(7 intermediate revisions by the same user not shown)
Line 1:
Line 1:
{{g}}Grades assigned to financial instruments and issuers by [[rating agency|rating agencies]] to save the honest toilers in the asset management industry the bother of conducting fundamental financial analysis on said issuers and instruments before piling into their securities on behalf of his client roster of pensioners orphans, the morally weak and other similar mutual fund investors. Now a cynic (who? Moi?) might wonder just what such an honest toiler would be bringing to the investment decision if all he was doing was relying on a published rating — isn’t that a bit like judging a film on its a star rating from the film critic in the Daily Express? — but nor is expecting every asset manager in the land to conduct the same fundamental analysis on the same issuers and [[Financial instrument|instrument]]s a fabulously efficient use of resources either.
{{a|g|[[File:CDO Squared.png|A triple-A rated [[CDO Squared]] in 2008|450px|center|frame]]}}Grades assigned to financial instruments and issuers by [[rating agency|rating agencies]] to save the honest toilers in the asset management industry the bother of conducting fundamental financial analysis on said issuers and instruments before piling into their securities on behalf of his client roster of pensioners orphans, the morally weak and other similar mutual fund investors.
Nevertheless a good example of the perils of a [[second order derivative]] measure of quality: at least if you expect your asset manager to be ''able'' to conduct fundamental financial analysis, she might be able to pick up something that the rating agencies had missed. Relying entirely upon them opens up the market to any bullshit artist who knows his ABCs — all right, and his Aa1-Aa2-Aa3s — to make quick coin in a sucker's market.
Now a cynic (who? Moi?) might wonder ''just what such an honest toiler would be bringing to the investment decision if all he was doing was relying on a published rating'' — isn’t that a bit like judging a film on its a star rating from the film critic in the Daily Express? — but nor is expecting every [[asset manager]] in the land to conduct the same fundamental analysis on the same issuers and [[Financial instrument|instrument]]s a fabulously efficient use of resources either. Except that they might, you know, use different methodologies, have different opinions and provide [[diverse]] perspectives, right? If only ''that'' were what people in the industry used credit ratings for.
And as in the early part of the millennium, we saw regulatory capital ratios predicated on ratings, meaning anyone who could hoodwink gullible [[rating agency]] professionals with a sophisticated cashflow model could create financial instruments with the potential to detonate the financial markets as we know them. [[CDO|Just as well that never happened]].
Nevertheless a good example of the perils of a [[second order derivative]] measure of quality: at least if you expect your [[asset manager]] to be ''able'' to conduct fundamental financial analysis, she might be able to pick up something that the rating agencies had missed. Relying entirely upon ratings opens up the market to any bullshit artist who knows his ABCs — all right, and his Aa1s, Aa2s and Aa3s — to make quick coin in a sucker's market.
And as in the early part of the millennium, we saw [[regulatory capital]] ratios predicated on ratings, meaning anyone who could hoodwink gullible [[rating agency]] professionals with a sophisticated cashflow model could create financial instruments with the potential to detonate the financial markets as we know them. [[CDO Squared|Just as well that never happened]].
Anyway, here, with feeling, you can find the ratings notches of each of the main organisations:
*'''S&P''': [https://en.wikipedia.org/wiki/S%26P_Global_Ratings here] (as set out by Wikipedia)
*'''Moody’s''': [https://www.moodys.com/sites/products/AboutMoodysRatingsAttachments/MoodysRatingSymbolsandDefinitions.pdf here] (as published by Moody’s in a handy PDF).
{{sa}}
{{sa}}
*[[Beware of shorthand]] but [[it’s okay to generalise]]
*[[Beware of shorthand]] but [[it’s okay to generalise]]
Anyway, here, with feeling, are the ratings notches.
===S&P===
'''Investment Grade'''
*{{S&P|AAA}}: An obligor rated 'AAA' has extremely strong capacity to meet its financial commitments. 'AAA' is the highest issuer credit rating assigned by Standard & Poor's. Equivalent to Moody's {{moodys|Aaa}}
*{{S&P|AA}}: An obligor rated 'AA' has very strong capacity to meet its financial commitments. It differs from the highest-rated obligors only to a small degree. Equivalent to Moody's {{moodys|Aa2}}Includes:
**{{S&P|AA+}}: equivalent to Moody's {{moodys|Aa1}} (high quality, with very low credit risk, but susceptibility to long-term risks appears somewhat greater)
**{{S&P|AA}}: equivalent to {{moodys|Aa2}}
**{{S&P|AA-}}: equivalent to {{moodys|Aa3}}
*{{S&P|A}}: An obligor rated 'A' has strong capacity to meet its financial commitments but is somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions than obligors in higher-rated categories. Equivalent to Moody's {{moodys|A1}}
**{{S&P|A+}}: equivalent to {{moodys|Aa}}
**{{S&P|A}}: equivalent to {{moodys|A1}}
**{{S&P|A-}}: equivalent to {{moodys|A2}}
*{{S&P|BBB+}}: An obligor rated 'BBB' has adequate capacity to meet its financial commitments. However, adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity of the obligor to meet its financial commitments. Equivalent to Moody's {{moodys|A3}}
*{{S&P|BBB}}: Equivalent to Moody's {{moodys|A}}
'''Non-Investment Grade''' (also known as [[junk bonds]])
*{{S&P|BB}}: An obligor rated 'BB' is less vulnerable in the near term than other lower-rated obligors. However, it faces major ongoing uncertainties and exposure to adverse business, financial, or economic conditions, which could lead to the obligor's inadequate capacity to meet its financial commitments.
*{{S&P|B}}: An obligor rated 'B' is more vulnerable than the obligors rated 'BB', but the obligor currently has the capacity to meet its financial commitments. Adverse business, financial, or economic conditions will likely impair the obligor's capacity or willingness to meet its financial commitments.
*{{S&P|CCC}}: An obligor rated 'CCC' is currently vulnerable, and is dependent upon favorable business, financial, and economic conditions to meet its financial commitments.
*{{S&P|CC}}: An obligor rated 'CC' is currently highly vulnerable.
*{{S&P|C}}: highly vulnerable, perhaps in bankruptcy or in arrears but still continuing to pay out on obligations
*{{S&P|CI}}: past due on interest
*{{S&P|R}}: An obligor rated 'R' is under regulatory supervision owing to its financial condition. During the pendency of the regulatory supervision, the regulators may have the power to favor one class of obligations over others or pay some obligations and not others.
*{{S&P|SD}}: has selectively defaulted on some obligations
*{{S&P|D}}: has defaulted on obligations and S&P believes that it will generally default on most or all obligations
| style="background:LightGrey” |<!-- NOTE: Moody's uses Aaa not AAA. Do not “correct” Aaa to AAA -->{{moodys|Aaa}} || style="background:#F2F2F2; text-align:left"|Rated as the highest quality and lowest credit risk. ||! rowspan="5” |'''Prime-1'''<br/>Best ability to repay short-term debt
|-
| style="background:LightGrey” |{{moodys|a1}} ||! rowspan="3” style="background:#F2F2F2; text-align:left"|Rated as high quality and very low credit risk.
|-
| style="background:LightGrey” |{{moodys|a2}}
|-
| style="background:LightGrey” |{{moodys|a3}}
|-
| style="background:LightGrey” |{{moodys|1}} ||! rowspan="3” style="background:#F2F2F2; text-align:left"|Rated as upper-medium grade and low credit risk.
|-
| style="background:LightGrey” |{{moodys|2}} ||! rowspan="2"|'''Prime-1'''/'''Prime-2'''<br/>Best ability or high ability to repay short term debt
|-
| style="background:LightGrey” |{{moodys|3}}
|-
| style="background:LightGrey” |{{moodys|aa1}}||! rowspan="3” style="background:#F2F2F2; text-align:left"|Rated as medium grade, with some speculative elements and moderate credit risk. ||'''Prime-2'''<br/> High ability to repay short term debt
|-
| style="background:LightGrey” |{{moodys|aa2}} ||'''Prime-2'''/'''Prime-3'''<br/>High ability or acceptable ability to repay short term debt
|-
| style="background:LightGrey” |{{moodys|aa3}} ||'''Prime-3'''<br/>Acceptable ability to repay short term debt
| style="background:LightGrey"|{{moodys|a1 ||! rowspan="3” style="background:#F2F2F2; text-align:left"| Judged to have speculative elements and a significant credit risk. ||! rowspan="11” | '''Not Prime'''<br/>Do not fall within any of the prime categories
|-
| style="background:LightGrey” |{{moodys|a2}}
|-
| style="background:LightGrey” |{{moodys|a3}}
|-
| style="background:LightGrey” |{{moodys|1}} ||! rowspan="3” style="background:#F2F2F2; text-align:left"| Judged as being speculative and a high credit risk.
|-
| style="background:LightGrey"|{{moodys|2}}
|-
| style="background:LightGrey” |{{moodys|3}}
|-
| style="background:LightGrey” |{{moodys|aa1}} ||! rowspan="3” style="background:#F2F2F2; text-align:left"| Rated as poor quality and very high credit risk.
|-
| style="background:LightGrey” |{{moodys|aa2}}
|-
| style="background:LightGrey” |{{moodys|aa3}}
|-
| style="background:LightGrey” |{{moodys|a}} || style="background:#F2F2F2; text-align:left"| Judged to be highly speculative and with likelihood of being near or in default, but some possibility of recovering principal and interest.
|-
| style="background:LightGrey” |{{moodys|}} ||! rowspan="1” style="background:#F2F2F2; text-align:left"|Rated as the lowest quality, usually in default and low likelihood of recovering principal or interest.
|}
Latest revision as of 13:29, 12 October 2020
The Jolly Contrarian’s Glossary
The snippy guide to financial services lingo.™
Grades assigned to financial instruments and issuers by rating agencies to save the honest toilers in the asset management industry the bother of conducting fundamental financial analysis on said issuers and instruments before piling into their securities on behalf of his client roster of pensioners orphans, the morally weak and other similar mutual fund investors.
Now a cynic (who? Moi?) might wonder just what such an honest toiler would be bringing to the investment decision if all he was doing was relying on a published rating — isn’t that a bit like judging a film on its a star rating from the film critic in the Daily Express? — but nor is expecting every asset manager in the land to conduct the same fundamental analysis on the same issuers and instruments a fabulously efficient use of resources either. Except that they might, you know, use different methodologies, have different opinions and provide diverse perspectives, right? If only that were what people in the industry used credit ratings for.
Nevertheless a good example of the perils of a second order derivative measure of quality: at least if you expect your asset manager to be able to conduct fundamental financial analysis, she might be able to pick up something that the rating agencies had missed. Relying entirely upon ratings opens up the market to any bullshit artist who knows his ABCs — all right, and his Aa1s, Aa2s and Aa3s — to make quick coin in a sucker's market.
And as in the early part of the millennium, we saw regulatory capital ratios predicated on ratings, meaning anyone who could hoodwink gullible rating agency professionals with a sophisticated cashflow model could create financial instruments with the potential to detonate the financial markets as we know them. Just as well that never happened.
Anyway, here, with feeling, you can find the ratings notches of each of the main organisations:
