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Credit Rating Agency
(CRA)
Agenda
1. What is a credit rating agency
2. The history
3. Why we need ratings
4. What are they rating
5. Rating process
6...
Government/Company InvestorsSafe
Financial System
1
Fatih Aydogdu – Cengizhan Bolat
What is a credit rating agency ?
• A Credit Rating Agency (CRA) is a company that assigns credit ratings for
issuers. The ...
The History
– Businesses were close to the customer and those who purchased
– Trading distances increased
– Everybody knew...
The History
–The today's rating agencies were established in the wake of the financial crisis
of 1837
– These agencies rat...
Why we need ratings ?
- Security of the international financial system
- Security of the lender / investor
- Security of t...
For whom ?
Investors:
• Low cost information
• Quick investment decision
• Independent investment decision
• Investor prot...
What are they rating ?
The rating agency offers its rating services to a wide range of issuers including:
– Companies – St...
Rating Process
Start
•Start with the request of the prospective issuer
•Receipt of information as may be available with su...
Methodology
Credit Rating
Methodology
Business Risk
Profile Analysis
Financial Risk
Profile Analysis
9
Fatih Aydogdu – Cen...
Business Risk
Business
Risk
Industry
Factors
Country
Risk
Company
Position
Profit-
ability
Country Risk:
• Political
• Eco...
Financial Risk
Financial
Risk
Governance
Risk
Account-
ing
CashFlow
Adequac
y
Liquidity
Accounting:
• Accounting Regime
• ...
Impact of Rating
• Increase/Decrease risk of Company
• Reduce/Raise cost of money
• Access to Investors/Markets
• Possibil...
The Market
The market for credit rating is a highly concentrated
industry
The two main actors in this business are Moody`s...
Big Three
40% 40% 15%
95% market
shares
14
Fatih Aydogdu – Cengizhan Bolat
Big Three
1. Standard & Poor`s
• Revenue: $2.61 billion
• 1.2 million outstanding ratings
• 1,416 analysts and supervisors...
Rating – Scale
Prime S & P Moody`s Fitch
High grade
A A A
A A +
A A
A A -
A a a
A a 1
A a 2
A a 3
A A A
A A +
A A
A A -
Up...
Critic on credit rating agencies ?
The decisions are made by rating committees, not individual analysts, and that
analysts...
Thank you for your attention !
Fatih Aydogdu – Cengizhan Bolat
References
• http://lexicon.ft.com/Term?term=rating-agencies
• http://en.wikipedia.org/wiki/Credit_rating_agency
• http://...
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Credit Rating Agency (CRA)

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Credit Rating Agencies CRA

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Credit Rating Agency (CRA)

  1. 1. Credit Rating Agency (CRA)
  2. 2. Agenda 1. What is a credit rating agency 2. The history 3. Why we need ratings 4. What are they rating 5. Rating process 6. Impact of rating 7. The market 8. Critic 9. References Fatih Aydogdu – Cengizhan Bolat
  3. 3. Government/Company InvestorsSafe Financial System 1 Fatih Aydogdu – Cengizhan Bolat
  4. 4. What is a credit rating agency ? • A Credit Rating Agency (CRA) is a company that assigns credit ratings for issuers. The CRA rates a debtor's ability to pay back debt How they do this ? by making timely interest payments and the likelihood of default The independence and professional approach of the agency ensure reliable, consistent and unbiased ratings= 2 Fatih Aydogdu – Cengizhan Bolat
  5. 5. The History – Businesses were close to the customer and those who purchased – Trading distances increased – Everybody knews their customers personally – Merchants no longer personally knew their customers – Business owners hesitate to extend credit to new customers The birth of the credit reporting industry 3 Fatih Aydogdu – Cengizhan Bolat
  6. 6. The History –The today's rating agencies were established in the wake of the financial crisis of 1837 – These agencies rated the ability of merchants to pay their debts and consolidated these ratings in published guides – Financial analyst John Moody issued the first publication in 1909 – Few years later the Big three CRA established S & P in 1922 and Fitch in 1924 4 Fatih Aydogdu – Cengizhan Bolat
  7. 7. Why we need ratings ? - Security of the international financial system - Security of the lender / investor - Security of the customers of a financial institution A credit rating facilitates the trading of securities on a secondary market. It affects the interest rate that a security pays out, with higher ratings leading to lower interest rates. 5 Fatih Aydogdu – Cengizhan Bolat
  8. 8. For whom ? Investors: • Low cost information • Quick investment decision • Independent investment decision • Investor protection • Forewarns risk Borrowers: • Sources of additional certification • Increase the investor population • Rating as a marketing tool • Low cost of borrowing • Foreign collaborations made easy 6 Fatih Aydogdu – Cengizhan Bolat
  9. 9. What are they rating ? The rating agency offers its rating services to a wide range of issuers including: – Companies – State and local goverments – Special purpose entities – Non-profit organizations – Banks and financial institutions The debt instruments rated by CRAs include: – Government bonds – CDOs – Corporate bonds – Mortgage-backed securities – Preferred stock – Collateralized securities The rating is based on an objective analysis of the information and clarifications obtained from the business entity 7 Fatih Aydogdu – Cengizhan Bolat
  10. 10. Rating Process Start •Start with the request of the prospective issuer •Receipt of information as may be available with such issuer •A team of analysts takes up the work of collection of data and information from the books and records of the concern •Search for other information from in-house research and database and other secondary sources which considered as reliable by the rating agency. •Process data and analyze End •Present a rating report of key rating issues Strict secret of the information 8 Fatih Aydogdu – Cengizhan Bolat
  11. 11. Methodology Credit Rating Methodology Business Risk Profile Analysis Financial Risk Profile Analysis 9 Fatih Aydogdu – Cengizhan Bolat
  12. 12. Business Risk Business Risk Industry Factors Country Risk Company Position Profit- ability Country Risk: • Political • Economic • Industry – Specific factors • Foreign exchange Profitability: • Trends • Quality of Earnings • Analytical adjustments • Peer Group Comparisons Company Position: • Market position • Keys to Success • Size • Diversification • Management Industry Factors: • Industry Trends • Industry Structure • Market Size • Growth Potential • Competition 10 Fatih Aydogdu – Cengizhan Bolat
  13. 13. Financial Risk Financial Risk Governance Risk Account- ing CashFlow Adequac y Liquidity Accounting: • Accounting Regime • Reporting & Disclosure • Analytical adjustments Liquidity: • Operating liquidity • Debt Characteristics • Bank credit facilities CashFlow Adequacy: • Focus on debt • Analytical distinctions with profitability • CashFlow ratios Governance Risk: • Ownership • Board of directors • Management practices • Financial Strategy • Risk Tolerance • Internal controls 11 Fatih Aydogdu – Cengizhan Bolat
  14. 14. Impact of Rating • Increase/Decrease risk of Company • Reduce/Raise cost of money • Access to Investors/Markets • Possibility to invest/fund in Countries • Strengthens/weakens of the image 12 Fatih Aydogdu – Cengizhan Bolat
  15. 15. The Market The market for credit rating is a highly concentrated industry The two main actors in this business are Moody`s and Standard & Poor`s (S&P) which controlling approximately 80% of the rating business 13 Fatih Aydogdu – Cengizhan Bolat
  16. 16. Big Three 40% 40% 15% 95% market shares 14 Fatih Aydogdu – Cengizhan Bolat
  17. 17. Big Three 1. Standard & Poor`s • Revenue: $2.61 billion • 1.2 million outstanding ratings • 1,416 analysts and supervisors 2. Moody`s • Revenue: $2.1 billion • 1 million outstanding ratings • 1,252 analysts and supervisors 3. Fitch • Revenue: $732.5 Million • 350,000 outstanding ratings • 480 analysts and supervisors 15 Fatih Aydogdu – Cengizhan Bolat
  18. 18. Rating – Scale Prime S & P Moody`s Fitch High grade A A A A A + A A A A - A a a A a 1 A a 2 A a 3 A A A A A + A A A A - Upper medium grade A + A A - A 1 A 2 A 3 A + A A - Lower medium grade B B B + B B B B B B - B a a 1 B a a 2 B a a 3 B B B + B B B B B B - Non-investment grade speculative B B + B B B B - B a 1 B a 2 B a 3 B B + B B B B - Highly speculative B + B B - B 1 B 2 B 3 B + B B - Substantial risk C C C + C a a 1 C C C Extremely speculative C C C C a a 2 C C C In default with little prospect for recovery C C C - C C C C a a 3 C a C a C C C C C C C C C In default D D D C / / D D D D D D 16
  19. 19. Critic on credit rating agencies ? The decisions are made by rating committees, not individual analysts, and that analysts are not compensated based on their ratings. Investors might pressure rating agencies for lower ratings because the securities, if deemed riskier, would pay higher yields. Issuers needed certain ratings in order to sell their bonds to regulated financial institutions Raters found issuers more willing to pay for the ratings than investors 17 Fatih Aydogdu – Cengizhan Bolat
  20. 20. Thank you for your attention ! Fatih Aydogdu – Cengizhan Bolat
  21. 21. References • http://lexicon.ft.com/Term?term=rating-agencies • http://en.wikipedia.org/wiki/Credit_rating_agency • http://www.standardandpoors.com/en_US/web/guest/home • http://bpb.de/ • https://www.fitchratings.com • http://www.investopedia.com/financial-edge/0911/why-you- shouldnt-trust-ratings-from-rating-agencies.aspx • https://www.moodys.com

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