Module XIII·Article I·~1 min read
Credit Ratings: Agencies and Methodologies
Credit Markets
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A credit rating is an opinion of a rating agency regarding the creditworthiness of an issuer or a specific debt instrument. Ratings play a key function in the financial system: they reduce informational asymmetry between issuers and investors, determine the cost of raising debt, and affect the accessibility of instruments for various categories of investors. The three largest agencies—Moody's, S&P Global Ratings, Fitch Ratings—control about 90% of the global ratings market.
Rating scales. Investment grade: S&P/Fitch: from AAA to BBB-; Moody's: from Aaa to Baa3. Speculative grade (High Yield or "junk" bonds): S&P/Fitch: from BB+ to D (default); Moody's: from Ba1 to C. The key dividing line is BBB-/Baa3 (the IG/HY boundary): crossing it has significant regulatory consequences for holders.
The methodology of rating agencies includes: Quantitative analysis—financial ratios (leverage, coverage, profitability, liquidity), financial indicators dynamics, comparison with industry peers. Qualitative analysis—business position (market share, diversification, competitive advantages), quality of management, financial policy, corporate governance. Industry and country context—a sovereign rating is usually the ceiling for corporate issuers. Notching—adjustment of an instrument's rating relative to the issuer (secured debt higher, subordinated debt lower).
Regulatory significance of ratings. Prudential regulation: Basel III—banks calculate risk-weighted assets based on ratings. Insurance regulation (Solvency II): capital requirements are linked to the ratings of investments. Money market funds: minimum rating restrictions.
Criticism of rating agencies. The 2008 crisis revealed fundamental problems: conflict of interest in the "issuer pays" model, assignment of AAA ratings to structured products (CDOs) which later defaulted, procyclicality (ratings are downgraded only after problems arise). Reforms: strengthening the regulation of agencies (SEC in the US, ESMA in the EU), requirements for the disclosure of methodologies, encouragement of the use of alternative credit risk assessments.
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