Cost of Borrowing & Rating Agencies
One of Wall Streets major credit-rating agencies, Moodys Investors Services Inc., is being investigated by the U.S. Justice Department for alleged antitrust violations, according to the Journal (3/27/96, p. C1).
The investigation centers around whether Moodys pressured bond issuers to either use its services to evaluate their debt or face negative comments and lower ratings.
Bond Ratings. Credit worthiness is rated by credit-rating agencies dominated by two giants, Moodys and Standard & Poors, with a distant third, Fitch Investors Service. In effect, these companies rank others based on their chances of defaulting. Note that default does not necessarily mean failing to pay the full interest on the debt, but rather the potential for delays in payment. Once again, I am trying to stress that in valuing assets not only the amount and risk of cash-flows are important, but their timing -when you actually receive the promised cash flows - play a major role in determining their value.
The highest quality rating is AAA, followed by AA, and so on. Rating below BBB is referred to as non-investment quality or junk bonds, where non-investment means that certain institutional investors are not allowed by law to invest in these bonds.
Note that U.S. government bonds are not rated as they are considered default free. Moreover, these agencies rate debt issued by corporations as well as munis - those issued by states, counties and municipalities.
Q So why should companies care about how their credit is rated?
A There are two disadvantages of lowered ratings:
Q Should individuals who have no intention of buying any of these companies bonds care about the ratings?
Note. At times, both agencies use adjustments. S&P uses "+" or "-" to indicated strength or weakness, Moody's uses 1, 2, or 3, with 1 being the highest.
By Alex Tajirian
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