Rating agencies

Rating agencies are independent companies that are dedicated to analyzing the credit quality of different issuers (both public and private entities).

Given that there are many debt issuers, this type of agency was born years ago to issue ratings based on the risk that each of the securities issued by these companies, both public and private, will be defaulted. Both considered fixed income.

The rating agencies analyze the credit quality, checking what is the credit risk of each debt security issued, and based on this issue a rating, so that investors can know the default risk of each entity without having to perform a comprehensive analysis.

In normal market situations, the lowest credit risk is that of the State, since it tends to have a higher credit quality than a company (corporate). Likewise, entities with better credit quality tend to pay a lower return than a company with worse credit quality, for the same term and the same type of asset.

The best known rating agencies are Moody's, Standard & Poor's and Fitch IBCA, and the defining characteristic of all of them is that they do not hold risk positions or interests in the markets and neither do they belong to any group that acts in them. His job is to analyze from the economic situation and the activity environment to the financial statements in detail, the risks of the company, the business and even the quality of the managers.

If a company issues a fixed income security and wants an agency to rate it, it is the issuing entity itself that has to pay for that rating. Which can sometimes cause controversy, since it could be thought that it is paid to obtain a better grade. However, this rarely happens, because otherwise it would end the business of these agencies, which is based on issuing ratings the more accurate the better. And what good will a company pay for a low rating? As a general rule, it will always be better to have a rating, even if it is low, than to have no credit rating at all.

Rating agencies play a very important role in financial markets, since through their ratings they guide investors by indicating the risk that is implicit in investing in a certain financial asset. Although it is true, that the fact of not having a qualification and wanting to finance (issue debt) in the financial markets has a disadvantage, and that is that you are going to pay a much higher interest rate.

Agency ratings

There are ratings or ratings of different terms; long-term, used for the capital market and short-term ratings used for the money market, each of the levels are detailed in the tables below.

It is worth noting the dividing line in the table of long-term ratings classifications, which separates the zone of assets with investment grade (or “investment grade”) to the zone with non-investment grade (“non investment grade”). The first assumes a high solvency of the issuer while the second a low credit quality.

Ratings are not static, they may change depending on market circumstances or the solvency of the company. So much so, that a downgrade revision, crossing the border from investment grade to non investment grade, means that most investment funds or banks that have these financial assets in their portfolio are going to sell them, causing stampedes in those assets and As is to be expected, a sharp decline in its price, which is why the lower part is considered high yield or junk bonds.