“One American journalist once said that if earlier it was necessary to introduce tanks, now it is enough to lower the state’s rating, and this will be almost the same blow to the country” (Pavel Samiev, deputy general director rating agency "Expert RA")

What are rating agencies?

Rating agencies are commercial organizations that evaluate the solvency, debt obligations, and other important financial indicators of issuers. They present their assessment as credit ratings, which are assigned to organizations, regions, countries depending on their creditworthiness. The main purpose of such ratings is to provide an assessment of the likelihood to potential investors/creditors that the issuer will/will not fulfill its obligations.

The most famous and authoritative rating agencies in the world are American agencies Standard & Poor's, Moody's, and Fitch Ratings. Their history goes back about 100 years. Russian ratings begin their history in the 90s and the largest are the Expert RA Rating Agency and NRA (National Rating Agency).

Agency credit ratings have a similar concept, but different designations and calculation methods. Basically the ratings are indicated in Latin letters in decreasing order of reliability level from A to C (for some agencies to D).

Rating agencies are accredited by the Ministry of Finance of the Russian Federation. In total, there are 8 officially accredited agencies in Russia, 3 foreign: Standard and Poor's, Moody's, and Fitch Ratings, one joint: "RA MOODS INTERFAX" and 4 Russian agencies: "National Rating Agency", "Expert RA", " RA "Analysis, Consulting and Marketing", "Rus-Rating".

The advantage of foreign agencies is their impartiality and greater authority. The advantage of Russian agencies is their efficiency; seeing the situation from the inside, they can react faster and change the rating Russian companies. Western agencies typically look at IFRS, which are published quarterly/annually, while Russian agencies look at some issuers' reports on a monthly basis.

How can a private investor use information from rating agencies?

It should be remembered that credit ratings are not a direct recommendation for the purchase or sale of securities. They reflect only one of the aspects necessary to make an investment decision, namely, creditworthiness. Companies with a maximum AAA rating may have problems and may default. However, if among companies with an AAA rating there will be only a few such cases, then companies with pre-default ratings will have hundreds and thousands of such cases of bankruptcy.

Rating agencies continue to have a major influence on financial markets. For example, Standard and Poor's decision to downgrade the US credit rating in August 2011 from the maximum AAA to AA+ caused panic on stock exchanges and a collapse in quotes around the world.

Follow the latest news from leading rating agencies on our website.

What an investor needs to know about rating agencies

I’ll start with the definitions of the rating agency (hereinafter, for brevity, I will write RA): what it is and what they do. These are large consulting companies that conduct a comprehensive assessment of the creditworthiness, financial stability, as well as the quality of management of public companies and entire countries (sovereign ratings), regions and large municipalities. Assessment reports are not limited to matters within a company or country. For comprehensive analysis, forecasts of macroeconomic trends, market conditions, as well as the ability of the subject being assessed are required to withstand unfavorable external factors.

International ratings

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Based on the audit results, the audited object is assigned a rating, symbols The most popular rating agencies are shown in the picture below. All ratings have the same principle: the closer to the beginning of the alphabet, the better; the fewer letters, the worse. For attractiveness great value has not only the rating itself, but also a forecast for its change: positive, stable, negative. There is also a classic rule that is worth mentioning: a company’s rating cannot be higher than the country’s sovereign rating.

Published ratings guide national and commercial investors, the International Monetary Fund, investment and private investors when making investment decisions. It is important to analyze this when placing your capital in the securities of certain issuers. The higher the rating, the lower the risk for the investor, the cost of borrowing for the issuer, and vice versa. Thus, countries in a state of bankruptcy with a rating of D - default (Greece in 2010, Argentina in 1990, etc.) were forced to issue short-term government bonds with a yield of 20-25% per annum. Such papers are ignored by serious players, but for gambling speculators there is something to profit from here, at your own peril and risk. The benefit is possible exit countries out of recession, or in improving the financial performance of an individual company. At a high fixed rate, the speculator receives excess income.

But the risk of freezing your investments for a long time, given the quality of the securities, is very high. It is extremely important to have a public rating for companies operating in the retail financial market (banks, management companies, pension funds, insurers). For them, having a high rating is often a condition for survival; large clients choose partners based on ratings, among other things.

Unfortunately, the same cannot be said about financial brokers who are not rated and do not position this advantage in any way to develop their brands. I attribute this to the fact that financial brokers in Russia are not public companies and do not raise capital on the corporate borrowing market. It is more important for them to confirm their reputation by demonstrating licenses. The exception is for brokers who are members of banking groups and post information on their website about the ratings of parent structures. Example – x, .

Otkritie-broker, on the contrary, does not use this opportunity: apparently due to the fact that FG Otkritie has a lower B+ rating from S&P. To obtain accreditation and gain a reputation in international markets, the RA must meet the following requirements:

• Independence from state and corporate institutions;
• Assessment methodology recognized by business and the international community;
• Availability of sufficient human resources to conduct a full analysis.

Now it is important for us to answer the question: why do private companies spend a lot of money on RA and deliberately expose themselves to reputational risk? After all, an audit can lead to a lower rating and a blow to competitive positions. Nevertheless, large public companies set aside budgets for RA examination, which is carried out “automatically” every year, regardless of whether the moment is favorable for the assessment or not. I will give my answer point by point so as not to miss important reasons:

• The ability to attract investments cheaper and restructure current liabilities without problems;
• Increasing the value and popularity of corporate bonds;
• Positive impact on the growth of the exchange rate when increasing the rating ;
• Prestige, customer trust, image of a transparent and open company.

RAs not only make a one-time assessment, but also constantly contact the government of the countries being assessed and the management of client companies. When ordering an assessment, economic authorities and business owners count not only on the assignment of a particular rating, but also on the expert assistance of the RA in correcting problems discovered during the study.

Big three

There are more than a hundred rating agencies in the world, but the dominant position in this business has been occupied by the so-called big three for the second century: the American Standard & Poor’s (S&P, founded in 1860), Moody’s (1900) and the Anglo-American Fitch Ratings (1913). I prefer to reject conspiracy theories of “dominance” American companies in this market and I find a more understandable explanation for this: the rating business comes from America and has great traditions there. Today the Big Three are present in more than a hundred countries around the world and collect the lion's share of orders for financial analytics. And, although their combined share is gradually falling, the three agencies own about 95% of the global market and mostly compete with each other.

In Moscow there are offices of all three agencies accredited by the Central Bank. They have the legal status of branches of foreign companies, but from July 13, 2017 they are required to switch to the format of a subsidiary with Russian jurisdiction. Russian-language websites of the Big Three agencies, where you can get acquainted with analytics and look for ratings that interest you, are here:

• S&P - spratings.com/en_US/topic/-/render/topic-detail/spotlight-on-russia-and-cis;
• Moody's - moodys.com/pages/default_ee.aspx;
• Fitch - fitchratings.com/site/russia.

In addition to multi-billion dollar contracts, the Big Three also receive numerous accusations of political bias. This is especially true for countries whose credit ratings are downgraded to a “junk” level unacceptable for investors. This happened with Greece in 2009-2012, with Russia in January 2014. “Offended” clients argue that RAs are commercial companies whose goal is profit. The RAs themselves and their lawyers insist that independent analysis can only be trusted to a private company that is not subordinate to officials and does not participate in geopolitics.

Doubts about the reliability of the analysis were also fueled in America itself in the wake of the 2007-2009 crisis, when Big Three experts did not give a timely forecast of the mortgage collapse and bankruptcy of the leading bank Lehman Brothers. They began to downgrade the ratings of banks and corporations after the fact, following the situation rather than warning it.

Moreover, employees who openly warned about the impending debt crisis were fired. The Big Three RAs were subject to severe penalties amounting to several billion dollars, which are still being paid. The result was a kind of “test of the examiners”, which benefited the entire industry. Classic methods have been revised, and the requirements for clients’ financial performance have been tightened. Today new system, which strictly regulates all financial institutions, is called Basel (after the name of the Swiss city in which the international agreement was signed).

This includes strengthening the responsibility of RAs for the ratings they assign. The biggest shift can be considered new trend, when the research is paid not by the issuer being assessed, but by an investor who is interested in analyzing this issuer.

The crisis contributed to the emergence of new players on the scene, including in Europe and Asia. Perhaps the most notable example is the Chinese national agency Dagong. China, representing the second economy in the world and being the second international creditor after the United States, declared its rights to participate in the rating process.

However, the Chinese, having a state-controlled financial system, are still mainly evaluating themselves (fortunately, volumes allow), and the same S&P, Moody’s and Fitch continue to be in demand on the international market. Disputes about the degree of objectivity of such decisions will never cease, but truly alternative companies with the same authority and qualifications have not yet appeared on the global financial market.

Import substitution in the rating services market

New prospects for domestic agencies opened in 2014, as part of the import substitution policy proclaimed by the state. Sanctions also played a role when, due to the inability to attract cheap ones from the West, domestic companies’ demand for international RA services decreased.

I began to actively write for new trends legislative framework. The main regulatory act today is the Law on the activities of credit rating agencies in the Russian Federation No. 222-FZ dated July 13, 2015, according to which all Russian players in this market are placed under the close control of the Central Bank. International rating agencies are deprived of the right to revoke ratings assigned on the national scale from Russian economic entities. Thus, national rating declared a priority in relation to the international one. Comparison table The rating scales are given below.

• S&P – BB+ positive outlook;
• Moody’s – Ba1 outlook stable;
• Fitch – BBB outlook stable.

The flip side of import substitution is the reduction in the presence international agencies in Russia. Already, most functions have been transferred to specialists in New York and London, Moscow offices are empty. This does not necessarily mean that the Big Three will leave Russia. In 2015, the same thing was said about Visa and Mastercard, but they continued to conduct their business with us. The Big Three are now actively engaged in the process of revoking national scale ratings from more than 150 Russian issuers and from the Russian Federation itself. There are many reports about this in the press, but I recommend that private investors treat this with restraint: the procedures are related to compliance with the provisions of the new law. All previously assigned international ratings will remain in effect.

Of the domestic RAs, only two are currently accredited by the Central Bank: JSC Rating Agency Expert RA raexpert.ru and JSC Analytical Credit Rating Agency (ACRA) acra-ratings.ru. Rus-Rating and the National Rating Agency (NRA) are at the stage of waiting and correcting the Central Bank’s comments. Inclusion in the register of the Central Bank is critically important for Russian RAs. Without this, they will not be able to conduct full-fledged activities. In particular, assign ratings, and they, in turn, will not receive the right to attract public money.

Conclusion

Let me summarize the final questions: how relevant are ratings when analyzing issuers? Should we trust the ratings of the Big Three, especially considering the blow to their reputation after the 2008 crisis? How should we treat the ratings assigned by Russian rating agencies, since their ratings do not have much value on the international capital market? IN general view I would answer like this:

• Ratings are certainly relevant as a source and tool comprehensive assessment companies.
• It is worth trusting, despite the ambiguity of the methods. Default can theoretically happen to a company with an AAA rating, but the likelihood of such an event occurring for an issuer from group C or D is many times higher.
• The ratings of Russian RAs need to be taken into account, because they have new legislation and demand in the new political realities on their side.
• Assessments from the Big Three agencies do not lose their value, because they have vast international experience and a reputation as recognized specialists.

Profit to everyone!

Credit ratings assigned to banks by international rating agencies allow us to judge their creditworthiness, financial stability, reliability and reputation. For ordinary consumers of financial services, these indicators will probably say little, but for credit institutions themselves, this assessment is very important; trust in the financial institution, the ability to attract borrowed funds and the conditions for obtaining loans depend on it. In general, investors will make their decisions based on ratings. And, ultimately, these financial decisions will determine the price at which banks will lend to their clients.

Among the most authoritative international rating agencies, three should be highlighted: largest companies: Moody’s Investors Service (Moody’s), Fitch Ratings and Standard & Poor’s (S&P). Each of them assigns its own ratings to banks on a national and international scale: long-term and short-term credit ratings, ratings of bank deposits, ratings of financial stability of banks, etc.

Each agency has its own rating scale, which has letter designations, usually from "AAA" to "D". In addition, the modifiers “+” and “-” or the numbers 1, 2 and 3 can be added to the letter categories if the bank falls into intermediate values. To show possible changes in the rating in the future, the agency's forecast is used. It can be: “Stable” - this means that a change in the rating is not expected in the next couple of years; “Developing” – the rating can either increase or decrease; “Negative” – the rating may be downgraded; “Positive” – a rating increase is possible.

Moody's long-term credit rating	Long-term credit rating Fitch Ratings	Long-term credit rating S&P	Symbol designation
Aaa	AAA	AAA	Debt obligations exclusively high quality, subject to minimal credit risk
Aa	A.A.	A.A.	The ability to pay off debt obligations is very high
A	A	A	Creditworthiness level is high
Baa	BBB	BBB	The level of creditworthiness is satisfactory
Ba	BB	BB	Insufficient level of creditworthiness, unfavorable economic conditions may affect solvency
B	B	B	Debt obligations are subject to high credit risk
Caa	CCC	CCC	Risk of default, debt payments depend on favorable economic conditions
Ca	CC	CC	Serious difficulties with debt payments, close to default.
C	C	C	Debt payments continue, but default is inevitable
-	-	SD	Default on certain obligations
D	D	D	Default declared

Rating assignment is a paid service. After concluding an agreement with the selected rating agency, the bank must provide the company's analysts with all the necessary information about its activities. After this, a rating meeting is organized with representatives of the management of the credit institution. Based on an assessment of all received data, the rating committee makes a decision on assigning a rating. If the client does not agree, he can appeal, providing additional information. Please note that the bank makes the decision to publish the rating at its own discretion.

Taking into account the fact that rating agencies have different approaches to assessing the factors that determine a bank’s position and have their own specifics, many credit organizations turn to several rating agencies at once. After all, the bank’s reputation in the domestic and international financial markets largely depends on this.

Investors periodically receive information from news sources that a rating agency is upgrading or downgrading the rating of an issuer, with revisions either up or down. The market reaction to this kind of news background can be quite violent. Therefore, every trader should understand what rating agencies are and what they do. In this article we will tell you about both.

The meaning of the work of rating agencies

Rating agencies, as the name suggests, establish credit ratings that characterize the level of credit risk (solvency) of both individual debt issues and issuers - individual companies. municipalities and even countries. These ratings are assigned by highly qualified analysts of rating agencies on the basis of certain mathematical models or analytical studies, which involve a certain proportion of subjective judgments based on the experience of the analysts themselves.

For issuers: having a higher rating (or having one in principle) makes it easier to enter the capital market and allows you to attract funds at a lower interest rate.
. For: ratings help to navigate the acceptability/unacceptability of a particular issuer/issue for investment cash This factor is very relevant if we take into account country specifics for international investors.
. For investment banks organizing the issue of debt securities of the issuer: the presence of a rating allows the issue to be implemented at the least cost. Moreover, many institutional investors (for example, funds) make their investments in accordance with investment declarations, which often require a rating from certain agencies.

Rating agencies are commercial organizations that receive their profit both from investors - for providing them with up-to-date information regarding the credit risk of a particular issuer / issue, and from issuers of securities to which these ratings are assigned. Moreover, ratings are not just assigned, but are also subject to revision, as a result of which the “status” of the rated may change, and this, in turn, requires the agency constant monitoring behind the issuer. It is worth noting that rating agencies (usually on a paid basis) publish for their subscribers various analytical reviews on markets of interest to investors - for example, on the credit ratings of bond issuers.

"Big Three" rating agencies

For a rating agency to be successful, investors must trust it. This requires a certain reputation, which has been accumulated over decades. Therefore, there are not many truly global and successful rating agencies in the world. The best of them form the so-called “big three”, which include S&P Global Ratings, Moody’s Investor Services and Fitch Ratings.

The history of rating agencies began with Henry Poore (founder of Standard and Poor's), publishing his research on this topic in 1860. On at the moment S&P Global Ratings operates in 28 countries. John Moody (founder of Moody's) presented his research to the world only in 1900. current moment Moody's assigns its ratings to 110 sovereign states, 11,000 corporate issuers, and 102,000 securities issues. The Fitch Ratings agency begins its history in 1913 - with the formation of the Fitch Publishing Company by John Fitch. After which the agency was formed until current state through a series of mergers. Moreover, historically, Fitch also has European roots, hence its primary specialization in Europe and Asia (compared to S&P and Moody’s).

Russia also has rating agencies - RIA Rating, Rus-Rating, National Rating Agency (NRA), AK&M PA, but the world's largest funds are less focused on the information received from these agencies. Nevertheless, the ratings of these agencies may be more adequate and specialized for Russian reality.

Rating scales

Rating agencies assign both long-term and short-term ratings. Traditionally, all ratings are somewhat similar to each other and are divided into only two categories: investment and speculative. In addition, ratings can be with a positive, negative or stable outlook. For the S&P agency, the investment category includes ratings from AAA to BBB-, and the speculative category - from BB+ to D. Moreover, the gradation of ratings from AA to CCC can be expanded by the symbols + and - with additional characteristics elements.

For Moody's, investment grade includes ratings from Aaa to Baa3, and speculative grade - from Ba1 to C.

For Fitch, investment grade includes ratings from AAA to BBB, and speculative grade - from BB to D

Conclusion

A credit rating is an independent and reliable assessment of an issuer's creditworthiness, on the basis of which market participants can make informed financial decisions. This may entail a reduction in the issuer's costs of raising borrowed funds. For those issuers that raise funds against third-party guarantees, a credit rating may reduce the cost of such a guarantee or raise funds more efficiently without purchasing a guarantee.

International rating agency Standard & Poor's (S&P) is a subsidiary of McGraw Hill Corporation engaged in analytical research financial market. Belongs to the three most influential international rating agencies. As an international rating agency, Standard & Poor's assigns short-term and long-term credit ratings.

Credit ratings can be assigned to an issuer (the national government, regional and local authorities, corporations, financial institutions, insurance companies, funds, etc.) or an individual debt obligation.

In the CIS countries, Standard & Poor's assigns ratings on an international scale (for obligations in national and foreign currencies) and on national scales created specifically for each specific country (currently for Russia and Kazakhstan).

Standard & Poor's family of indices are used by investors around the world to evaluate investment performance and as a basis for wide range financial instruments such as index funds, deposit products, futures, options and exchange traded funds (ETFs).

The credit rating of the issuer on the international scale of Standard & Poor's expresses the current opinion about the overall creditworthiness of the issuer of debt obligations, the guarantor or surety, the business partner, its ability and intention to timely and fully fulfill its debt obligations.

The credit rating of debt obligations on the international Standard & Poors scale expresses the current opinion on the credit risk of specific debt obligations (bonds, bank loans, loans, and other financial instruments).

Standard & Poor's long-term rating evaluates the issuer's ability to timely fulfill its debt obligations. Long-term ratings range from the highest category - "AAA" to the lowest - "D". Ratings in the range from "AA" to "CCC" may be supplemented with the sign " plus" (+) or "minus" (-), indicating intermediate rating categories in relation to the main categories.

A short-term rating is an assessment of the likelihood of timely repayment of obligations considered short-term in the relevant markets. Short-term ratings also have a range - from "A-1" for liabilities highest quality to "D" for the lowest quality commitments. Ratings within the A-1 category may contain a plus sign (+) to highlight stronger obligations within that category.

In addition to long-term ratings, Standard & Poor's has specific ratings for preferred stocks, money market funds, mutual bond funds, insurance company solvency, and derivatives companies.

The company conducts analysis of the capital markets of more than 110 countries.

Moodys uses two different rating systems, or scales, to rate bonds. One of them, the Moodys Global Scale, is used to assign ratings to non-financial and financial organizations, sovereign and sub-sovereign issuers, as well as structured finance securities. The global scale establishes a correspondence between various rating categories and relative levels of mathematical expectation of losses in periods of time of varying duration. The mathematical expectation of losses includes an estimate of the probability of default and the expectation of losses upon default.

According to the Moodys agency, mathematical expectation losses associated with a particular rating symbol and a particular time period should be the same for all debt obligations and issuers that are assigned a corresponding rating on a global (international) scale. All Moodys rating methodologies, rating practices and rating monitoring systems are designed to ensure consistency in rating assessments.

In addition, to meet the needs of investors, Moodys also issues National Scale Ratings in some jurisdictions, which are opinions of the relative creditworthiness of issuers and debt issues within a given country and cannot be used to match ratings. , assigned in other countries.

Fitch Ratings

Fitch Ratings is an international rating agency dedicated to providing the world's credit markets with independent and forward-looking credit ratings, research and data. Fitch Ratings employees work in 50 offices around the world and provide analysis of the capital markets of more than 150 countries.

Fitch Ratings is headquartered in New York and London and is part of the Fitch group. In addition to Fitch Ratings, the group includes Fitch Solutions, the distribution arm of Fitch Ratings, providing information, analysis and related services. Also part of the Fitch group is Algorithmics, a global leader in enterprise risk management solutions. The Fitch Group is majority owned by Fimalac S.A., headquartered in Paris, France.

Fitch has over 15 years of experience assigning international and national credit ratings to banks, non-bank financial institutions, insurance companies, corporate sector issuers, regional and local authorities, and sovereign governments. Fitch also rates fixed income debt issues and structured finance transactions.

Fitch credit ratings are an opinion of an issuer's relative ability to meet its financial obligations, such as interest payments, preferred dividends, principal repayments, insurance claims settlement, and counterparty obligations.

Fitch's credit ratings cover corporate, sovereign (including interstate and subnational entities), financial, banking and insurance issuers, municipal and other public finance entities, as well as the securities and other obligations issued by such issuers, and, finally, structured financial instruments. financing secured by accounts receivable or other financial assets.

Fitch credit ratings do not directly assess any risks other than credit risks. In particular, ratings do not assess the risks of a decline in the market value of the rated entity. securities due to change interest rates, liquidity or other market factors. However, with respect to payment obligations on rated obligations, market risks may be considered to the extent that it affects the issuer's ability to make required payments. Ratings do not address market risk as it affects the size or terms of payment obligations (for example, in the case of index-linked bonds).

In the default components of ratings of specific obligations or instruments, the agency typically takes into account the probability of nonpayment or default based on the terms of the instrument's documentation. In some cases, based on special factors, Fitch may issue a rating higher or lower than the bond documentation would suggest. In such cases, the agency clearly states the basis for this opinion in the associated rating message.

The material was prepared based on information from open sources