credit rating agencies

(noun)

A credit rating agency (CRA) is a company that assigns credit ratings to issuers of certain types of debt obligations, as well as to the debt instruments themselves.

Examples of credit rating agencies in the following topics:

  • Ratings

    • Bond credit rating agencies assess and report the credit worthiness of a corporation's or government's debt issues.
    • The credit rating is analogous to a credit rating for individuals.
    • The ratings are assigned by credit rating agencies, such as Moody's, Standard & Poor's, and Fitch Ratings, and are given in letter designations (AAA, B, CC), which represent the quality of a bond.
    • These are bonds that are rated below investment grade by the credit rating agencies.
    • Until the early 1970s, bond credit ratings agencies were paid for their work by investors who wanted impartial information on the credit worthiness of securities issuers and their particular offerings.

  • Bond Rating System

    • The credit rating is a financial indicator assigned by credit rating agencies; bond ratings below BBB-/Baa are considered junk bonds.
    • It is analogous to credit ratings for individuals.The credit rating is a financial indicator to potential investors of debt securities, such as bonds.
    • These are assigned by credit rating agencies such as Moody's, Standard & Poor's, and Fitch Ratings to have letter designations (such as AAA, B, CC), which represent the quality of a bond.
    • Credit rating agencies registered as such with the SEC are "Nationally recognized statistical rating organizations. " The following firms are currently registered as NRSROs: A.M.
    • Generally, they are bonds that are judged by the rating agency as likely enough to meet payment obligations that banks are allowed to invest in them.

  • Credit Ratings

    • Credit ratings are determined by credit ratings agencies.
    • The credit rating represents the credit rating agency's evaluation of qualitative and quantitative information for a company or government; including non-public information obtained by the credit rating agencies analysts.
    • Therefore, some rating agencies simply report short-term ratings.
    • These are assigned by credit rating agencies such as A.
    • Each credit rating agency designates the quality of bonds with letters.

  • International Credit Rating Agencies

    • International credit-rating agencies do not focus on risk for particular companies but assess investment risk associated with countries.
    • Two well-known credit agencies are A.M Best and Coface.
    • Best is an international credit agency that classifies country risk into five tiers.
    • Table 2 shows a country's rating for 2012.
    • Coface, France's export credit underwriter, is another international credit-rating agency.

  • Analyzing Long-Term Liabilities

    • Standard & Poor's is a credit rating agency that issues credit ratings for the debt of public and private companies.
    • As part of their analysis Standard & Poor's will issue a credit rating that is designed to give lenders and investors an idea of the creditworthiness of the borrower.
    • Please consult the figure as an example of Standard & Poor's credit ratings issued for debt issued by governments all over the world.
    • In addition to credit rating agencies such as Standard & Poor's, analysts can use debt ratios to help benchmark a company to it's industry peers.
    • There is more to analyzing long-term liabilities than simply reading a company's credit rating and performing independent debt ratio analysis.

  • Securitization and the 2008 Financial Crisis

    • Credit-rating agencies could rate some bonds as AAA that pays the lowest return to investors, but investors are first in line if the fund goes bust.
    • Credit-rating agencies, such as Standard & Poor, and Moody's conspired with theinvestment banks.
    • Credit agencies always rated CDOs with an AAA credit rating, even though some CDO's funds contained subprime mortgages.
    • Credit-rating agencies were either incompetent or perpetuating fraud.
    • The AAA credit rating became vital for bankers to sell the CDOs.

  • Price Risk

    • Interest rates and bond prices carry an inverse relationship.
    • Fixed-rate bonds are subject to interest rate risk, meaning that their market prices will decrease in value when the generally prevailing interest rates rise.
    • When the market interest rate rises, the market price of bonds will fall, reflecting investors' ability to get a higher interest rate on their money elsewhere — perhaps by purchasing a newly-issued bond that already features the new higher interest rate.
    • On the flip side, if the prevailing interest rate were on the decline, investors would naturally buy bonds that pay lower rates of interest.
    • Bond prices can become volatile depending on the credit rating of the issuer – for instance if the credit rating agencies like Standard & Poor's and Moody's upgrade or downgrade the credit rating of the issuer.

  • Problems of Long-Run Government Debt

    • A credit rating is an evaluation of the creditworthiness of a government, but not individual consumers.
    • The evaluation is made by a credit rating agency of the country's ability to pay back the debt and the likelihood of default.
    • A sovereign credit rating is the credit rating of a sovereign entity (i.e., a national government).
    • The sovereign credit rating indicates the risk level of the investing environment of a country and is used by investors looking to invest abroad.
    • If a country has a bad credit rating, it generally must have a higher interest rate on the debt it issues.

  • Depository Institutions

    • For example, if you borrowed $10,000 at a 5%, interest rate and loaned it out at 10%, then you earn a profit.
    • However, if you borrowed $10,000 at 10% interest rate and loaned it out at 5%, subsequently, you earn a loss.
    • Interest rates rose during the 1980s as the savings institutions paid a greater interest rate to thedepositors than the amount of these institutions earned on the mortgages. mortgages are usually 30-year loans, and savings institutions were locked into low interest rates from the 1960s.
    • Currently, savings institutions are similar to banks, except different government agencies regulate the savings institutions.
    • Credit unions are another depository institution.

  • The National Credit Union Administration (NCUA)

    • The NCUA is the independent federal agency created by the U.S.
    • The National Credit Union Administration (NCUA) is the United States independent federal agency that supervises and charters federal credit unions.
    • The chartering of credit unions in all states is due to the signing of the Federal Credit Union Act by President Franklin D.
    • At first, the newly created Bureau of Federal Credit Unions was housed at the Farm Credit Administration.
    • Responsibility for regulation would shift over the years as the agency migrated from the Federal Deposit Insurance Corporation to the Federal Security Agency, then to the Department of Health, Education, and Welfare.