• 05Dec

    What are the rating agencies – what and how do they rate?

    Rating agencies are very powerful institutions as most governments today have a policy of permanent credit loans. There is almost no company in the world, especially a big one, that does not borrow money from banks to finance its development. If there were no rating agencies, the process would lack control, and the crisis on the markets would be even more likely and more severe than it is today. The most important thing about the rating agencies is that they are organizations which are estimating the credit rating of the countries and companies in the world. That way, they keep the world economy in balance. The “Big Three” rating agencies are Standard&Poors, Moody’s Investors Service, and Fitch Group. These agencies constantly monitor the situation in the economic world and try to predict which investments, bonds, stocks, or currencies are safe and which might be quite risky for the investors in the near future.




    Generally speaking agencies try to asses the risk and predict the future situation. Lately, the rating agencies have been mostly known for lowering ratings of many countries’ bonds and deciding that some are less secure. That decision has its immediate impact on interest rates as countries regarded as less secure have to offer higher interest rates to attract the investors. That is the reason why rating agencies are very powerful. They can greatly influence a whole country’s budget and financial situation by just lowering its rating or giving a bad recommendation for it. Suddenly, the country struggles to get more money on the market and has to pay much more for it – problems and crisis in the country start taking shape.

    Standard&Poors

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    There is almost no company in the world, especially a big one, that do not borrow money from banks to finance its development

    Standard&Poors is one of the most credible agencies for estimating risk. It was founded in 1860, and, with its headquarters in New York, it employs over 10,000 people . The most secure stocks evaluated by Standard&Poors are marked as AAA. Those are mostly government bonds of countries with almost no risk  like the United States, Japan, or Germany. When the bonds are evaluated as AA, it means that the possibility of return on the investment is high, and there is no big difference between the bonds with AA and AAA rating. The next rating is A which characterizes a very high possibility of the return of invested money, but at the same time, indicates that the bonds can be sensitive to changes in the market. BBB rating is still trustworthy, but more prone to changes. The next ratings are BB, B, CCC, C and D which represent the stocks with speculative risks. BB rating indicates the lowest risk and CC stocks have the highest risk. The stock with the D rating are reserved for the bonds with arrearages, and you rather should not be interested in them :).

    Moody’s Investors Service

    Another powerful agency for estimating the risk is Moody’s Investors Service, founded in 1909. The bonds with the highest security are government bonds evaluated usually as Aaa. Corporate bonds with high quality and low risk are estimated as Aa bonds. The bonds with good potential for investing are evaluated as A, but they can be susceptible to risks in the future. The Baa rating means that the possibility of return of the invested money is not highly protected, and there is some mediocre risk involved. Ba bonds are those with speculative elements. B bonds represent the bonds with quite high risk. The bonds evaluated as Caa are already in a bad position and problems in getting the invested funds back are very probable. Ca and C bonds are the bonds in the worst position, where the risk is constantly growing. Sometimes these are called trash bonds.

    Fitch Group

    The Fitch Group was established in 1913 by John Knowles Fitch.  With Standards&Poors and Moody’s Investors Service, it represents the last of the “Big Three”, that have the highest credibility in the world of financial services. The bonds with AAA rating are reserved for companies of the best quality and are reliable and stable. AA rating represent quality companies, a bit higher risk than AAA. An A-rated economic situation can affect finance. The rating BBB refers to medium class companies which are satisfactory at the moment. The companies rated as BB are more prone to changes in the economy, and those rated as B indicate that the financial situation may change noticeably. Currently, companies that are vulnerable and dependent on favorable economic conditions to meet commitments are rated as CCC. Very speculative bonds and very vulnerable bonds are typically assigned a CC rating. Highly vulnerable and very speculative bonds are those with C rating.  And finally, bonds rated as D have low probability to default on obligations, and Fitch believes that it will not generally default on most or all of their obligations.

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