Moody's Rating Definitions
Moody's
Rating Scale
Moody's Credit Ratings
Introduction
Long-Term
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Issuer
Ratings
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US
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Withdrawn
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Rated
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Indicative
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Available
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Without Rating
Rating
Outlooks
Watchlist
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of a Rating
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of a Rating
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Equivalent Ratings
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Rating (*)
Rating Methodology
Guide to Moody's Ratings, Rating Process, and Rating Practices
Understanding Moody's Corporate Bond Ratings And Rating Process
The Bond Rating Process: A Progress Report
The Bond Rating Process In A Changing Environment
The Evolving Meaning of Moody's Bond Ratings
Moody’s Rating System
in Brief
Please select from the
following options:
What is a rating?
A rating is Moody’s opinion of the ability and willingness of an issuer to make
timely payments on a debt instrument, such as a bond, over the life of that
instrument.
What
a rating is not…
Ratings are not recommendations to buy or sell, nor are they a guarantee that
default will not occur.
How
do the capital markets use ratings?
Investors use ratings to help price the credit risk of fixed-income securities
they may buy or sell. Many also use ratings as limits on their investment
parameters and as means for expanding their investment horizons to markets or
security types they do not cover by their own analysis. Because major investors
globally rely on Moody’s ratings, the ratings help to provide issuers of debt
with stable, flexible access to those sources of capital.
What
types of securities does Moody’s rate?
Any type of debt or related obligation of interest to institutional investors,
e.g., bonds, debentures, asset-backed and mortgage-backed securities,
convertible bonds, medium-term notes, derivative securities, etc. Moody’s does
not rate stocks, i.e. equities.
What
do credit ratings measure?
Ratings are a forecast or indicator of the potential for credit loss due to a failure
to make payment, delay in payment, or partial payment to the investor. Credit
loss is the difference between what the issuer has promised to pay and what is
actually received. Moody’s ratings measure total credit loss – including both
the probability an issuer will default and the expected severity of loss after
a default occurs.
What
is Moody’s rating process?
The rating process:
- gathers information sufficient to evaluate risk to
investors who might own or buy a given security,
- develops a conclusion in committee on the appropriate
rating,
- monitors on an ongoing basis to determine whether the
rating should be changed, and
- informs the marketplace and market participants of
Moody’s actions.
How
does a Moody’s rating committee work?
Moody’s ratings are initially determined or subsequently changed through
committee. The lead analyst for a given company, industry, country or asset
type frames the discussion, including offering the rating recommendation and
its rationale.
At minimum, the committee
includes a managing director or other designated individual and the lead
analyst. The committee may be expanded to include as many perspectives and
disciplines as are needed to address all analytical issues relevant to the
issuer and the security being rated.
Issues affecting the size
of the committee may include the size of the issuer, complexity of the
security, geography or whether a transaction of this type has ever been done
before. The discussions of the committees are strictly confidential, and only
Moody’s analysts may serve on them.
What
sources of information do analysts use?
Publicly available data,
e.g., annual reports.
- Prospectuses, offering circulars, offering memoranda,
trust deeds, or indentures of particular securities.
- Market data, e.g., stock price trends, trading volume,
data on bond price spreads.
- Economic data from industry groups, associations or
bodies, such as the World Bank.
- Data from agencies, such as central banks, ministries,
or regulators.
- Books or articles from academic sources, financial
journals, news reports.
- Discussions with expert sources in industry,
government, or academia.
- Data that may come from meetings or conversations with
the debt issuer. If the data are confidential, Moody’s strictly observes
this.
How long
has the rating system been in use?
John Moody introduced ratings to the U.S. bond market in 1909 when he published
the first debt ratings in his Manual of Railroad Securities.
How
does the probability of default change as one moves down the rating scale?
The historic default rate for Aaa-rated securities is very low. The average
default rate from 1970- 2000 for Aaa-rated securities over a 10-year period was
only 0.67%, well under 1%. However, as one descends the rating scale into the
speculative-grade section, the default rate increases dramatically. For B-rated
securities, the 10-year probability of default is 44.57%.
Important
definitions pertaining to the rating process:
- Rating outlooks: A Moody's rating outlook is an
opinion regarding the likely direction of an issuer's rating over the
medium term. Rating outlooks fall into the following four categories:
Positive, Negative, Stable, and Developing (Contingent upon an event). In
the few instances where an issuer has multiple outlooks of differing directions,
Moody's written research will describe any differences in the outlooks for
the issuer and the reasons for these differences. If no outlook is
present, the following designations will be used: Rating(s) Under Review
or No Outlook. Rating(s) Under Review indicates that the issuer has one or
more ratings under review for possible change, and thus over-rides the
Outlook designation. If an analyst has not yet assigned an Outlook, then
No Outlook will be displayed.
- Rating review/watchlist: A credit is placed on the
watchlist when it is on review for possible upgrade, or on review for
possible downgrade, or (more rarely) on review with direction uncertain.
Moody's will attempt to conclude a formal review within 60 days.
- Confirmation of a rating: A confirmation occurs following
a formal rating review when it is decided that the rating will not change.
Rating confirmations are formally entered in Moody's databases and rating
action lists (rating release sheets), and are communicated via a press
release.
- Affirmation of a rating: An affirmation of a rating
occurs when no review has taken place and does not involve an entry in a
database or rating action lists. Affirmations are also communicated
through a press release and may occur:
• following an annual review
• following the release of new information by the company
• following a major market event (such as regulatory changes, a major
acquisition, and/or market turbulence, etc.)
There may also be other special situations in which ratings are affirmed.
What
is Moody’s rating scale?
The rating scale, running from a high of Aaa to a low of C, comprises 21
notches. It is divided into two sections, investment grade and speculative
grade. The lowest investment-grade rating is Baa3. The highest
speculative-grade rating is Ba1.
Long-Term Debt Ratings (maturities of one year or more):
- Investment Grade
Aaa – “gilt edged”
Aa1, Aa2, Aa3 – high-grade
A1, A2, A3 – upper-medium grade
Baa1, Baa2, Baa3 – medium grade
- Speculative Grade
Ba1, Ba2, Ba3 – speculative elements
B1, B2, B3 – lack characteristics of a desirable investment
Caa1, Caa2, Caa3 – bonds of poor standing
Ca – highly speculative
C – lowest rating, extremely poor prospects of attaining any real
investment standing
Short-Term Debt Ratings (maturities of less than one year):
Prime-1 (highest quality)
Prime-2
Prime-3
Not Prime (can be thought of as speculative grade)