For the exclusive use of B. Zhang, 2015.

9-104-060
REV: MARCH 28, 2005

DAVID F. HAWKINS

Bond Ratings

1

The two major bond-rating services are Moody’s Investors Service, Inc., and Standard & Poor’s
Corporation. These two companies rate public and private corporate bond issues, commercial paper, preferred stock, and some large debt offerings of foreign companies and governments. Other rating agencies are Duff and Phelps, and Fitch’s.
The information provided by the rating agencies is one of the factors that the marketplace uses to determine the appropriate yield on debt securities. Since many institutional investors can only own bonds above a certain rating, the rating also determines who will or will not buy the issue. A bond rating may also influence the value of a company’s common equity, since some common stock rating services take bond ratings into account when they rate stocks.
A committee of the rating agency is responsible for ratings. Initially, in the case of corporate bonds, the company seeking a rating for a new issue makes a presentation to the rating agency.
Based on these and other data, such as company visits, a bond analyst employed by the rating agency prepares a report on the company that measures the probability of trouble or loss for the investor, especially from default and poor marketability of the bonds. In this report, the analyst assesses the likelihood of earnings declining or turning negative, the likelihood of a company’s survival during a recession, and the likelihood that the issuer will be able to repay the principal borrowed and pay the interest owed at the times agreed upon. The analyst may suggest a rating to the rating committee.
The rating agencies charge a fee for ratings requested by companies. Many companies contract with the agencies to do a preliminary rating and then, depending on what it is,