The structure of rating agencies


The structure of rating agencies

Thursday, 15 November, 2012

Credit rating agencies exist to assess the creditworthiness of bond issuers. These can be companies or countries hat borrow money by issuing IOUs known as bonds. The agencies give the borrowers a rating – expressed as a series of letters such as AAA, Ba3 or D – which tells the buyers of this debt the likelihood of getting their money back. As a result, the scores also affect the rate of return that investors are likely to charge on that borrowing. A lower score (AAA is the highest, D the lowest) makes investors more likely to demand higher rates, potentially making borrowing more difficult.

The three main rating agencies are:

- Moody’s Investor’s Service, created in 1914, headquartered in New York. Previously, in 1900, John Moody and Company began publishing “Moody’s Manual”, which contained basic statistics and general information about the stocks and bonds of various industries.

- Standard & Poor’s (S&P) has its origins in 1860, when Henry poor published a history of the finances of railroads and canals in the United States as guide for investors. S&P is headquartered in New York.

- Fitch Ratings, founded in 1913 by John Knowles Fitch, headquartered in Paris. In 1924, Fitch introduced the AAA through D rating system that has become the basis for ratings throughout the industry.

There are hosts of other agencies, but these three were the first to be acknowledged by US regulator the Securities and Exchange Commission (SEC) as Nationally Recognized Statistical Rating Organizations (NRSROs). Their combined market share is around 95 per cent.