Bond credit rating, or simply credit rating, in the world of investment, is the credit worthiness of government or corporate bonds. It is distinct from an individual’s credit score. Financial service companies called credit rating agencies (CRAs) provide credit ratings, or analysis about a security’s or issuer’s creditworthiness. These are the agencies that publish the ratings of the bonds that are utilised by investors to determine the probability that the debt will be repaid.
Investing as simple as ABC
The credit rating agencies or the managers aid the investors in making a comprehensive understanding of the debt repayment and reducing the risk by mitigating the capital and loan loss exposures. Many of the rating industry firms have implemented their own innovative rating procedures so that actual results are as accurate and usable. For example, based on the possibility of default, the ratings hierarchy assigns letter grades to debt securities and their issuers, with AAA denoting the best creditworthiness and the lowest risk of default, and D denoting an issuer that has declared bankruptcy.
Investment grade bonds are those that are rated AAA, AA, A, or BBB, whereas speculative or junk grade bonds are those that are rated BB, B, CCC, CC, or D. Investment grade refers to anything that has a rating between AAA and BBB and can easily repay debt. Debt with a rating between BB+ and D is seen as speculative and has a hazy future. The risk of default increases with lower ratings, with a D rating being the worst. In this way, the industry manages to rate the credit of the bonds and helps investors develop a thorough understanding of the debt payback.
Making Investments Accurate
In 1970, in the US market, the credit ratings sector started implementing some significant adjustments and advances. Investors purchased subscriptions to each rating agency’s publications, and issuers did not incur any costs for the research and analysis that were necessary in the creation of published credit ratings. Credit rating companies as a whole started to understand how much objective credit ratings benefited issuers: they lowered the costs of raising capital and raised the market value of a security issuer, which made it easier for issuers to access money. The decision to charge issuers of securities fees for rating services was made across the industry due to the expansion and complexity of the capital markets as well as the rising demand for statistical and analytical services. Between 2017 and 2022, the UK market size for rating agencies increased by 2.3% per year on average, and it increased faster than the overall economy of the UK. The rating agency industry, along with the credit bureau industry of the UK, secured the 13th place in the Administrative and Support Service Activities industry as per the market size in the entire UK.
Bonding with the Market Analytics
The credit rating market is dominated by three large agencies, which account for 95% of the global market, and the top firm among them is Moody’s Investor Services. Moody’s and a few other companies together dominate 80% of the international credit rating market. Leading providers of credit ratings, research, and risk evaluation include Moody’s Investors Service. Approximately 5,000 non-financial corporate issuers, 4,000 financial institutions, 18,000 public finance issuers, 11,000 structured finance transactions, and 1,000 infrastructure and project finance issuers are included in the firm’s ratings and analysis of debt, covering more than 135 sovereign nations. A division of Moody’s Corporation, which had USD 4.2 billion in revenue in 2017, Moody’s Investors Service has offices in 42 countries and employs about 12,300 people globally. The firm is also listed in the 2021 Fortune 500. By measuring potential investor loss in the event of default, the company uses a standardised ratings system to rate the creditworthiness of debtors. Moody’s Investors Service assigns ratings on debt instruments in a number of bond market areas. These consist of financial institutions such as banks and non-bank finance firms; government, municipal, and corporate bonds, managed investments such as money market funds and fixed-income funds, and asset classes in structured finance. The securities rated by Moody’s Investors Service range from AAA to C, with AAA being the highest quality and C representing the lowest quality.
The company offers prime solutions for credit risk analysis and management to its clients or investors. It is the leading company among the three companies mentioned above. Due to its excellent performances in the field, International Business Magazine awarded two awards to the company- the “Best Credit Risk Management Solutions Provider UK 2022” and the “Best Credit Risk Analysis UK 2022”.
In order to address the growing demand in the worldwide market for unbiased opinions on the qualifications of designated green, social, sustainable, and sustainability-linked debt issues, Moody’s is also expanding its capacity to offer second party opinions (SPOs). The SPO business of Moody’s will be moved from Moody’s ESG Solutions to Moody’s Investors Service, along with the analytical personnel.
Better the ratings, Better the profits
A good bond rating from the rating agencies aids organizations in obtaining more affordable borrowing costs, much as having a good credit score enables people to acquire loans with more favourable terms. Ratings can encourage businesses to pay their debts on time and refrain from taking on more debt than they can comfortably handle. Bond ratings offer crucial information to investors regarding the riskiness of different assets. Investors can decide how much risk they are ready to take on and whether the anticipated profits are worth the dangers by looking at a company’s or bond’s ratings. The ratings given by the agencies provide another crucial factor you may use to choose which investments are best for you, regardless of whether you just feel comfortable buying investment-grade bonds or you’re ready to take a calculated risk by buying trash bonds.
Blog By Tasleem Majumder
