Rating Agencies

The rating agencies are independent companies that analyze the credit quality of the different issuers (both public and private entities).

Since there are many debt issuers, years ago they were born such agencies to issue credit ratings depending on the risk of being unpaid each of the securities issued these companies, both  publ i ca  as  private . Both considered fixed income.

The rating agencies analyze the credit quality , checking what is the credit risk of each debt title issued, and based on that issue a rating, so that investors can know the risk of default of each entity without having to make a thorough analysis.

In normal market situations the  lowest credit risk is that of the State, since it usually has a higher credit quality than a company (corporate). Likewise, entities with better credit quality tend to pay a lower return than those of a company with worse credit quality, at the same time and same type of asset .

The best-known rating agencies are Moody’s, Standard & Poor’s and Fitch IBCA, and the characteristic that defines all of them is that they do not hold risk positions or interests in the markets and do not belong to any group that acts in them. Its job is to analyze from the economic situation and the activity environment to the financial statements in detail, the risks of the company, the business and even the quality of the managers.

If a company issues a fixed income title and wants an agency to rate it, it is the issuing entity itself that has to pay for that qualification. What can sometimes cause controversy, since it might be thought that it is paid to obtain a better rating. However, this rarely occurs, because if it would not end the business of these agencies, it is based on issuing ratings the more accurate the better. And what will it be for a company to pay for a low rating? It will always be better as a general rule to have a rating, even if it is low, than not having a credit rating.

The rating agencies have a very important role in the financial markets , since through their ratings they guide investors by indicating the risk that is implied in the investment in a given financial asset. While it is true that the fact of not having a rating and wanting to finance (issue debt) in financial markets has a disadvantage, is that you are going to pay a much higher interest rate.

Agency ratings

There are ratings or ratings of different terms; In the long term, used for the capital market and short-term ratings used for the money market, each level is detailed in the tables below.

Note the dividing line in the box guest ratings long term, which separates the asset investment grade (or “investment grade”) to the area with non – investment grade ( “non investment grade”). The first assumes high solvency of the issuer while the second low credit quality.

The ratings are not static, they may change depending on the market circumstances or the solvency of the company. So much so that a downward revision (downgrade), crossing the border from investment grade to non – investment grade means that most investment funds or banks with holdings such  assets to finance r you  are going to sell you causing stampedes in those assets and as expected a sharp decline in its price, so the bottom is considered  high yield or junk bonds.

by Abdullah Sam
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