Bond rating

Credit rating agencies registered as such at the US Securities and Exchange Commission are called “Nationally Recognized Statistical Rating Organizations” (NPSRO). These include, in particular:

• AM Best Company, Inc.
• DBRS Ltd.
• Egan-Jones Rating Company
• Fitch, Inc.
• Japan Credit Rating Agency, Ltd.
• LACE Financial Corp.
• Moody's Investors Service, Inc.
• Rating and Investment Information, Inc.
• Standard & Poor's Ratings Services.

According to the law on credit rating agencies in the USA, NPSRO can create 5 types of credit ratings:

1. Rating of financial institutions, brokers and dealers
2. Ratings of insurance companies;
3. Ratings of corporate issuers;
4. Ratings of issuers of bonds providing them with assets or securities;
5. Ratings of government securities, municipal securities, or securities issued by foreign governments

The rating agencies S & P, Moody's and Fitch both dominate the market, occupying 90–95 percent of the world market.

Moody 's assigns credit ratings of Aaa, Aa, Baa, Ba, B, Saa, Ca, C, WR to the bonds - withdrawn from sale and NR - to those whose evaluation was not carried out. ^[1] Standard & Poor's and Fitch denote credit ratings by letter combinations AAA, AA, A, BBB, BB, B, CCC, CC, C, D.

As of April 2011, there were 4 companies that received an AAA rating from S & P: ^[2]

• Automatic Data Processing (NYSE: ADP)
• Johnson & Johnson (NYSE: JNJ)
• Microsoft (NASDAQ: MSFT)
• ExxonMobil (NYSE: XOM)

Moody's, S & P and Fitch also assign intermediate ratings at levels between AA and CCC (for example, BBB +, BBB and BBB-), and can also express an opinion on whether the rating will rise, decrease or remain stable.

Bonds are considered investment grade if their credit rating is BBB- and higher by Standard & Poor's , Baa3 and higher by Moody's or BBB (low) or higher by DBRS rating. Usually they are bonds of those issuers that, according to rating agencies, have sufficient funds to meet payment obligations, which means that banks can invest in them.

Ratings play a crucial role in determining how much companies and other entities, including sovereign debt issuing governments, must pay in order to get access to loans, that is, what percentage they must pay for the issued bond.

Bonds that are not investment grade bonds are known as “high yield” bonds or more mockingly, like “junk bonds”.

The risks associated with investment grade corporate bonds are considered to be noticeably higher than in the case of first-class government bonds. The difference between the rates of first-class government bonds and investment grade corporate bonds is called investment spread . This is an indicator of market confidence in the stability of the economy. The higher the investment spread, the weaker the economy.

Until the early 1970s, ratings were compiled by rating agencies by investors who wanted to receive objective information about the solvency of issuers of securities. Since the early 1970s, the “big three” rating agencies (S & P, Moody, and Fitch) began to receive payment for their work from issuers of securities for which they constitute ratings, which led to allegations that these rating agencies may not always be impartial in compiling ratings for such issuers of securities. The issuers of securities were charged with bribes for the best ratings from these three rating agencies, in order to attract investors. This practice is cited as one of the main causes of the mortgage crisis (which began in 2007), when some securities, in particular mortgage-backed securities (MBSs) and secured debt (CDO), were highly appreciated by credit rating agencies, as a result of which was actively invested by many organizations and individuals, but later they quickly and significantly lost their value due to defaults. There is still no information about who introduced this rating system.

• Credit risk
• Default
• Yield to maturity
• List of countries by credit rating

• "What is A Corporate Credit Rating?" , Investopedia.com
• "As company priorities shift, fewer get AAA debt rating," USA Today (Mar 2005)
• “Fitch says confident in“ AAA “subprime ratings”, Reuters (Jul 2007)