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    Moody's Rating System

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    TL Ngoc Thao
    Moody's provides credit ratings that represent their opinion of an issuer's creditworthiness and expected loss for investors. Ratings are not recommendations to buy or sell securities but help investors price credit risk. Lower rated entities are expected to default more frequently than highly rated entities. Moody's rating process involves gathering information, developing a rating conclusion through committee, ongoing monitoring, and informing the market of rating actions. The probability of default increases as ratings decrease down Moody's 21-notch scale, which ranges from Aaa (highest quality) to C (lowest rating, typically in default).

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    Moody's Rating System

    Uploaded by

    TL Ngoc Thao
    153 views2 pages
    Moody's provides credit ratings that represent their opinion of an issuer's creditworthiness and expected loss for investors. Ratings are not recommendations to buy or sell securities but help investors price credit risk. Lower rated entities are expected to default more frequently than highly rated entities. Moody's rating process involves gathering information, developing a rating conclusion through committee, ongoing monitoring, and informing the market of rating actions. The probability of default increases as ratings decrease down Moody's 21-notch scale, which ranges from Aaa (highest quality) to C (lowest rating, typically in default).

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    mô tả về cơ chế hoạt động của tổ chức xếp hạng tín dụng Moody's

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    Moody's provides credit ratings that represent their opinion of an issuer's creditworthiness and expected loss for investors. Ratings are not recommendations to buy or sell securities but help investors price credit risk. Lower rated entities are expected to default more frequently than highly rated entities. Moody's rating process involves gathering information, developing a rating conclusion through committee, ongoing monitoring, and informing the market of rating actions. The probability of default increases as ratings decrease down Moody's 21-notch scale, which ranges from Aaa (highest quality) to C (lowest rating, typically in default).

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    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    153 views2 pages

    Moody's Rating System

    Uploaded by

    TL Ngoc Thao
    Moody's provides credit ratings that represent their opinion of an issuer's creditworthiness and expected loss for investors. Ratings are not recommendations to buy or sell securities but help investors price credit risk. Lower rated entities are expected to default more frequently than highly rated entities. Moody's rating process involves gathering information, developing a rating conclusion through committee, ongoing monitoring, and informing the market of rating actions. The probability of default increases as ratings decrease down Moody's 21-notch scale, which ranges from Aaa (highest quality) to C (lowest rating, typically in default).

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    of 2

    RATING SYSTEM IN BRIEF

    12 MARCH 2009

    Moodys Rating System in Brief


    What is a rating?
    A rating is Moodys opinion of the credit quality of individual obligations or of an issuers general creditworthiness.

    What a rating is not


    Ratings are not recommendations to buy or sell, nor are they a guarantee that default will not occur.

    How do the capital markets use ratings?


    Investors use ratings to help price the credit risk of fixed-income
    securities they may buy or sell. Many also use ratings as limits on
    their investment parameters and as means for expanding their
    investment horizons to markets or security types they do not cover
    by their own analysis. Because major investors globally rely on
    Moodys ratings, the ratings help to provide issuers of debt with
    stable, flexible access to those sources of capital.

    What types of securities does Moodys rate?


    Any type of debt or related obligation of interest to institutional
    investors, e.g., bonds, debentures, asset-backed and mortgagebacked securities, convertible bonds, medium-term notes, derivative
    securities, etc.

    What do credit ratings measure?


    Moodys credit ratings represent a rank-ordering of creditworthiness, or expected loss. Expected loss is a function of the probability
    of default and the expected severity of loss given a default. Ratings
    are forward looking in that the rank ordering is designed to hold
    across multiple horizons.

    While a rating summarizes the credit risk characteristics of an obligor or obligation, it is not a statement as to which obligors or obligations will default in the future. Rather, it is expected that lower
    rated entities and obligations will default, on average, at a higher
    frequency than more highly rated entities and obligations.

    What is Moodys rating process?


    The rating process:
    gathers information sufficient to evaluate risk to investors who
    might own or buy a given security,
    develops a conclusion in committee on the appropriate rating,
    monitors on an ongoing basis to determine whether the rating
    should be changed, and
    informs the marketplace and market participants of Moodys
    actions.

    How does a Moodys rating committee work?


    Moodys ratings are initially determined or subsequently changed
    through committee. The lead analyst for a given company, industry, country, or asset type frames the discussion, including offering
    the rating recommendation and its rationale.
    At minimum, the committee includes a managing director or other
    designated individual and the lead analyst. The committee may be
    expanded to include as many perspectives and disciplines as are
    needed to address all analytical issues relevant to the issuer and the
    security being rated.
    Issues affecting the size of the committee may include the size
    of the issuer, complexity of the security, geography, or whether a
    transaction of the type has ever been done before. The discussions of the committees are strictly confidential, and only Moodys
    analysts may serve on a committee.

    What sources of information do analysts use?

    Important definitions pertaining to the rating process:

    Publicly available data, e.g., annual reports.


    Prospectuses, offering circulars, offering memoranda, trust
    deeds, or indentures of particular securities.
    Market data, e.g., stock price trends, trading volume, data on
    bond price spreads.
    Economic data from industry groups, associations or bodies,
    such as the World Bank.
    Data from agencies, such as central banks, ministries, or
    regulators.
    Books or articles from academic sources, financial journals,
    news reports.
    Discussions with expert sources in industry, government, or
    academia.
    Data that may come from meetings or conversations with the
    debt issuer. If the data are confidential, Moodys strictly observes
    this.

    Rating outlooks: These are opinions regarding the likely direction of an issuers rating over the medium term. Rating outlooks fall into the following four categories: Positive, Negative,
    Stable, and Developing (Contingent upon an event),
    Rating review/watchlist: A credit is placed on the watchlist
    when it is on review for possible upgrade, or on review for
    possible downgrade, or (more rarely) on review with direction
    uncertain. Moodys will attempt to conclude a formal review
    within 90 days.

    How long has the rating system been in use?


    John Moody introduced ratings to the U.S. bond market in 1909
    when he published the first debt ratings in his Manual of Railroad
    Securities.

    How does the probability of default change as one moves


    down the rating scale?
    The historic default rate for Aaa-rated obligors is negligible, across
    all horizons. As one moves down the rating scale, default risk rises.
    Obligors rated in the lowest rating categories may in fact be in
    default.

    What is Moodys rating scale?


    The rating scale, running from a high of Aaa to a low of C,
    comprises 21 notches. It is divided into two sections, investment
    grade and speculative grade. The lowest investment-grade rating is
    Baa3. The highest speculative-grade rating is Ba1.

    Long-term Debt Ratings


    (maturities of one year or greater)
    INVESTMENT GRADE

    Aaa highest rating, representing minimum credit risk


    Aa1, Aa2, Aa3 high-grade
    A1, A2, A3 upper-medium grade
    Baa1, Baa2, Baa3 medium grade

    SPECUL ATIVE GRADE

    Ba1, Ba2, Ba3 speculative elements


    B1, B2, B3 subject to high credit risk
    Caa1, Caa2, Caa3 bonds of poor standing
    Ca highly speculative, or near default
    C lowest rating, bonds typically in default, little prospect for recovery of principal or interest

    Short-Term Debt Ratings


    (maturities of less than one year)

    Prime-1 (highest quality)


    Prime-2
    Prime-3
    Not Prime

    For more information, please contact your sales representative or call:


    EMEA
    +44-20-7772-5454
    [email protected]

    ASIA-PACIFIC
    +852-3551-30773
    [email protected]

    JAPAN
    +81-3-5408-4100
    [email protected]

    SP9108

    AMERICAS
    +1.212.553.1653
    [email protected]

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