Asset Manager Review

IN this article we answer various questions about the credit rating agencies and the significance of the recent downgrades. Who are the rating agencies and what do they do?

Credit rating is a process of assessing and scoring the creditworthiness of would-be borrow), on a standardized basis, to help lenders to decide who to lend to, and on what terms.

Logically, if you were told that one borrower has a good credit score and another one has, by comparison, a bad score, you would lend only to the first borrower, or if you did decide to lend to the second one, you would ask for a higher rate of interest and you would only want to lend a smaller amount. You might also require the loan to be repaid sooner.

Credit rating agencies carry out this process on so-called “institutional” borrowers – this means governments, banks, parastatals, companies and other specialised commercial borrowers. Credit bureaux monitor the credit track record of individuals – the agencies do not rate individuals.

Internationally, the three big names of Moody’s, Standard and Poor’s (S&P) and Fitch dominate the credit ratings industry, although there are smaller regional and national firms as well. In Southern Africa, a local firm called Global Credit Ratings (GCR) competes with the big players.

Firms seeking to provide credit ratings in South Africa have to be registered with the Financial Services Board. Moody’s, S&P and GCR are all registered here, but Fitch recently withdrew from the South African market (although it still provides ratings on RSA bonds in the international context).

What is the “business model” of the credit rating agencies?

When a company wants to borrow money, by issuing a bond, it will often ask one of the rating agencies to rate the bond. The company issuing the bond will pay the agency to provide the rating.

Most of the income and profits