– Information is important for making quick, but also optimal decisions. Credit rating agencies are considered as an integral part of the international financial market, as one of the elements of the architecture of the financial market. It is expected that their ratings will be assisted in minimizing investment risk – for both the issuer and issued by its debt securities, and will be – in a broader sense – to support the security of trading in these securities – he says.
the scope of the agency today is also much greater than one hundred years ago when they were first ratings. The main principle, however, has not changed: it still is to assess the ability to meet liabilities. The ratings awarded so bonds of companies, but also government securities and local governments. But not only. Agencies can take a magnifying glass also insurance policies, bills, notes, preferred shares as to payment of dividends. Agents also assess non-standard derivatives operations forward or swap.
While the world today there are about 150 credit rating agencies, the market is dominated by the most influential agencies of the big three: Standard & amp; Poor’s (S & amp; P), Fitch and Moody’s. Since their verdicts depend not only banks and businesses, but the entire economy – despite the mishaps, agencies have been classified on the occasion of the biggest crises of the last 20-30 years.
– The sources of this strong position several . Long story, developed through years of competitive position, the international scope of operations, the experience of these agencies – says Ewa Radom. The strength of the Big Three is so high that investors virtually ignoring the assessment of less recognizable agency. Example: on the eve of the collapse of Lehman Brothers, investors were guided by the big three ratings that characterized the position of the bank as a very stable. They did not notice or ignore rating agency Egan-Jones of Philadelphia, which gave the bank an assessment of CCC talking about the high risk of default.
– Another source of the strong position of these agencies is the introduction in the United States by the Securities Commission securities and Exchange Commission SEC regulations granting final status of US credit rating agencies, which NRSRO – Nationally Recognized Statistical Rating Organization – those companies that have been registered with the SEC. This adjustment somewhat forced market participants to use the services of these agencies. The list NRSRO is currently 10 credit rating agencies, outside the big three are still: A.M. Best Company, DBRS, Egan-Jones Rating, HR Ratings de Mexico, Japan Credit Rating Agency, Kroll Bond Rating Agency, Morningstar Credit Ratings – lists of Radom.
The strong position of the Big Three is sanctioned in other countries. Our interlocutor gives the example of Germany: in accordance with local regulations government securities bought by pension funds or insurance companies must have at least a BBB rating from rating agency Standard & amp; Poor’s, Fitch or comparable Baa3 from Moody’s. These regulations were introduced in Germany in order to ensure the protection of clients funds and insurers. Downgrading it for fund managers alarm signal, which causes the sale of bonds. What often has side effects: on the basis of herd behavior to insurers and pension funds join other investors.
Professor Joanna Żabińska from the University of Economics in Katowice adds that oligopoly largest credit rating agencies in the world strengthened or regulations of the new capital in 2004. – the so-called. Basel II. It was in them that supervisors in their assessments of supervised entities should be guided by external ratings.
– In this way, the commercial entities given enormous power. What is so important that most of the market is controlled agencies of the United States. In Europe, there were no such institutions, and this is because the capital market has developed more slowly than in the US and there was no need – said prof. Żabińska. It is estimated that the S & amp; P is about 40 percent. participation, like Moody’s. Fitch has about 15 percent. And the remaining 5 percent. falls on the rest of the agency.
Earning ratings
The biggest rating agencies are commercial companies. Their income is the fees awarded to the assessment. Once they paid by investors buying newsletters. Often they purchased for this purpose a special subscription (subscription) and earned the agencies. Their structure more like publishing mixed with news agencies.
– Based on a model in which subscription fees account for the majority of revenues, continue to operate mainly smaller rating agencies. This model is rated as one that lets you publish an opinion to a lesser extent based on a conflict of interest. While it may happen, however, that a single subscriber will have a significant share in the revenue agency, which in turn may feel obliged to publish reviews to help him make the investment decision – says Dr. Radom.
the model adopted by most large and medium-sized rating agencies (including the Standard & amp; Poor’s, Fitch, Moody’s, Japan Credit Ratings, R & amp; I, AM Best) is the “issuer pays”. – The main source of the Agency’s revenue comes from fees paid by the issuers themselves. The rating agencies justify the adoption of this model that today increased the scope and complexity of capital markets. We need specialists, complex econometric software, which costs – says an economist.
How much? The cost of evaluating a credit rating agency is usually a certain percentage of the value of the securities issue. It is also taken into account the situation of the issuer of the financial market. Is set as the minimum fee.
– Standard cost of granting the rating of the bond is about 0.03 percent. their value, but not less than 25 thousand. dollars. In addition, the issuer bears a fixed annual fee for supervision by the agency, the so-called. constant monitoring of the situation of the issuer. In this model – in comparison with the model based on the subscriber – there is a greater possibility of a conflict of interests – says Dr. Radom.
– When discussed the establishment of a European rating agency, fell proposals that it had form the foundation. Then its activity would not be dependent on the income from the ratings because it always raises the risk that the rating is biased, drawn by the issuer that, after paying. The Foundation would be funded by contributions and the rating could be more objective – Professor adds. Joanna Żabińska.
Przegapiony crisis
According to our interlocutors major agencies have failed in the last major crises.
– did not foresee nor the Mexican crisis of the mid-90s, or the Asian crisis, or Russian. Not to mention the fact that a very long maintained high ratings during the recent global crisis, eg. For Greece or Portugal or Ireland – calculates prof. Żabińska.
– Are ratings are able to predict the future development of the risk and return associated with the activity of the issuer regarding the possibility of servicing liabilities? They are unable to predict. Rating is an assessment at a particular time. The issuer’s situation can change quickly – adds Ewa Radom. And he notes that while investors are aware of this fact, it is in the minds of many market participants assess the credit rating agencies are offset by the potential danger of making a wrong decision.
Another type of charges against the rating agencies is their “Americanism”. The fact that Europe does not have its own institutions, and the cards in the field distribute the Americans, became the reason for the increasingly shrill voices that you have to take the big three in the scores. In 2009. The European Parliament issued a regulation, which was to regulate the activities of credit rating agencies to protect investors and European financial markets against the risk of abuse. This was to ensure the independence and integrity of the process of the evaluation, and improve the quality of the ratings. The most important decision: to be able to issue credit ratings in the EU, it was necessary to register with the European Supervisory Authority Securities and Markets Authority (ESMA).
To be able to register, it was necessary and fill several conditions including establish a timetable for publishing ratings of EU countries (the ratings were to be revised at least every six months), publishing ratings would be held after the closing of EU securities markets and at least one hour prior to their re-opening (hence the rating of Moody’s, which will be published on Friday evening) . The regulation assumed that the rating agency may be held liable for infringements of the Regulation, whether intentionally or through gross negligence, through which an investor or issuer suffered damage.
Importantly, investors and EU countries were to receive information on the facts and assumptions on which is based on each rating.
– for a long time the agencies do not want to talk about the methodology used when creating assessments. After 2008. Some European governments demanded its disclosure – like prof. Żabińska.
This, however, did not stop criticism of the agency. When in 2010 and 2011. They started to abruptly lower the assessment of member states of the EU, thereby aggravating the debt crisis, agencies were pilloried criticism, and participated in by leaders such as Jose Manuel Barroso (then head of the European Commission) and German Chancellor Angela Merkel. EU Commissioner of Justice Viviane Reding has publicly demanded the division of the big three, calling it a cartel.
– There were ideas that based companies such as Euler Hermes in Germany and the French Coface – major players in the industry economic information, with experience in the assessment of export credits – to create rating institutions. Indeed, Euler Hermes was probably the first agency that registered in the Authority. But so far strictly European rating agency is not established – said prof. Żabińska.
FINANSOPEDIA
● The rating agency is an institution dedicated to analyzing the ability of entities to settle its obligations. Market rating agencies is dominated by the Big Three, three US agencies: Standard & amp; Poor’s, Moody’s Investors Service and Fitch Ratings. Agents of the big three are commercial companies, their revenues come from fees paid by issuers. What is the scale of the action, show information about the S & amp; P – only in 2014. Analysts of the agency assessed the debt worth more than 4.3 trillion dollars. Revenues Moody’s Group, the parent company of Moody’s Investors Service in 2015. Amounted to 3.5 billion dollars.
● Rating – synthetic credit rating. The ratings can be divided into three categories: investment, speculative and high risk of default. Another division is the rating of long- and short-term debt or for the local and foreign currency. For foreign investors is the most important long-term rating for foreign currency debt granted to the issuer (and not the specific bonds sold by it), because she best describes the level of risk of investing in the country. The preparation of the rating is not discretionary: the biggest rating agencies use models called. quantitative analysis. Standard & amp; Poor’s take for example. Into account five key factors: the effectiveness of institutions, structure of the economy and growth prospects, external liquidity position with foreign investment, the state of public finances and monetary flexibility. Each is assigned a certain number of points from 1 to 6 – 1 point is the highest rating, and 6 is the lowest. The system is clearly defined – to get a given number of points, you must meet clearly defined conditions. The Moody’s rating on the country consists of the assessment of its financial strength and susceptibility to event risk. Financial strength is above all the flexibility of the economy, in which the institutions are one of the most important factors. When measuring the resistance of risky events Moody’s evaluates, among other political risk.
● The outlook (outlook) – along with granting credit rating agency also gives her perspective, which determines the direction of the potential change. The prospect may be negative (this means that a rating may be lowered at the next revision), stable or positive (rating may be raised). Often reviewing the agency does not change once the main assessment, and changes the perspective, eg. From stable to negative – which is a signal that the characteristics of any of the factors taken into account in determining the rating deteriorated. But this is not a hard rule: the grant of positive prospects for the rating does not guarantee to keep it at the next review, the rating may be lowered without first changing perspective (and vice versa: negative outlook does not mean that the rating may be raised).
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