Credit Rating Tutorial

About Credit Ratings

Credit Ratings, assigned by rating agencies to companies and debt instruments, are designed to gauge the likelihood that a company will default on its obligations to creditors. Thus, they give investors a rough idea of the risk associated with loaning money to the entity being rated. Each of the three primary rating agencies – Fitch, Moody’s, and Standard & Poor’s – employs a slightly different rating scale. All start at A and end at C with a division, somewhere in the mid-B’s, between “investment grade,” and “non-investment grade.” The division is in an important one. At present, instiutional investors like pension funds, and banks are prohibited from buying non-investment grade securities.

About Rating Agencies

Rating agencies are for-profit companies that assign ratings based upon published ratings criteria. With approval from the Securities and Exchange Commission they may register as Nationally Recognized Statistical Rating Organizations, a status that gives them power to determine which securities are investment grade.

Finding Ratings

Use Bloomberg to find ratings. The CRPR command brings up a list of all ratings for a company and the debt instruments it has issued. Equity issues are not rated (eg: IBM <Equity> CRPR <Go>):

 

IBM_CRPR

Click on a rating to see the rating history – red indicates a downgrade, and green indicates an upgrade:

IBM_hist 

Finding Rating Scales

The RATD command (RATD <Go>) returns a list of rating agencies with links to their rating scales:

 

RATD_000

At the end of the list is Bloomberg’s table comparing rating scales across all rating agencies.

Finding Rating Criteria

Nationally Recognized Statistical Rating Organizations are required to make extensive disclosure about ratings methodology and criteria. They must also evalute the accuracy of their ratings. Most of this information is disclosed on SEC form NRSRO, which the agencies must make available on their websites.

Fitch’s form NRSRO
Standard & Poor’s form NRSRO
Moody’s Investor Services’ form NRSRO