings with a focus on potential changes to the key analytical factors that supported the earlier ratings opinion. When appropriate, analysts present recommendations for ratings changes to a Rating Committee for a possible action. Standard & Poor‘s 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.

Standard & Poor‘s discloses changes to public ratings, generally with a short explanation, and makes them available at www.standardandpoors.com. Actions may include credit rating upgrades, downgrades, withdrawals, and suspensions, as well as changes in credit rating outlooks and CreditWatch placements and removals. Type and Frequency of Surveillance Standard & Poor‘s considers 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. For corporate and government ratings, it is routine to schedule periodic meetings with management. These face-to-face meetings with issuers assist analysts in staying apprised of any changes in the issuer‘s plans and allow them to discuss new developments, performance relative to prior expectations, and potential problem areas. For structured finance ratings, dedicated surveillance analysts monitor performance data and other pertinent information.

Standard & Poor's Analyst-Driven Rating Process

CreditWatch: The Likelihood of a Rating Change
As part of its surveillance process, Standard & Poor‘s may communicate the potential for a credit ratings change by placing the rating on CreditWatch. Ratings for an issuer or issue appear on CreditWatch when, based on Standard & Poor‘s analysis, an event or deviation from an expected trend has occurred, or may occur, that is likely to cause a ratings change in the near term, usually within 90 days. Specifically, a CreditWatch listing signifies that Standard & Poor‘s believes that a specific rating has at least a one-in-two likelihood of being upgraded or downgraded in the near term. A variety of events and factors, including mergers, recapitalizations, regulatory actions, unanticipated operating developments, or criteria changes may trigger a CreditWatch listing. While the listing means that the potential for a rating change is substantial in the near term, it does not mean that a ratings change is inevitable. Rather, it indicates that more information or analysis is required before taking

action. Whenever possible, the rationale explaining the CreditWatch placement indicates a range of possible ratings outcomes that can be anticipated, particularly the extent of the change, up or down. Standard & Poor‘s may also adjust a credit rating without placing the issuer or issue on CreditWatch beforehand. Standard & Poor‘s does not delay a ratings change merely because it has not signaled a potential change on CreditWatch. If all the necessary information is available, Standard & Poor‘s changes the rating to reflect the altered circumstances.

Expressions Of Change: Outlook And CreditWatch
Outlooks and CreditWatch use a special vocabulary to convey the likelihood of a ratings change: • "Positive" indicates a rating may be raised. • "Negative" indicates a rating may be lowered. •"Developing" applies to unusual situations where the effect of future events is so uncertain that Standard & Poor's is not yet clear whether it might raise or lower a specific rating. • "Stable" is used only in outlooks and signals that a ratings change is unlikely, but does not express an opinion that the financial performance of the issuer or issue will necessarily remain stable.

Outlook: Longer-Term View of a Potential Rating Change
Standard & Poor‘s also assesses the potential for a ratings change by assigning an outlook to most long-term credit ratings Outlooks have a longer time frame than CreditWatch listings and address trends or risks with the potential, not the certainty, of affecting credit quality. The time frame for an outlook generally is up to two years for high-grade ratings and generally up to one year for speculative-grade ratings. An outlook is not an indication that a rating will be listed on CreditWatch. Outlooks use a similar vocabulary to CreditWatch to signal whether a rating is positive, negative, developing, or stable.

Why Credit Ratings Change
Standard & Poor‘s changes credit ratings in response to events or information that has an impact on the credit risk of an issuer or issue, as determined by the rating committee. While ratings upgrades and downgrades occur across the entire credit range, historically they have occurred more frequently in lower-rated categories, reflecting increased volatility in that segment of the credit spectrum. On average, higher ratings generally have been more stable than lower ratings. If ratings are lowered, it‘s Standard & Poor‘s opinion that there is a greater likelihood of default. Conversely, if ratings are raised, Standard & Poor‘s believes there is less likelihood of default. A ratings change denotes Standard & Poor‘s opinion of creditworthiness and is only one factor among others that investors should consider when making an investment decision. Reasons for Ratings Changes In some cases, changes in the business climate can affect the credit risk of a wide array of issuers and securities. For instance, new competition or technology, beyond what might have been expected and factored into the ratings, may hurt a company‘s expected earnings performance, which could lead to one or more rating downgrades over time. Growing or shrinking debt burdens, hefty capital spending requirements, and regulatory changes may also trigger ratings changes. In addition, Standard & Poor‘s may adjust its ratings in response to mergers and acquisitions, or an increase or decrease in projected revenues. While some risk factors tend to affect all issuers, others may pertain only to a narrow group of issuers and issues. For instance:

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A securitized obligation based on underlying credit card payments may have geographically concentrated portfolios, exposing it to regional slumps that a more diversified pool would dilute.

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The creditworthiness of a government issuer may be affected by changes in the stability of political and economic institutions within its country. In the case of corporate issuers that adopt a highly aggressive business model, such as growth through large acquisitions or expansion in unproven markets, the risks associated with their ability to execute this strategy are important factors in assessing their creditworthiness.

Ratings Volatility Volatility of ratings can be expressed either as the proportion of ratings that change or the frequency of change. Higher ratings, in general, have been more stable than lower ratings. Standard & Poor‘s upgraded or downgraded roughly 20% of its corporate credit ratings each year from 1981 through 2007, compared to about 10% for structured finance from 1978 through 2007. However, these percentages can increase during periods of significant and unexpected changes in the credit markets or the business environment. In addition, credit ratings for a specific industry, or for a type of structured finance instrument, can have higher or lower rates of change than the general averages. For example, when the price of oil declined sharply in the mid-1980s, Standard & Poor‘s lowered its ratings on about 75% of rated companies in the oil industry, and some of the ratings were lowered repeatedly. Merger and acquisition activity at the time also weakened credit quality. In 1986, the oil industry‘s default rate reached 9.3% of rated companies in the industry. Declining credit quality eventually spread to Texas banks that made loans to energy companies, which led to above-average downgrades for financial institutions within the region. Ratings Withdrawals Standard & Poor‘s may withdraw a credit rating at any time. For example, it may withdraw issuer credit ratings when there is not enough information to actively monitor the rating. It also withdraws the ratings on issues that have been repaid in full. In rare cases, credit ratings may also be withdrawn at the request of an issuer, such as when a company has been acquired. In some of these cases, Standard & Poor‘s may temporarily suspend rather than withdraw a credit rating if there is an expectation that adequate information will become available and/or the rating is likely to be reinstated. Prior to withdrawing or suspending the rating, Standard & Poor‘s will affirm, downgrade, or upgrade the rating. Ratings Changes and Structured Finance Ratings changes are generally driven by changes in the credit performance of the underlying assets which back the structured finance instruments. For example, a structured finance vehicle may sell notes worth $100 million and receive an investment-grade rating because there is overcollateralization or a cushion of an additional $15 million in assets in the vehicle. This overcollateralization or credit enhancement raises the total value of the asset pool to $115 million, with the additional collateral providing a buffer against future adverse conditions. But if the conditions are worse than anticipated, and the underlying assets generate less cash flow than expected, the shortfall will reduce the buffer created by the additional $15 million. As a result, Standard & Poor‘s could lower its rating on the related structured finance instruments to reflect the decrease in credit quality of the underlying assets in the pool.

When Ratings Change
Credit rating adjustments may play a role in how the market perceives a particular issuer or individual debt issue. Sometimes, for example, a downgrade by a rating agency may change the market‘s perception of the credit risk of a debt security which, combined with other factors, may lead to a change in the price of that security. Market prices continually fluctuate as investors reach their own conclusions about the security‘s shifting credit quality and investment merit. While ratings changes may affect investor perception, credit ratings constitute just one of many factors that the marketplace should consider when evaluating debt securities.

Ratings Behavior: Standard & Poor's Ratings Performance
Ratings Behavior Over Time
Different types of credit ratings have different life expectancies, which can affect how ratings change over time. For example, since corporations and governments can exist indefinitely, issuer ratings tend to have a long life span. In contrast, ratings for individual debt securities and structured finance instruments expire once the debt has been repaid. Short versus long lives of ratings are important when examining ratings changes, since ratings with longer life spans are more likely to experience transitions as they are exposed to a wide array of circumstances over time. Rating Through Different Business Cycles For high-grade credit ratings, Standard & Poor‘s considers the anticipated ups and downs of the business cycle, including industry-specific and broad economic factors. The length and effects of business cycles can vary greatly, however, making their impact on credit quality difficult to predict with precision. In the case of higher risk, more volatile, speculative-grade ratings, Standard & Poor‘s factors in greater vulnerability to down business cycles. Business cycles can affect individual entities in ways that have a lasting impact on their creditworthiness. For example, a company may accumulate enough cash in an economic upturn to cushion the risks of the next downturn. On the other hand, a downturn could severely deplete a firm‘s or local government‘s financial resources. While Standard & Poor‘s aims to keep ratings forwardlooking in order to minimize their volatility, some adjustments are inevitable since information changes over time and future events can differ from expectations. Comparability of Ratings Standard & Poor‘s seeks to maintain consistency in its rating scale over time. That means that Standard & Poor‘s assigns a particular rating to an issuer or issue when it believes the credit risk is similar to that of issuers and issues with the same rating. For example, Standard & Poor‘s rates a security ‗BBB‘ when its overall risk appears broadly similar to that of securities currently and historically rated ‗BBB‘. Generally speaking, a particular rating category is intended to signal a comparable level of credit risk across corporate, government, and structured finance ratings.

Ratings as Measures of Relative Creditworthiness
Historically, Standard & Poor‘s ratings in aggregate have been good indicators of relative creditworthiness. Higher ratings have been correlated with lower levels of default, and lower ratings have been correlated with higher levels of default.

Transition and Default Studies
To measure the performance of its credit ratings, Standard & Poor‘s conducts studies to track default rates and transitions, which is how much a rating has changed, up or down, over a certain period of time. Agencies may use these studies to refine and evolve their analytic methods in forming their ratings opinions. Transition rates can also be helpful to investors and credit professionals because they show the relative stability and volatility of credit ratings. For example, investors who are obligated to purchase only highly rated securities and are looking for some indication of stability may review the history of rating transitions and defaults as part of their investment research. In addition to its studies of three broad market segments—corporate, government, and structured finance—Standard & Poor‘s publishes narrower transition and default studies. For example, these studies track local and regional governments separately from national governments and analyze corporate issuers based on their industry classification. The studies also distinguish among different types of structured finance instruments, such as residential mortgage-backed securities (RMBS) and collateralized debt obligations (CDOs). Standard & Poor‘s begins tracking its own ratings as soon as they are initially assigned. Analyzing transition and default rates by vintage, which is the year in which Standard & Poor‘s first rates an issue or issuer, has yielded a number of important findings:

Higher Credit Ratings Correlate Positively with Lower Default Rates Standard & Poor‘s transition and default studies support the relationship between higher ratings and lower default rates. In other words, default rates tend to rise with each step down the rating scale. In addition, studies show that what market participants generally refer to as investment grade ratings (‗BBB–‗ and above) are associated with lower default rates than non-investment grade ratings (below ‗BBB–‗). Lower Ratings Are Less Stable Than Higher Ratings Ratings performance data show that lower ratings are less stable than higher ratings. This means a higher proportion of ‗A‘-rated issuers and issues retain their ‗A‗ rating during a specified time period, compared with a smaller portion of ‗B‘-rated issuers and issues for that same period. Ratings Are More Volatile Over Time Ratings are more volatile over longer time periods. For example, regardless of category, transition rates over a 10 year period show greater volatility than one-year transition rates. The broader range of business conditions that can affect credit quality over the course of a longer period may partly account for this increased volatility.

Standard & Poor’s Transition and Default Studies
Standard & Poor‘s transition and default studies have tracked the performance of structured finance instruments since 1974, government issuers since 1975, and corporate issuers since 1981. The agency conducts its transition and default research both globally and regionally based on ratings coverage of issuers in more than 100 countries. Standard & Poor‘s makes its Default, Transition & Recovery Studies available on its public web site

New rules on credit rating agencies (CRAs) – frequently asked questions
Reference: MEMO/13/13 Event Date: 16/01/2013
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EUROPEAN COMMISSION MEMO Brussels, 16 January 2013

New rules on credit rating agencies (CRAs) – frequently asked questions
I. GENERAL CONTEXT AND APPLICABLE LAW 1. What is a credit rating? A credit rating is an opinion issued by a specialised firm on the creditworthiness of an entity (e.g. an issuer of bonds) or a debt instrument (e.g. bonds or asset-backed securities). This opinion is based on research activity and presented according to a ranking system. 2. What is a credit rating agency? A credit rating agency (CRA) is a service provider specialised in the provision of credit ratings professional basis. The three biggest rating agencies are Standard & Poor's, Moody‘s and Fitch. cover approximately 95% of the world market. Smaller rating agencies make up the remaining For a list of all European CRAs already registered under the CRA Regulation, http://www.esma.europa.eu/page/List-registered-and-certified-CRAs 3. Why do we need to regulate credit rating agencies? CRAs have a major impact on today's financial markets, with rating actions being closely followed and impacting on investors, borrowers, issuers and governments: e.g. sovereign ratings play a crucial role for the rated country, since a downgrading has the immediate effect of making a country's borrowing more expensive. A downgrading also has a direct impact for example on the capital levels of a financial institution. The financial crisis and developments in the context of the euro debt crisis have revealed serious weaknesses in the existing EU rules on credit ratings. In the run up to the financial crisis, CRAs failed to appreciate properly the risks inherent in more complicated financial instruments (especially structured financial products backed by risky subprime mortgages), issuing incorrect ratings that were far too high. on a They part. see:

4. What do current applicable EU rules on credit rating agencies say? The G20 summit in Washington (2008) aimed to ensure that no institution, product or market was left unregulated at EU and international levels. The EU Regulation on Credit Rating Agencies (CRA Regulation)1, in force since December 2010, was part of Europe's response to these commitments. The Regulation was amended in May 2011 to adapt it to the creation of the European Securities and Markets Authority (ESMA)2. The current CRA Regulation focuses on:

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registration: in order to be registered, a CRA must fulfill a number of obligations on the conduct of their business (see below), intended to ensure the independence and integrity of the rating process and to enhance the quality of the ratings issued. ESMA is entrusted since July 2011 with responsibility for registering and directly supervising CRAs in the EU;

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conduct of business: the existing Regulation requires CRAs to avoid conflicts of interest (for example, a rating analyst employed by a CRA should not rate an entity in which he/she has an ownership interest), to ensure the quality of ratings (for example, requiring the on-going monitoring of credit ratings) and rating methodologies (which must be, inter alia, rigorous and systematic) and a high level of transparency (for example, every year the CRA should publish a Transparency Report); and

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supervision: ESMA has comprehensive investigatory powers including the possibility to demand any document or data, to summon and hear persons, to conduct on-site inspections and to impose administrative sanctions, fines and periodic penalty payments. This centralises and simplifies the supervision of CRAs at European level. Centralised supervision ensures a single point of contact for registered CRAs, significant efficiency gains due to a shorter and less complicated registration and supervisory process and a more consistent application of the rules for CRAs. CRAs are at present the only financial institutions which are directly supervised by a European supervisory authority. The current CRA Regulation, however, does not regulate the use of credit ratings and their impact on the market. The use of external ratings by financial institutions is regulated in sectoral financial legislation (e.g. in the Capital Requirements Directive). 5. What has already been proposed to reduce the risk of overreliance in the banking sector? The Commission's proposal for a new Capital Requirements Directive (CRD IV) of July 2011 proposed measures to reduce reliance on ratings. In that proposal (IP/11/915) it is envisaged to reduce to the extent possible reliance by credit institutions on external credit ratings by requiring that: - all banks' investment decisions are based not only on ratings but also on their own internal credit opinion; - banks with a material number of exposures in a given portfolio develop internal ratings for that portfolio instead of relying on external ratings for the calculation of their capital requirements. II. THE INTERNATIONAL CONTEXT 6. What is the situation at international level? Are the proposed measures in line with regulatory approaches of other jurisdictions and international standard-setting bodies? The Commission's efforts are broadly in line with the policy developed by our international partners within the Financial Stability Board (FSB) and the Basel Committee. In October 2010, the Financial Stability Board (FSB) endorsed principles to reduce authorities‘ and financial institutions‘ reliance on CRA ratings. The G20 approved the FSB's principles on reducing reliance on external credit ratings (Seoul Summit, 11-12 November 2010). More recently (end-2012) the FSB adopted a roadmap to accelerate the implementation of the principles. These principles aim to achieve:

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removing or replacing references to CRA ratings in laws and regulations, wherever possible, with suitable alternative standards of creditworthiness assessment;

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that banks, market participants and institutional investors make their own credit assessments and not rely solely or mechanically on CRA ratings. The Basel Committee on Banking Supervision has also proposed to reduce overreliance on credit rating agencies' ratings in the regulatory capital framework. In the USA, the Dodd-Frank Wall Street Reform and Consumer Protection Act3 has strengthened rules on CRAs. Among other things section 939A of the Dodd-Frank Act requires federal agencies to review how existing regulations rely on ratings and remove such references from their rules as appropriate. As a consequence, the Securities and Exchange Commission (SEC) is exploring ways to reduce regulatory reliance on external credit ratings and replace them with alternative criteria. Some references have already been replaced in US legislation. III. THE NEW RULES: WHY THEY ARE NEEDED 7. Why was a reform of the CRA Regulation considered necessary? Because there were, and still are, weaknesses in the existing EU rules on credit ratings that had been highlighted both by the financial crisis and the euro debt crisis:

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non-transparent sovereign ratings: Downgrading sovereign ratings has immediate consequences on the stability of financial markets but CRAs are insufficiently transparent about their reasons for attributing a particular rating to sovereign debt. Given the importance of ratings on sovereign debts, it is essential that ratings of this asset class are both timely and transparent. While the EU regulatory framework for credit ratings already contains measures on disclosure and transparency that apply to sovereign debt ratings, further measures are needed such as access to more comprehensive information on the data and reasons underlying a rating in order to improve the process of sovereign debt ratings in EU;

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investors' over-reliance on ratings: European and national laws give a quasiinstitutional role to ratings. For example, the amount of capital that banks must hold is determined in some cases by the external ratings given to it. Furthermore, some investors rely excessively on the opinions of CRAs, and don‘t have access to enough information on the debt instruments rated or the reasons behind the credit rating which would enable them to conduct their own credit risk assessments. Measures are needed to reduce references to external ratings in legislation and to ensure investors carry out their own additional due diligence on a well-informed basis;

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conflicts of interest threaten independence of CRAs and high market concentration: CRAs are not independent enough from the rated entity that contracts (and pays) them: e.g. as a rating agency has a financial interest in generating business from the issuer that seeks the rating, this could lead to assigning a higher rating than warranted in order to encourage the issuer to contract them again in the future. Furthermore, a small number of large CRAs dominate the market. The rating of large corporates and complex structured finance products is conducted by a few agencies that also happen to have shareholders that sometimes overlap;

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(absence of) liability of CRAs: CRAs issuing credit ratings in violation of the CRA Regulation are not always liable towards investors that suffered losses. National differences in civil liability regimes could result in credit rating agencies or issuers shopping around, choosing jurisdictions under which civil liability is less likely. 8. What are the new rules that have been agreed? 8.1. Reduce overreliance on credit ratings In line with G20 commitments, the new rules aim to reduce overreliance on external ratings, requiring financial institutions to strengthen their own credit risk assessment and not to rely solely and mechanically on external credit ratings. Specifically, the directive amends current directives on undertakings of collective investment in transferable securities (UCITS)4 and on alternative investment funds managers (AIFM)5 in order to reduce these funds' reliance on external credit ratings when assessing the creditworthiness of their assets.

Also ESAs should avoid references to external credit ratings and will be required to review their rules and guidelines and where appropriate, remove credit ratings where they have the potential to create mechanistic effects. 8.2. Improve quality of ratings of sovereign debt of EU Member States To avoid market disruption, CRAs will be required to set up a calendar for sovereign debt rating which will be limited to three ratings per year for unsolicited sovereign ratings. Deviation of the publication of sovereign rating or related rating outlooks from the calendar shall only be possible in as much as this is necessary for the credit rating agency to comply with its obligations on methodologies, models and key rating assumptions, disclosure and presentation of credit ratings and general and periodic disclosures. It shall also be accompanied by a detailed explanation of the reasons for the deviation from the announced calendar. These ratings will only be published after the close of business and at least one hour before the opening of trading venues in the EU. Furthermore, investors and Member States (MS) will be informed of the underlying facts and assumptions on each rating which will facilitate a better understanding of credit ratings of Member States. Moreover, sovereign ratings would have to be reviewed at least every six months (rather than every 12 months as currently applicable under general rules). 8.3. Make credit rating agencies more accountable for their actions The new rules will make rating agencies more accountable for their actions as ratings are not just simple opinions. Therefore, the new rules ensure that a rating agency can be held liable in case it infringes intentionally or with gross negligence, the CRA Regulation, thereby causing damage to an investor. 8.4. Reduce conflicts of interest due to the "issuer pays remuneration model" and encourage the entrance of more players onto the credit rating market The principal ways by which the new Regulation will improve the independence of credit rating agencies: a) To mitigate the risk of conflicts of interest, the new rules will require CRAs to disclose publicly if a shareholder with 5% or more of the capital or voting rights of the CRA holds 5% or more of a rated entity, and would prohibit a shareholder of a CRA with 10% or more of the capital or voting rights from holding 10% or more of a rated entity. b) Furthermore, to ensure the diversity and independence of credit ratings and opinions, the proposal would prohibit ownership of 5% or more of the capital or the voting rights in more than one CRA, unless the agencies concerned belong to the same group (cross-shareholding). c) Due to the complexity of structured finance instruments and their role in contributing to the financial crisis, the Regulation will also require the issuers, who pay credit rating agencies for their ratings, to engage at least two different CRAs for the rating of structured finance instruments. d) The Regulation introduces a mandatory rotation rule forcing issuers of structured finance products with underlying re-securitised assets, who pay CRAs for their ratings ("issuer pays model"), to switch to a different agency every four years. An outgoing CRA would not be allowed to rate resecuritised products of the same issuer for a period equal to the duration of the expired contract, though not exceeding four years. But mandatory rotation will not apply to small CRAs, or to issuers employing at least four CRAs each rating more than 10% of the total number of outstanding rated structured finance instruments A review clause provides the possibility for mandatory rotation to be extended to other instruments in the future. Mandatory rotation would not be a requirement for the endorsement and equivalence assessment of third country CRAs. e) Measures are taken to encourage the use of smaller credit rating agencies. The issuer should consider the possibility to mandate at least one credit rating agency which does not have more than 10 % of the total market share and which could be evaluated by the issuer as capable for rating the relevant issuance or entity (Comply or Explain). 8.5. Publication of ratings on European Rating Platform

All available ratings will be published on a European Rating Platform which will improve comparability and visibility of all ratings for any financial instrument rated by rating agencies registered and authorised in the EU. This should also help investors to make their own credit risk assessment and contribute to more diversity in the rating industry. 8.6. Additional steps to be taken The Regulation calls on the Commission to prepare a report by 1 July 2016, reviewing the situation in the credit rating market, and if necessary to follow it up with appropriate legislative proposals on some of the new provisions. IV. WHAT WILL CHANGE? 9. Who will be affected by the changes and how? The following categories of market participants will be directly affected by the proposed changes:

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Corporate, structured finance instruments’ and sovereign issuers:

They will benefit from more choice of rating providers which may lead to lower rating fees in the medium term. Sovereign issuers (e.g. states and municipalities) will benefit from the improved transparency and process of issuing sovereign ratings. From now on, an issuer of structured finance products with underlying re-securitised assets who pays credit rating agencies for their ratings ("issuer pays model") will be required to switch to a different agency every four years. An outgoing credit rating agency would not be allowed to rate resecuritised products of the same issuer for a period equal to the duration of the expired contract, though not exceeding four years. But mandatory rotation would not apply to small credit rating agencies or to issuers employing at least four credit rating agencies each rating more than 10% of the total number of outstanding rated structured finance instruments. An issuer of structured finance instruments, who pays credit rating agencies for their ratings, will need to engage at least two different credit rating agencies. Moreover, an issuer, an originator and a sponsor of a structured finance instrument established in the Union will jointly need to disclose to the public information on the credit quality and performance of the underlying assets of the structured finance instrument, the structure of the securitisation transaction, the cash flows and any collateral supporting a securitisation exposure as well as any information that is necessary to conduct comprehensive and well informed stress tests on the cash flows and collateral values supporting the underlying exposures. All issuers, including sovereigns, will enjoy additional time to react to ratings before they are made public. The current rules already provide for ratings to be announced to the rated entity 12 hours before their publication. In order to avoid that this notification takes place outside working hours and to leave the rated entity sufficient time to verify the correctness of data underlying the rating, the new rules will require that the rated entity should be notified during working hours of the rated entity and at least a full working day before publication of the credit rating or the rating outlook. A list of the persons able to receive this notification a full working day before publication of a rating or of a rating outlook should be limited and clearly identified by the rated entity. This information shall include the principal grounds on which the rating or outlook is based in order to give the entity an opportunity to draw attention of the credit rating agency to any factual errors. The publication of sovereign ratings will be done in a manner that is least distortive on markets: at the end of December, credit rating agencies should publish a calendar for the next 12 months setting the dates for the publication of sovereign ratings and corresponding to these, the dates for the publication of related outlooks where applicable. Such dates should be set on a Friday. Only for unsolicited sovereign credit ratings should the number of publications in the calendar be limited to three. Where this is necessary to comply with their legal obligations, credit rating agencies should be allowed to deviate from their announced calendar explaining in detail the reasons for such deviation. However, this deviation may not happen routinely.

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Investors:

They will be in a better position to evaluate the credit risk of financial instruments themselves, including complex structured instruments. They will have free access to a European Rating Platform where all ratings issued by rating agencies, registered and authorised in the EU, regarding a specific

company or financial instruments can be found and compared. In addition, investors will benefit from an increase in the quality of ratings as conflicts of interest due to the "issuer-pays" model and the shareholder structure will be reduced. The investor will benefit from enhanced transparency on structured finance instruments established in the European Union (EU) as the issuer, the originator and the sponsor of a structured finance instrument established in the EU will jointly disclose to the public information on the credit quality and performance of the underlying assets of the structured finance instrument, the structure of the securitisation transaction, the cash flows and any collateral supporting a securitisation exposure as well as any information that is necessary to conduct comprehensive and well informed stress tests on the cash flows and collateral values supporting the underlying exposures. ESMA will set up a webpage for the publication of the information on structured finance instruments. Furthermore, the investors' right of redress against credit rating agencies having infringed the CRA Regulation are enhanced. The new rules ensure that a rating agency can be held liable in case it infringes intentionally or with gross negligence, the CRA Regulation, thereby causing damage to an investor or an issuer.

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Credit rating agencies will need to: be more transparent notably regarding their pricing policy and the fees they receive.

be more transparent about how they conduct their process of rating and reach their conclusions. be more independent from their shareholders and from other CRAs.

be liable towards investors when breaching intentionally or with gross negligence the CRA Regulation. ESMA:

Its role will be reinforced regarding supervision of sovereign ratings. In addition, ESMA will be entrusted with new tasks e.g. it will have to draft a number of new technical standards for adoption by the Commission as well as to provide the Commission with technical advice. For instance, ESMA should establish a European Rating Platform so as to allow investors to easily compare all ratings for EU registered and authorised rating agencies that exist with regard to a specific rated entity. ESMA will need to develop draft regulatory technical standards to specify the content to be used by CRAs when providing such information. - Regarding the new rating methodologies: A CRA that intends to change materially existing or use any new rating methodologies, models or key rating assumptions that could have an impact on a credit rating will need to publish the proposed changes or proposed new methodologies on its website inviting stakeholders to submit comments during a period of one month together with a detailed explanation of the reasons for and the implications of the proposed material changes or proposed new methodologies. A CRA will need to inform ESMA of errors detected in methodologies and/or their application. - Regarding existing ratings: European Rating Platform EU registered and authorised CRAs will have to communicate to ESMA all credit ratings they issue. ESMA will make them available to the public on a website. 10. Why did the Commission propose specific rules for sovereign ratings? Sovereign ratings include ratings of countries, regions and municipalities. Sovereign ratings are very important for the rated public entity. For instance, the conditions of access to external funding very much depend on the rating received. In addition, rating actions with regard to specific countries can have impacts on companies located in that country, on other countries and even on the stability of financial markets. Due to this specific role, it is particularly important that sovereign ratings are accurate and transparent so that investors can fully understand rating actions regarding sovereigns and their wider implications. 11. Should there be a prohibition of sovereign debt ratings? Sovereign debt ratings are important and the implications of such ratings can in some circumstances be far-reaching. Not only do they affect the borrowing costs of Member States but they can also have

further implications for other Member States and the financial stability of the Union as a whole. However, a prohibition of sovereign debt ratings could give the impression that Member States had something to hide and therefore it is not included in the new Regulation. A prohibition could have important effects for the access to capital of some Member States and could increase the borrowing cost for sovereign debt. The Commission considers that this Regulation improves considerably the transparency of sovereign ratings and will avoid negative effects of sovereign ratings which have been observed in recent years and stop risks of market disruption. The Regulation requires rating agencies to publish a calendar for sovereign ratings, limiting the number of ratings to thee annually (while deviations remain possible when appropriately explained by CRAs). Sovereign ratings will be complemented by full research reports explaining the underlying assumptions which will enable investors to better understand sovereign ratings and make their own assessment of Member States creditworthiness. Sovereign ratings will be published on Fridays after closure of European trading venues and at least one hour before opening. 12. Will the Commission set up a European CRA? The Commission did not propose to set up a European Credit rating agency. An analysis showed that setting up a credit rating agency with public money would be costly (ca. €300-500 million over a period of five years), could raise concerns regarding the CRA‘s credibility especially if a publicly funded CRA would rate the Member States which finances the CRA, and put private CRAs at a comparative disadvantage. However, as part of this agreement, the Commission will analyse the situation in the rating market and report to the European Parliament on the feasibility of creditworthiness assessments of sovereign debt of EU Member States, a European credit rating agency dedicated to assessing the creditworthiness of Member States' sovereign debt and/or a European Credit Rating Foundation for all other ratings. 13. Will there be rules allowing civil claims against credit rating agencies? Ratings are not mere opinions but have important consequences. Therefore, CRAs should operate responsibly. The regime does not aim to address "wrong ratings". Investors will only be able to sue a credit rating agency which, intentionally or with gross negligence, infringes the obligations set out in the CRA Regulation, thereby causing damage to investors. This new regime will ensure that rating agencies will act more responsibly as they can be held liable by investors and issuers. 14. Will there be a reversal of burden of proof for civil claims? No, the new rules do not include such a reversal. However the Regulation ensures that the judge/competent court will need to take into consideration that the investor or issuer may not have access to information, which is purely within the sphere of the CRA.. 15. Why have shareholder limitations been introduced? If a shareholder of a CRA holds an important position in other CRAs or in an instrument rated by a CRA, this could lead to a conflict of interest that could affect the quality of ratings. To this end the compromise introduces limitations on shareholding in CRAs: (1) 5% limitation in cross-shareholding of a CRA; (2) a disclosure regime for rating instruments of shareholders holding more than 5%; and (3) a prohibition for rating instruments of shareholders holding more than 10%. 16. Why has a rotation rule been introduced and why is it limited to re-securitisations? A long relationship between a CRA and an issuer could undermine the CRA's independence and in view of the "issuer pays" model lead to a conflict of interest that could affect the quality of ratings. To this end the rotation rule limits the duration of a contract between a CRA and an issuer. While the Commission had proposed a broader scope, the compromise limits the rotation rule to resecuritisations. This can be seen as an important way to test the effectiveness of the rotation rule. By end-2016, the Commission will report back to the European Parliament on the effectiveness of the rotation rule with a view to extending the scope if appropriate. 17. What is the objective of the new European Rating Platform? All ratings for EU registered and authorised rating agencies will be published on the central European Rating Platform which will improve the visibility and comparability of credit ratings from debt

instruments. The Platform will also contribute to the visibility of small and medium-sized credit rating agencies operating in the EU. V. OTHER: 18. When will the Commission present its report concerning the "issuer pays" remuneration model which was promised for end 2012? The report foreseen by end 2012 in the existing CRA regulation was anticipated by the impact assessment which accompanied the new legislative proposal on credit rating agencies from 15 November 2011 following a public consultation end-2010. The rotation principle was proposed as an effective measure to address conflicts of interest due to the "issuer pays" model as well as shareholder limitations. The new Regulation contains a new obligation for the Commission to reassess by 2016 the risks of conflicts of interest due to the ―issuer pays‖ remuneration model, based on a technical advice of the European Securities and Markets Authority (ESMA). 19. Will the Commission promote small and medium sized credit rating agencies? The current regime requires the registration of all CRAs operating on the EU territory offering credibility to small and medium-sized CRAs. The Commission is committed to evaluating the possibilities of promoting the development of regional credit rating agencies of small and medium size, as well as supporting (financially and non-financially) the creation of a network of credit rating agencies. The Commission will present a report on this matter by end of this year (2013). 20. Is deleting all references to ratings from EU legislation the best solution, i.e. the Dodd-Frank Act in the US? The Commission supports the view that overreliance on external credit ratings should be reduced. However, it is important not to create legal uncertainty. It would not be appropriate to remove all references to external ratings without considering alternative credit risk measures. The experience in the US has shown that it is difficult to remove references to ratings without having viable alternatives in place. The credit ratings should be considered as opinions amongst others. Furthermore, it is important that all financial entities conduct their own internal credit risk assessment, subject to supervision by the competent authorities. To this end, the Commission favours a two-step approach. First, the Commission will propose to remove all references which trigger mechanistic reliance on ratings, and in a second step, the Commission will report to the European Parliament on alternatives to external credit ratings with a view to removing all remaining references by 2020. 21. What are the third country implications of these new rules on credit rating agencies? The third country regime provided by the existing CRA Regulation remains unchanged. The concepts of equivalence and endorsement will continue to apply. To be equivalent, it is not necessary to have the same rules in place, only to have rules which achieve the same objectives. However, as these new rules strengthen the regulatory framework for CRAs, a transitional period has been introduced until 2018 to allow third countries to accommodate the new rules. More information: http://ec.europa.eu/internal_market/securities/agencies/index_en.htm
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Regulation (EC) No 1060/2009 of the European Parliament and of the Council of 16 September 2009 on credit rating agencies , OJ L 302, 17.11.2009. Regulation (EC) No 1060/2009 is often referred to as CRA I Regulation.
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: Regulation (EU) No 513/2011 of the European Parliament and of the Council of 11 May? 2011 amending Regulation (EC) No 1060/2009. Regulation (EU) No 513/2011 is often referred to as CRA II Regulation.: http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:L:2011:145:0030:0056:EN:PDF 3 : http://www.sec.gov/about/laws/wallstreetreform-cpa.pdf 4 :

Personal ratings are set by credit reference agencies in the UK, and by credit bureaus in the USA. They are different to credit rating agencies, who deal with both Corporate and Sovereign credit ratings.

Personal - for You
We all have a credit rating calculated from our financial history and gives a lender, for example, a good idea about how able we are to pay back a loan. A poor credit rating means you may be refused a loan or be subject to higher interest rates.

Corporate - for Companies
Companies have credit ratings too - these are called corporate credit ratings. These are used by investors in order to gain a financial indication of such areas as debt securities.

Sovereign - for Countries
Finally, countries also get their own credit rating - this is called a sovereign credit rating. This gives an indication as to a country's level of risk for investors, as well as political risk. Both corporate and sovereign credit ratings are assigned by a credit rating agency. Many countries have one or more credit rating agencies, and there are some which are used widely as a trusted source. We have listed these, starting with the main agencies, and then by country in alphabetical order.

The Top 4
You will notice that the Top 4 world rating agencies are all based in the USA. Credit rating agencies are generally worldwide, so they are not utilized on a countrywide basis. All four top agencies have affiliates in Latin America and Asia.

A.M. Best
A.M. Best is historically the main agency used for insurance companies. It assigns ratings to insurance companies to measure how able they are to pay claims. It is recognised by the United States Securities and Exchange Commission as an NRSRO - a Nationally Recognized Statistical Rating Organization. A.M. Best is based in the USA but has European and world arms. View Website

Fitch
Fitch Group was, alongside other main agencies, designated NRSRO status by the US Securites and Exchange Status. It uses the same rating system as Standard & Poor's. View Website

Moody's
Moody's Corporation is, like most of the main credit rating agencies, based in the USA. According to some sources, it has a 40 per cent share in the world credit rating market. View Website

Standard & Poor's
Standard & Poor's is usually referred to simply as S&P's and they are also one of the most-used ratings agencies. Like many, S&P's dates back to the early part of the last century. Most well known on its ratings is the S&P 500, which is a very actively traded index. It is made up of the prices of 500 common stocks. View Website

OTHER CREDIT RATING AGENCIES
Africa
Agusto & Co Agusto & Co. are based in Nigeria and is widely regarded as the primary credit rating agency in Nigeria. It has been in operation since the early 1990s, and was the first credit rating agency in Nigeria to be licensed by the Securities & Exchange Commission of Nigeria. View Website Global Credit Rating Co.

Global Ratings is based in South Africa and has offices in Nigeria, Kenya and Zimbabwe. The head office is in Sandton South Africa. View Website

Oceania
Rapid Ratings International, Inc. Rapid Ratings provides investors and risk managers with ratings, research and analysis for the financial health of companies in Australia and New Zealand. View Website Veda Advantage Veda Advantage is the main credit bureau for Australia and New Zealand. View Website

North America
Dominion Bond Rating Service Dominion Bond Rating Service - also known as DBRS is based in Canada, and is the largest rating agency there. Despite being based in Canada, it is also one of the ten US Nationally Recognized Statistical Rating Organizations. It is recognized in a similar way in some European countries. View Website Egan-Jones Rating Company Egan-Jones Rating Company is an independent company based in the USA. It rates over 2000 high grade and high-yield US corporate debt issuers. View Website LACE Financial LACE Financial was founded in 1984 and is based in the US. It is another of the ten NRSRO companies. View Website TheStreet.com Ratings, Inc. TheStreet.com are based in the US and provide ratings on a number of sources - banks, mutual funds and a range of insurers. View Website Veribanc, Inc. Veribank, Inc provides bank ratings for US banks that are federally insured. View Website Caribbean Information & Credit Rating Services Ltd. (CariCRIS) CariCRIS is the regional credit rating agency for the Caribbean. They are based in Port of Spain, Trinidad & Tobago. View Website

ASIA
Ahbor Rating Ahbor Rating is based in Uzbekistan. The website does not work so we have provided the Uzbek government homepage which contains information on Ahbor. View Website Chengxin International Credit Rating Co. Ltd. Chengxin are based in China and are a Fitch affiliate. Please note there is no English option on the website. View Website China Lianhe Credit Rating, Co. Ltd. China Lianhe Credit Rating are based in China and provide analysis for investors. Please note the website is not available in English and requires Quick Time Player. View Website China Financial Ratings Services - Xinhua Finance Xinhua provide transparency on Chinese companies. View Website Credit Analysis & Research Ltd (CARE) CARE are based in India and is one of the main credit rating agencies of India. Its services are wide and span across most sectors. View Website Credit Rating Agency of Bangladesh, Ltd. (CRAB) CRAB is based in Bangladesh and styles itself as one of the predominant credit rating agencies of the area. The Securities & Exchange Commission (SEC) of Bangladesh has granted CRAB with a license.

View Website Credit Rating Information and Services, Ltd. (CRISL) CRISL is another key credit rating agency for Bangladesh. View Website CRISIL, Ltd. CRISL is an S&P company, and as such is one of the leading credit rating agencies of India. View Website Dagong Global Credit Rating Co. Ltd. Dagong is based in China and is a highly-qualified credit rating agency - they are a member of the Association of Credit Rating Agencies in Asia and is on the China Securities Regulatory Commission. View Website Investment Information and Credit Rating Agency (ICRA) ICRA is based in India and is a Moody's associate. View Website Japan Credit Rating Agency Japan Credit Rating Agency - or JCR - was established in 1985, and is the main credit rating agency in Japan. View Website JCR-VIS Credit Rating Co. Ltd. Based in Pakistan, this company is an affiliate of Japan Credit Rating Agency, Ltd. It is also a founder shareholder of Bahrain's IIRA. View Website Korea Investors Service, Inc. (KIS) KIS is an affiliate of Moody's. It was established in 1985 and claims to be the first credit rating agency in Korea. View Website Korea Ratings Corporation Korea Ratings has been in operation since 1985 and is an affiliate of Fitch. View Website Malaysian Rating Corporation Berhad Also known as MARC, this is a credit rating agency based in Malaysia. They were established in 1996, and currently 'paid-up' capital for MARC stands at RM20 million. Ratings are reviewed annually. View Website National Information & Credit Evaluation, Inc. (NICE) NICE is based in Korea and claims to be the largest credit information provider there. View Website ONICRA Credit Rating Agency of India, Ltd. ONICRA provides screening in employment background for businesses. It also provides information for associates and for personal credit rating. View Website Pakistan Credit Rating Agency, Ltd. (PACRA) PACRA was formerly a Fitch affiliate and styles itself as a key credit rating agency for Pakistan. View Website Philippine Rating Services, Corp. (PhilRatings) PhilRatings is the only domestic credit rating agency in the Philippines. It is accredited by the SEC. View Website P.T. PEFINDO Credit Rating Indonesia PT PEFINDO is based in Indonesia and was established in 1993. View Website RAM Ratings (Lanka) Limited RAM Ratings was formerly known as Lanka Rating Agency Ltd and and is a subsidiary of Malaysian parent company RAM Holdings Berhad. RAM Ratings is based in Sri Lanka. View Website Rating and Investment Information, Inc Based in Japan, the capitalization of R&I stands at nearly 590 million yen. It, along with nine other agencies, sits on the US NRSRO list. It was established in 1975. View Website Seoul Credit Rating & Information, Inc SCI is based in Korea and was established in 1992. It is a KOSDAQ listed corporate. View Website Shanghai Credit Information Services Co. Ltd

CIS are based in China and provide credit rating information for investors. Please note the website is not available in English. View Website SME Rating Agency of India Limited (SMERA) SMERA is a joint initiative by numerous Indian banks, SIDBI and D&D View Website Taiwan Ratings, Corp. (TCR) TCR are an S&P's partner for Taiwan. View Website Thai Rating and Information Services Co., Ltd. (TRIS) TRIS is a credit ratings agency for Thailand. Please note the website is in Thai. View Website Türk KrediRating (TCRating) TCR is based in Istanbul, Turkey and provides ratings on a number of companies in Turkey. View Website Islamic International Rating Agency, B.S.C. (IIRA) Based in Bahrain, IIRA provides transparency and information for the Islamic financial services industry. View Website

LATIN AMERICA
Pacific Credit Rating Pacific Credit Rating - or PCR - began in Peru but now serves a number of Latin American countries View Website Apoyo & Asociados Internacionales S.A.C. Apoyo is based in Peru and is an associate of Fitch Ratings. View Website Bank Watch Ratings S.A Bank Watch Ratings is based in Ecuador and is an affiliate of Fitch Ratings. The website provides links to all Fitchconnected agencies. View Website BRC Investor Services S.A. BRC is based in Columbia and is an affiliate of Moody's Investor Service. As such they are one of the most relied-upon agencies of Columbia. View Website Calificadora de Riesgo, PCA Calificadora de Riesgo are based in Uruguay and provide accurate risk assessment for investors. View Website Clasificadora de Riesgo Humphreys, Ltd. Humphry's is based in Chile and was established in 1988. View Website Class y Asociados S.A. Clasificadora de Riesgo Class & Asociados is based in Peru. View Website Duff & Phelps de Colombia, S.A., S.C.V DCR Colombia is a Fitch associate. As such their services are trusted and relied on. View Website Ecuability, SA Ecuability SA are based in Ecuador. View Website Equilibrium Clasificadora de Riesgo Equilibrium is based in Peru and is an affiliate of Moody's. It is called on by many investors in Latin America. View Website Feller Rate Clasificadora de Riesgo Feller Rate is based in Chile and is a strategic affiliate of Standard & Poor's. View Website HR Ratings de Mexico, S.A. de C.V HR Ratings are based in Mexico and have a large base in international support. It aims to provide transparency on the Mexican financial market. View Website

Sociedad Calificadora de Riesgo Centroamericana, S.A. (SCRiesgo) SCRiesgo are based in Costa Rica and provides risk rating for companies and projects in the region. View Website

EUROPE
Capital Intelligence, Ltd. Capital Intelligence are based in Cyprus, and model themselves as a leading credit rating agency for the world's emerging markets. View Website Central European Rating Agency (CERA) CERA is also known as Fitch Polska, and is based in Poland. View Website Companhia Portuguesa de Rating, SA (CPR CPR is based in Portugal and is one of the main credit rating agencies there. View Website European Rating Agency (ERA) ERA was formerly known as the Slovak Rating Agency. It provides risk profile information on emerging European markets. View Website Interfax Rating Agency (IRA) Interfax has a connection with Moody's via its partner at Moody's Interfax Rating Agency. It provides a source for the financial markets of Russia and the countries of the former Soviet Union. View Website Rus Rating Rus Rating is part of the Global Rating Group and is based in Russia. View Website Slovak Rating Agency, a.s. (SRA) The SRA are an affiliate of ERA and are based in Slovenia. Ratings and analysis is provided on companies in the Balkans, Central and Eastern Europe. View Website Credit-Rating, Ltd. First rating agency in Ukraine committed to assessment of issuer's solvency and to assignment of credit ratings pursuant to the National rating scale. Since 2003 the agency's rating estimations have been officially recognized by Ministry of Finance of Ukraine. In 2009 the agency entered the Belarusian market. In 2010 the agency became a member-founder of European Association of Credit Rating Agencies (EACRA).

Subscription Services
GCR’s overriding objective has always been to establish itself as the most credible and cost effective source of information in the marketplace and our exceptional market penetration reflects this subscriber emphasis. In view of the above, GCR established the largest subscriber base in the industry in less than 4 years.

Services offered
GCR provides the full range of rating and research services, sub-divided by the following key sectors:

 Banks, building societies & discount houses  Insurance, assurance & reinsurance  Corporates & industrial borrowers  Parastatals, utilities & local authorities  Structured finance & securitisation  Medical schemes ( South Africa only)

GCR Africa provides these ratings and research services in a number of Southern, East and West African countries. In total the above sectors incorporate ratings and research on approximately 400 individual organisations. In the course of its rating activities GCR has also established very comprehensive statistical databases and strategic industry profiles in all sectors.

What subscribers receive
In each country, clients can choose which sectors they wish to subscribe to and are entitled to:

 The detailed rating reports issued on individual participants in the nominated sector.  The regular industry bulletins compiled in each sector, incorporating a strategic industry overview and summarised
profiles on all companies in the sector.

 The regular rating update bulletins and newsletters summarising all ratings/changes and commenting on topical credit
risk issues.

 Access to the comprehensive statistical databases maintained in each sector.  Access to individual senior analysts in order to discuss both company and industry related issues.  Automatic placement in our “hot line” service whereby clients are electronically advised in the event of a development
that we feel may adversely impact on a rating.

Costs
The annual cost of subscribing to any one specific sector in South Africa averages around US$2,900, with discounts applicable to clients which subscribe to more than one sector. For example the annual cost of subscribing to all 6 sectors in South Africa is US$10,000. The annual cost of subscribing to any one specific sector in each other country in which GCR has established

a presence averages around US$2,500, with a discounted fee of US$4,900 (per country) applicable in respect of subscribing to all sectors in the country.

Key advantages of GCR’s subscription service, relative to other agencies.

 We have the greatest number of formal rating relationships in Africa (i.e. double that of all our competitors combined).  To the best of our knowledge we are the only rating agency to have demonstrated both the capability and the
willingness to provide vital “early warnings” to clients (in times of potential counterparty loss) in recent years.

 We provide coverage on certain sectors and countries that are not covered by any other rating agency.  Our subscription fees are currently the most competitive in the market.  Most importantly, we pride ourselves on our ratings track record and our service levels.

Benefits of a GCR rating
The role of a rating agency is to independently differentiate credit quality across all industry sectors and investment instruments, with the purpose of providing investors with the information on which to base appropriate investment and pricing decisions. Accordingly, a formal rating provides an independent and internationally recognised measurement of an organisation’s financial strength. A favourable rating can immediately result in an increased pool of investors, can facilitate direct access to capital markets and can ultimately result in reduced funding costs. Furthermore, the extensive distribution of the detailed rating report can prove to be a highly effective complement to an organisation’s own investor relations activities. Finally, quite apart from the rating, the process provides a useful management tool insofar as it provides management with the benefit of a knowledgeable, independent, third party opinion on the organisation and its operations (including the results of an extensive “benchmarking” process across a wide range of financial, operational and control variables). In the final analysis, a rating agency is judged on the accuracy of its ratings over a prolonged period of time, and its track record for pro - actively (rather than reactively) adjusting its ratings to take into account changing circumstances over time. When the agency can prove that there is a great deal of correlation between its rating symbols and probability of default, then the market can place reliance on these ratings for purposes of establishing investment/counterparty limits, pricing for credit risk and monitoring credit exposures. This is where the likes of S&P and Moody’s have established such a strong track record in the US and other developed markets. Crucially, GCR has now established an unrivalled track record for ratings accuracy in emerging markets. With an overall investment grade default ratio of only 0.9% over the past 10 years

(despite severe emerging market crises and “systemic shocks”), this is far and away the most accurate of any agency operating in emerging markets. In fact GCR reflects more favourably than both Moody’s and Standard & Poor’s US default histories. As a result, there is a direct correlation between GCR’s ratings and the yields demanded by investors. GCR’s core competitive advantage is based on the principal of “analytical excellence”, market penetration and distribution.

GCR offers issuers the following specific benefits:

 A large subscriber base - GCR has the largest subscriber base in the market, encompassing over 700 local and
international issuing and investing institutions.

 Market leadership in Africa - GCR currently occupies the market leadership position in all rating sectors, rating
more companies in Africa than all other rating agencies combined.

 Proven ratings accuracy and analytical excellence - GCR’s unrivalled record with regards to rating accuracy has
earned the company significant respect amongst the investing community, facilitating improved risk pricing.

 Highly competitive pricing - Due to GCR’s substantial scale economies and its entrenched position as the lowest
cost producer in the world, GCR is able to charge rating and subscription fees that are considerably lower than the competition (typically less than half).

 Full regulatory recognition - GCR is officially accredited in all markets in which it operates (where such
accreditation has been made a requirement), in fact being the ONLY international agency that can boast this feat in Africa at this point in time.

 Extensive coverage - GCR’s ratings feature widely in leading and international finacial journals, while GCR’s ratings
are also available on all Bloomberg’s terminals.