Moody's Investors Service and its close competitors play a key role in global capital markets as a supplementary credit analysis provider for banks and other financial institutions in assessing the credit risk of particular securities. This form of third party analysis is particularly useful for smaller and less sophisticated investors, as well as for all investors to use as an external comparison for their own judgments.[4]
Credit rating agencies also play an important role in the laws and regulations of the United States and several other countries, such as those of the European Union. In the United States their credit ratings are used in regulation by the U.S. Securities and Exchange Commission as Nationally Recognized Statistical Rating Organizations (NRSROs) for a variety of regulatory purposes.[3] Among the effects of regulatory use was to enable lower-rated companies to sell bond debt for the first time; their lower ratings merely distinguished them from higher-rated companies, rather than excluding them altogether, as had been the case.[5] However, another aspect of mechanical use of ratings by regulatory agencies has been to reinforce "pro-cyclical" and "cliff effects" of downgrades. In October 2010, the Financial Stability Board (FSB) created a set of "principles to reduce reliance" on credit ranges agencies in the laws, regulations and market practices of G-20 member countries.[4] Since the early 1990s, the SEC has also used NRSRO ratings in measuring the commercial paper held by money market funds.[3]
The SEC has designated seven other firms as NRSROs,[6] including, for example, A. M. Best, which focuses on obligations of insurance companies. Companies with which Moody's competes in specific areas include investment research company Morningstar, Inc. and publishers of financial information for investors such as Thomson Reuters and Bloomberg L.P.[7]
Especially since the early 2000s, Moody's frequently makes its analysts available to journalists, and issues regular public statements on credit conditions.[5] Moody's, like S&P, organizes public seminars to educate first-time securities issuers on the information it uses to analyze debt securities.[5]
Moody's credit ratings
According to Moody's, the purpose of its ratings is to "provide investors with a simple system of gradation by which future relative creditworthiness of securities may be gauged". To each of its ratings from Aa through Caa, Moody's appends numerical modifiers 1, 2 and 3; the lower the number, the higher-end the rating. Aaa, Ca and C are not modified this way. As Moody's explains, its ratings are "not to be construed as recommendations", nor are they intended to be a sole basis for investment decisions. In addition, its ratings don’t speak to market price, although market conditions may impact credit risk.[8][9]Moody's credit ratings | ||
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Investment grade | ||
Rating | Long-term ratings | Short-term ratings |
Aaa | Rated as the highest quality and lowest credit risk. | Prime-1 Best ability to repay short-term debt |
Aa1 | Rated as high quality and very low credit risk. | |
Aa2 | ||
Aa3 | ||
A1 | Rated as upper-medium grade and low credit risk. | |
A2 | Prime-1/Prime-2 Best ability or high ability to repay short term debt |
|
A3 | ||
Baa1 | Rated as medium grade, with some speculative elements and moderate credit risk. | Prime-2 High ability to repay short term debt |
Baa2 | Prime-2/Prime-3 High ability or acceptable ability to repay short term debt |
|
Baa3 | Prime-3 Acceptable ability to repay short term debt |
|
Speculative grade | ||
Rating | Long-term ratings | Short-term ratings |
Ba1 | Judged to have speculative elements and a significant credit risk. | Not Prime Do not fall within any of the prime categories |
Ba2 | ||
Ba3 | ||
B1 | Judged as being speculative and a high credit risk. | |
B2 | ||
B3 | ||
Caa1 | Rated as poor quality and very high credit risk. | |
Caa2 | ||
Caa3 | ||
Ca | Judged to be highly speculative and with likelihood of being near or in default, but some possibility of recovering principal and interest. | |
C | Rated as the lowest quality, usually in default and low likelihood of recovering principal or interest. |
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