Three Credit Rating Agencies

A credit rating agency gathers and analyzes information that individual or institutional investors use to assess the issuer of a debt obligation or securities will honor them at the due date. There are three major credit rating organizations in the United States: Moodys, Standard & Poors and Fitch.

The Ratings

Fitch introduced an AAA through to D credit rating system in 1924. Standard & Poors has since adopted the same system. The AAA grade represents the highest credit score, followed by AA and A through to D. Moodys uses a different system which starts with Aaa as the highest rating. The Aa1, Aa2 and Aa3 and A1, A2, A3 are grades given to companies with low credit risks in the immediate future, but susceptible to long-term risks. The Baa1, Baa2 and Baa3 ratings are for institutions deemed relatively risky. All these categories under Moodys system are considered investment grades. Non-investment grades start from, Ba1, Ba2, Ba3, then B1, B2, B3. The C grades are assigned to institutions already in default. All three agencies also give an intermediate between AA and B. For example, a country with a fairly troubled financial history seeking to issue international bonds could be assigned a B+.

Risk Assessment

All three crediting rating companies provide risk assessment and research data on both private and public institutions that issue debt and fixed-income securities. In June 2010, for example, Moodys relegated the Greek government bond rating to junk status because the heavily indebted country was struggling to honor its debt obligations. Other examples are in developing countries. Angola, seeking to issue international bonds amounting to $1 billion, was given a B+ rating by Standard & Poors, which means the risk involved is highly speculative. The ratings allow investors to make informed decisions about certain securities.

The Agencies

These credit rating agencies subject each other to the same scrutiny. In June 2010, for example, S&P, which has an A1 rating for Moodys, threatened to downgrade its short-term rating following legislation that could result in a change in the applicable pleading litigation brought against rating agencies. The credit rating agencies have also been criticized for failing to foresee the credit crisis and collapse of the housing market, which resulted in the global economic meltdown that began in 2008.