Credit Rating Agencies

Overview: Rating agencies assess the financial strength of companies and governmental entities, both domestic and foreign, particularly their ability to meet the interest and principal payments on their bonds and other debt. Rating agencies also carefully study the terms and conditions of each specific debt issue. The rating for a given debt issue reflects the agency's degree of confidence that the borrower will be able to meet its promised payments of interest and principal as scheduled. The rating for a given debt issue may differ somewhat from the overall credit rating for the issuer, depending on its specific terms.

Impact: Debt issues with the highest credit ratings from the agencies will incur the lowest interest rates. Investors' confidence in borrowers' ability to meet their payment obligations is highly influenced by the rating agencies' analyses. Meanwhile, the interest rate demanded by investors on a given debt issue is inversely correlated with the creditworthiness of the borrower: stronger borrowers pay less, weaker borrowers pay more.

Analogy: The credit rating agencies perform similar work to consumer credit bureaus. The credit scores that the latter produce for individuals similarly influence the rates of interest at which individuals may borrow.

Career opportunities: Working as an analyst at a rating agency is one way to pursue a career in securities research. The larger rating agencies tend to have large numbers of entry-level openings and internships, so that they can monitor the vast number of debt securities on the market. They thus help train a large number of people who eventually work elsewhere in the financial services industry, in a similar capacity.

Negatives: Rating agencies have received mounting criticism in recent years for the quality of their research. Many observers claim that they are poor financial forecasters, too slow to spot negative trends in the issuers that they track, and too late to revise their ratings. There also are conflicts of interest because issuers select and pay the rating agencies for their bonds. In a 2008 survey of investment professionals by the CFA Institute, 11% of respondents claim to have seen rating agencies upgrading bond ratings under pressure from issuers. Meanwhile, a 2003 Federal Reserve study acknowledged the conflicts but concluded that there were only minor distortions, finding that rating agencies place considerably more value on guarding their reputations than on satisfying clients.

Leading firms: The leading firms in this sector are:

Standard and Poor's (also commonly called S&P)
Moody's
Fitch
A.M. Best

Combined, Standard & Poor's and Moody's rate about 80% of all corporate and municipal (state and local government) bond issues. They are generally seen as a head above Fitch(14%). A.M. Best is small, but a respected specialist in rating insurance companies since 1899.

List of credit rating agencies

A. M. Best (U.S.)
Baycorp Advantage (Australia)
Credo line (UA)
Dagong Global (People's Republic of China)
Dominion Bond Rating Service (Canada)
Egan-Jones Rating Company (U.S.)
Fitch Ratings (Dual-headquartered U.S./UK)
Japan Credit Rating Agency, Ltd. (Japan)[29]
Moody's Investors Service (U.S.)
Muros Ratings[30] (Russia alternative rating agency)
Standard & Poor's (U.S.)

There are no notable European CRAs.

Credit Rating Agencies in India

  Credit Rating Information Services of India Limited (CRISIL)

Investment Information and Credit Rating Agency of India (ICRA)

 Credit Analysis & Research Limited (CARE)

Duff & Phelps Credit Rating India Private Ltd. (DCR India)

ONICRA CREDIT RATING AGENCY OF INDIA LIMITED.