37. Rating agencies and their role in the global financial market. Рейтинговые агентства и их роль и значение на глобальном финансовом рынке.

A credit rating agency (CRA) is a company that assigns credit ratings for issuers of certain types of debt obligations as well as the debt instruments themselves.

In most cases, the issuers of securities are companies, special purpose entities, state and local governments, non-profit organizations, or national governments issuing debt-like securities (i.e., bonds) that can be traded on a secondary market. Debt securities are issued in order to raise capital either for further investments, or to pay existing debt.

A credit rating for an issuer takes into consideration the issuer's credit worthiness (i.e., its ability to pay back a loan), and affects the interest rate applied to the particular security being issued (low CR=high IRs).

Bonds and other debts are rated by rating agencies. The three leading rating agencies are Standard and Poor's, Moody's Investor Service (40% m’t share) and Fitch Ratings (14%). Rating agencies issue ratings on a scale from the best quality credit to the lowest. Moody’s & Fitch rating scales are similar (1 to 3 letters with +/-), S&P uses combination of letters with digits (e.g. Baa3). Moody’s & Fitch speculative grade starts from BB+, S&P’s one – Ba1. Default by M.,F. - CCC+, S&P – Caa1. The issuer has to pay a fee to the rating agency for conducting the necessary analysis for issuing a rating. This is the primary criticism of RAs as it raises the potential conflict of interest. Another criticism of the CRAs is that FED and SEC had eliminated competition between CRAs and practically forced market participants to use the services of the three big agencies.

Steps in evaluation of CR: 1. estimation of CF for debt service PMTs 2. Estimation of total expected RV over the project’s life. 1 compared versus 2.

Role: Credit ratings are important because they affect the cost of borrowing, i.e., the interest rate that the issuer will pay the investor for buying the bonds. Issuers with good credit ratings are able borrow at low cost (i.e., they pay low interest rates). As a result, bonds with good ratings will have low interests and low yields for investors. The higher the yield, the higher the risk of non-repayment, the lower the CR is.

The value of such security ratings has been widely questioned after the 2007–09 financial crisis. It is supposed that some of the big 3 CRAs were paid to maintain high CRs of corporations, which were not solvent anymore. As a result, investors relied on fake CRs, which are generally termed as an important indicator of company’s financial condition, hence, lost their investments. More recently, ratings downgrades during the European sovereign debt crisis of 2010–11.

No debt security or debt-like instrument can be issued without the credit rating. Credit rating is a necessary tool for main buyers of debt securities – pension funds.