Moody's
Encyclopedia
Moody's Corporation is the holding company for Moody's Analytics
and Moody's Investors Service, a credit rating agency
which performs international financial research and analysis on commercial and government entities. The company also ranks the credit-worthiness of borrowers using a standardized ratings scale. It is one of the Big Three credit rating agencies
and has a 40% share of the world market, as does its main rival, Standard & Poor's
; Fitch Ratings
has a smaller share.
Moody's was founded in 1909 by John Moody. The top institutional owner and only shareholder holding more than 5% of all shares of Moody's is Warren Buffett
's company Berkshire Hathaway
, holding a share of ~13%.
In 1909, a new company, now known as Moody's, was founded by John Moody, and published Analyses of Railroad Investments, "a book about railroad securities, using letter grades to assess their risk." Moody's Investors Service was incorporated on July 1, 1914, and soon extended coverage to US municipal bonds. By 1924, Moody's ratings covered nearly 100 percent of the US bond market.
In the 1970s, Moody's expanded into commercial debt, and also began the practice, along with other ratings agencies, of charging bond issuers for ratings as well as charging investors.
The number of countries covered by Moody's has risen from 3 in 1975, to 33 in 1990, to over 100 by 2000. Announcements by Moody's of possible or actual downgrades of a country's bond rating can have a major political and economic impact, as for example in Canada in 1995 and the United States in 2011.
Credit rating agencies such as Moody's have been subject to criticism in the wake of large losses in the asset-backed security
collateralized debt obligation
(ABS CDO) market that occurred despite being assigned top ratings by the credit rating agencies. For instance, losses on $340.7 million worth of ABS collateralized debt obligations (CDO) issued by Credit Suisse Group added up to about $125 million, despite being rated AAA by Moody's.
Similarly, large companies such as Bear Stearns
and Lehman Brothers
had AAA and AA rating until they went bankrupt in 2008.
was offered a "free rating" by Moody's. The insurer refused. Moody's continued with the "free ratings", but over time lowered its rating of the company. Still refusing Moody's services, Moody's lowered Hannover's debt to junk, and the company in a few hours lost $175 million in market value.
"As the housing market collapsed in late 2007, Moody's Investors Service, whose investment ratings were widely trusted, responded by purging analysts and executives who warned of trouble and promoting those who helped Wall Street plunge the country into its worst financial crisis since the Great Depression. A McClatchy investigation has found that Moody's punished executives who questioned why the company was risking its reputation by putting its profits ahead of providing trustworthy ratings for investment offerings."
and Portugal alike. Moody's has been accused of fueling speculation and bias towards European assets. Furthermore the legitimacy of US based rating agencies has also been put in question.
State owned utility and infrastructure companies like ANA – Aeroportos de Portugal, Energias de Portugal
, Redes Energéticas Nacionais, and Brisa – Auto-estradas de Portugal were also downgraded despite claims to having solid financial profiles and significant foreign revenue.
Portuguese citizens promptly classified Moody's actions as economic terrorism
and began several initiatives on social sites, namely Facebook
, to express their outrage. Mainly the initiatives were aimed at disrupting Moody's website. On the 11th of July, the website was temporarily unavailable in Portugal and a few other countries, due to a coordinated DDoS attack. Portuguese IP's were temporarily blocked from the web server in order to minimize the disturbance.
Speculative grade (also known as "High Yield" or "Junk")
Special
Moody notes that "Canadian issuers rated P-1 or P-2 have their short-term ratings enhanced by the senior-most long-term rating of the issuer, its guarantor or support-provider."
Moody's Analytics
Moody’s Analytics provides capital markets and risk management professionals with credit analysis, economic research, financial risk management software, and advisory services...
and Moody's Investors Service, a credit rating agency
Credit rating agency
A Credit rating agency is a company that assigns credit ratings for issuers of certain types of debt obligations as well as the debt instruments themselves...
which performs international financial research and analysis on commercial and government entities. The company also ranks the credit-worthiness of borrowers using a standardized ratings scale. It is one of the Big Three credit rating agencies
Big Three (credit rating agencies)
The Big Three credit rating agencies are Standard & Poor's , Moody's, and Fitch Group. S&P and Moody's are US-based, while Fitch is dual-headquartered in New York City and London, and is controlled by the France-based FIMALAC. The European Union has considered setting up a state-supported EU-based...
and has a 40% share of the world market, as does its main rival, Standard & Poor's
Standard & Poor's
Standard & Poor's is a United States-based financial services company. It is a division of The McGraw-Hill Companies that publishes financial research and analysis on stocks and bonds. It is well known for its stock-market indices, the US-based S&P 500, the Australian S&P/ASX 200, the Canadian...
; Fitch Ratings
Fitch Ratings
The Fitch Group is a majority-owned subsidiary of FIMALAC, headquartered in Paris. Fitch Ratings, Fitch Solutions and Algorithmics, are part of the Fitch Group....
has a smaller share.
Moody's was founded in 1909 by John Moody. The top institutional owner and only shareholder holding more than 5% of all shares of Moody's is Warren Buffett
Warren Buffett
Warren Edward Buffett is an American business magnate, investor, and philanthropist. He is widely regarded as one of the most successful investors in the world. Often introduced as "legendary investor, Warren Buffett", he is the primary shareholder, chairman and CEO of Berkshire Hathaway. He is...
's company Berkshire Hathaway
Berkshire Hathaway
Berkshire Hathaway Inc. is an American multinational conglomerate holding company headquartered in Omaha, Nebraska, United States, that oversees and manages a number of subsidiary companies. The company averaged an annual growth in book value of 20.3% to its shareholders for the last 44 years,...
, holding a share of ~13%.
History
John Moody & Company was founded in 1900. The first product was Moody's Manual of Industrial and Miscellaneous Securities. The company did not survive the stock market crash of 1907.In 1909, a new company, now known as Moody's, was founded by John Moody, and published Analyses of Railroad Investments, "a book about railroad securities, using letter grades to assess their risk." Moody's Investors Service was incorporated on July 1, 1914, and soon extended coverage to US municipal bonds. By 1924, Moody's ratings covered nearly 100 percent of the US bond market.
In the 1970s, Moody's expanded into commercial debt, and also began the practice, along with other ratings agencies, of charging bond issuers for ratings as well as charging investors.
The number of countries covered by Moody's has risen from 3 in 1975, to 33 in 1990, to over 100 by 2000. Announcements by Moody's of possible or actual downgrades of a country's bond rating can have a major political and economic impact, as for example in Canada in 1995 and the United States in 2011.
Criticism
See also: Credit rating agency criticismCredit rating agencies such as Moody's have been subject to criticism in the wake of large losses in the asset-backed security
Asset-backed security
An asset-backed security is a security whose value and income payments are derived from and collateralized by a specified pool of underlying assets. The pool of assets is typically a group of small and illiquid assets that are unable to be sold individually...
collateralized debt obligation
Collateralized debt obligation
Collateralized debt obligations are a type of structured asset-backed security with multiple "tranches" that are issued by special purpose entities and collateralized by debt obligations including bonds and loans. Each tranche offers a varying degree of risk and return so as to meet investor demand...
(ABS CDO) market that occurred despite being assigned top ratings by the credit rating agencies. For instance, losses on $340.7 million worth of ABS collateralized debt obligations (CDO) issued by Credit Suisse Group added up to about $125 million, despite being rated AAA by Moody's.
Similarly, large companies such as Bear Stearns
Bear Stearns
The Bear Stearns Companies, Inc. based in New York City, was a global investment bank and securities trading and brokerage, until its sale to JPMorgan Chase in 2008 during the global financial crisis and recession...
and Lehman Brothers
Lehman Brothers
Lehman Brothers Holdings Inc. was a global financial services firm. Before declaring bankruptcy in 2008, Lehman was the fourth largest investment bank in the USA , doing business in investment banking, equity and fixed-income sales and trading Lehman Brothers Holdings Inc. (former NYSE ticker...
had AAA and AA rating until they went bankrupt in 2008.
Power and influence
Moody's has been accused of "blackmail". In one example the German insurer Hannover ReHannover Re
Hannover Re , with a gross premium of around €11 billion, is one of the leading reinsurance groups in the world...
was offered a "free rating" by Moody's. The insurer refused. Moody's continued with the "free ratings", but over time lowered its rating of the company. Still refusing Moody's services, Moody's lowered Hannover's debt to junk, and the company in a few hours lost $175 million in market value.
"As the housing market collapsed in late 2007, Moody's Investors Service, whose investment ratings were widely trusted, responded by purging analysts and executives who warned of trouble and promoting those who helped Wall Street plunge the country into its worst financial crisis since the Great Depression. A McClatchy investigation has found that Moody's punished executives who questioned why the company was risking its reputation by putting its profits ahead of providing trustworthy ratings for investment offerings."
Portugal controversy
Portugal's foreign debt downgrade to the category Ba2 "junk" has infuriated the European UnionEuropean Union
The European Union is an economic and political union of 27 independent member states which are located primarily in Europe. The EU traces its origins from the European Coal and Steel Community and the European Economic Community , formed by six countries in 1958...
and Portugal alike. Moody's has been accused of fueling speculation and bias towards European assets. Furthermore the legitimacy of US based rating agencies has also been put in question.
State owned utility and infrastructure companies like ANA – Aeroportos de Portugal, Energias de Portugal
Energias de Portugal
EDP - Energias de Portugal ranks among Europe's major electricity operators, as well as being one of Portugal's largest business groups....
, Redes Energéticas Nacionais, and Brisa – Auto-estradas de Portugal were also downgraded despite claims to having solid financial profiles and significant foreign revenue.
Portuguese citizens promptly classified Moody's actions as economic terrorism
Economic terrorism
The term economic terrorism is strictly defined to indicate an attempt at economic destabilization by a group. More precisely, in 2005 the Geneva Centre for Security Policy defined economic terrorism in the following terms:...
and began several initiatives on social sites, namely Facebook
Facebook
Facebook is a social networking service and website launched in February 2004, operated and privately owned by Facebook, Inc. , Facebook has more than 800 million active users. Users must register before using the site, after which they may create a personal profile, add other users as...
, to express their outrage. Mainly the initiatives were aimed at disrupting Moody's website. On the 11th of July, the website was temporarily unavailable in Portugal and a few other countries, due to a coordinated DDoS attack. Portuguese IP's were temporarily blocked from the web server in order to minimize the disturbance.
Long-term obligation ratings
Investment grade- Aaa: Moody judges obligations rated Aaa to be the highest quality, with the "smallest degree of risk".
- Aa (Aa1, Aa2, Aa3): Moody judges obligations rated Aa to be high quality, with "very low credit risk", but "their susceptibility to long-term risks appears somewhat greater". (AA+, AA and AA- in S&P)
- A (A1, A2, A3): Moody judges obligations rated A as "upper-medium grade", subject to "low credit risk", but that have elements "present that suggest a susceptibility to impairment over the long term". (A+, A and A- in S&P)
- Baa1, Baa2, Baa3: Moody judges obligations rated BAA to be "moderate credit risk". They are considered medium-grade and as such "protective elements may be lacking or may be characteristically unreliable".
Speculative grade (also known as "High Yield" or "Junk")
- Ba1, Ba2, Ba3: Moody judges obligations rated Ba to have "questionable credit quality."
- B1, B2, B3: Moody judges obligations rated B as speculative and "subject to high credit risk", and have "generally poor credit quality."
- Caa1, Caa2, Caa3: Moody judges obligations rated CAA as of "poor standing and are subject to very high credit risk", and have "extremely poor credit quality. Such banks may be in default..."
- Ca: Moody judges obligations rated Ca as "highly speculative" and are "usually in default on their deposit obligations".
- C: Moody judges obligations rated C as "the lowest rated class of bonds and are typically in default," and "potential recovery values are low".
Special
- WR: Withdrawn Rating
- NR: Not Rated
- P: Provisional
Short-term taxable ratings
- P-1 Moody judges Prime-1 rated issuers as having "a superior ability to repay short-term debt obligations".
- P-2: Moody judges Prime-2 issuers as having "a strong ability to repay short-term debt obligations".
- P-3: Moody judges Prime-3 rated issuers as having "an acceptable ability to repay short-term obligations".
- NP: Moody considers "Not Prime" rated issuers as not falling "within any of the Prime rating categories".
Moody notes that "Canadian issuers rated P-1 or P-2 have their short-term ratings enhanced by the senior-most long-term rating of the issuer, its guarantor or support-provider."
Short-term tax-exempt ratings
Unlike S&P, Moody's has separate categories for short term municipal bonds. The ratings categories largely overlap, though, and have the same implications for the ability to repay short-term obligations.Individual bank ratings
Moody's also rates each bank's financial strength. These ratings differ from deposit ratings in that they measure how likely the bank is to need assistance from third parties.- A: "superior intrinsic financial strength"
- B: "strong intrinsic financial strength"
- C: "adequate intrinsic financial strength"
- D: :"modest intrinsic financial strength, potentially requiring some outside support at times"
- E: "very modest intrinsic financial strength, with a higher likelihood of periodic outside support"
Executive officers
- Raymond W. McDaniel Jr.Raymond W. McDaniel Jr.Raymond W. McDaniel, Jr. is chairman and chief executive officer of Moody's Corporation., the parent company of Moody's Investor Services and Moody's Analytics....
- Chairman and Chief Executive OfficerChief executive officerA chief executive officer , managing director , Executive Director for non-profit organizations, or chief executive is the highest-ranking corporate officer or administrator in charge of total management of an organization... - Linda S. Huber - Executive Vice President and Chief Financial OfficerChief financial officerThe chief financial officer or Chief financial and operating officer is a corporate officer primarily responsible for managing the financial risks of the corporation. This officer is also responsible for financial planning and record-keeping, as well as financial reporting to higher management...
See also
- Moody's AAA BondMoody's AAA BondMoody's Aaa Corporate Bond, also known as "Moody's Aaa" for short is an investment bond that acts as an index of the performance of all bonds given an Aaa rating by . This corporate bond is often used in macroeconomics as an alternative to the federal ten-year Treasury Bill as an indicator of the...
- A. M. Best
- Dominion Bond Rating ServiceDominion Bond Rating ServiceDBRS is a credit rating agency headquartered in Toronto, Ontario. Founded in 1976 by its current owner and president, Walter Schroeder, it is the largest rating agency in Canada....
- Fitch Group
- Nationally Recognized Statistical Rating OrganizationNationally Recognized Statistical Rating OrganizationA Nationally Recognized Statistical Rating Organization is a credit rating agency that issues credit ratings that the U.S. Securities and Exchange Commission permits other financial firms to use for certain regulatory purposes...
s - ReutersReutersReuters is a news agency headquartered in New York City. Until 2008 the Reuters news agency formed part of a British independent company, Reuters Group plc, which was also a provider of financial market data...
- Bloomberg L.P.Bloomberg L.P.Bloomberg L.P. is an American privately held financial software, media, and data company. Bloomberg makes up one third of the $16 billion global financial data market with estimated revenue of $6.9 billion. Bloomberg L.P...
- Morningstar, Inc.Morningstar, Inc.Morningstar, Inc. is an independent investment research company based in Chicago, Illinois, USA.-Businesses:Morningstar, Inc. is a leading provider of independent investment research in North America, Europe, Australia, and Asia. The company offers an extensive line of products and services for...
- List of countries by credit rating