rating agencies. What do rating agencies do?

Credit ratings assigned to banks by international rating agencies make it possible to judge their creditworthiness, financial stability, reliability and reputation. For ordinary consumers of financial services, these indicators will probably tell little about anything, but for credit institutions themselves, this assessment is very important, trust in financial organization, the possibility of attracting borrowed money and conditions for obtaining loans. In general, based on the ratings, investors will make their decisions. And, ultimately, from these financial solutions and will depend on the price at which banks will lend to their customers.

Among the most authoritative international rating agencies, three largest companies should be singled out: 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, bank deposit ratings, bank financial strength ratings, 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 a possible change in the rating in the future, the agency's forecast is used. It can be: "Stable" - this means that the rating is not expected to change in the next couple of years; "Developing" - the rating can both increase and decrease; "Negative" - ​​a downgrade is possible; “Positive” – rating upgrade is possible.

Rating is 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 that, a rating meeting is organized with representatives of the management of the credit institution. Based on the assessment of all received data, the rating committee makes a decision on assigning a rating. If the client does not agree, then he can file an appeal, providing additional information. It should be noted 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 the position of the bank, and have their own specifics, many credit organizations apply to several rating agencies at once. After all, the reputation of the bank in the domestic and international financial markets largely depends on this.

What an investor needs to know about rating agencies

I will start with the definitions of a rating agency (hereinafter, for brevity, I will write RA): what is it and what do they do. These are big consulting companies, which 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. Evaluation reports are not limited to cases within a company or country. For complex analysis, forecasts of macroeconomic trends, market conditions, as well as the ability of the subject being assessed to withstand adverse external factors are required.

International rankings

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

Published ratings are guided in making investment decisions by national and commercial, the International Monetary Fund, investment and, as well as private investors. 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, the 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 lies in the possible exit of the country from the recession, or in the improvement of the financial performance of an individual company. With a high fixed , the speculator receives windfall profits.

But the risk of freezing your investments for a long time, with such a quality of 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, the presence of a high rating is often a condition for survival, large clients choose partners, including based on ratings.

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

The opening broker, on the other hand, does not use this opportunity, apparently due to the fact that FG Opening 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;
• Valuation 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 knowingly expose themselves to reputational risk? After all, an audit can lead to a downgrade and a blow to competitive positions. However big public companies laying down budgets for the RA expertise, which is carried out “on the machine” annually, regardless of whether the moment is favorable for the assessment or not. I will give the answer point by point so as not to miss important reasons:

• The ability to attract investments cheaper and easily restructure current liabilities;
• Increasing the value and popularity of corporate bonds;
• The positive impact of an increase in the rating on the growth of the exchange rate ;
• Prestige, customer confidence, the image of a transparent and open company.

RAs not only make a one-time assessment, but also constantly contact the governments 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 the problems identified during the study.

big three

There are more than a hundred rating agencies in the world, but the so-called big three have dominated this business 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 discard the conspiracy theories about the “dominance” of American companies in this market and 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 world market and they compete for the most part among themselves.

All three agencies accredited by the Central Bank have offices in Moscow. They have legal status branches foreign companies, but from July 13, 2017 they are obliged to switch to the format of a subsidiary with Russian jurisdiction. The Russian-language websites of the Big Three agencies, where you can get acquainted with analytics and search for the ratings you are interested in, 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 multibillion-dollar contracts, the big three also receive numerous accusations of political partisanship. This is especially true for countries whose credit rating is downgraded to an unacceptable "junk" level for investors. So it was with Greece in 2009-2012, with Russia in January 2014. “Offended” clients argue their arguments by the fact that RA are commercial companies whose purpose is profit. The RAs themselves and their lawyers insist that independent analysis can only be trusted private company, which 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 experts from the Big Three did not give a timely forecast of a mortgage collapse and bankruptcy of the leading bank, Lehman Brothers. They began to downgrade banks and corporations after the fact, following the situation, not warning it.

Moreover, employees who openly warned of an impending debt crisis were fired. Severe punitive sanctions in the amount of several billion dollars were imposed on the Big Three RAs, which are still being paid. It turned out to be a kind of "verification of the inspectors", which benefited the entire industry. The classical methods have been revised, the requirements for the financial performance of clients have been tightened. Today new system, which tightly regulates all financial institutions, is called Basel (by the name of the Swiss city in which the international agreement is signed).

In particular, the responsibility of the RA for the ratings assigned by them has been strengthened. The biggest shift can be considered a new trend, when not the assessed issuer itself pays for the research, but the investor who is interested in the analysis of 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 world's second largest economy and being the second international creditor after the US, has 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 international market the same S&P, Moody's and Fitch continue to be in demand. Disputes about the degree of objectivity of such decisions will never stop, 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 up in 2014, as part of the import substitution policy proclaimed by the state. Sanctions also played their role when, due to the inability to attract cheap money in the West, domestic companies' demand for the services of international RAs decreased.

Under the new trends began to be actively written the legislative framework. Main normative act today is the Law on the activities of credit rating agencies in the Russian Federation No. 222-FZ of July 13, 2015, according to which all Russian players in this market are placed under close control of the Central Bank. International rating agencies are deprived of the right to revoke the ratings assigned on the national scale from Russian economic entities. In this way, national ranking declared a priority in relation to the international one. A comparative table of rating scales is given below.

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

The flip side of import substitution is the reduction in the presence of international agencies in Russia. Already, most of the functions have been transferred to specialists in New York and London, the Moscow offices are emptying. This does not necessarily mean that the Big Three will leave Russia. In 2015, the same was said about Visa and Mastercard, but they continued to do business with us. Now the big three are actively involved in the process of withdrawing ratings on the national scale from more than 150 Russian issuers and from the Russian Federation itself. There are many reports in the press about this, but I recommend that private investors treat this with restraint: the procedures are related to the implementation of the norms 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: Expert RA Rating Agency JSC raexpert.ru and Analytical Credit Rating Agency (ACRA) JSC acra-ratings.ru. Rus-Rating and the National Rating Agency (NRA) are in the stage of waiting and correcting the comments of the Central Bank. Inclusion in the register Central Bank is critical for Russian RAs. Without this, they will not be able to conduct a full-fledged activity. In particular, to assign ratings, and those, in turn, will not receive the right to attract public money.

Conclusion

To sum up the final questions: how relevant are the ratings in the analysis of issuers? Should we trust the ratings of the big three, especially given the blow to their reputation after the 2008 crisis? How to relate to the ratings assigned by Russian RAs, because their ratings are not of great value in the international capital market? AT general view I would answer like this:

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

All profit!

The credit rating reflects the risk of default on debts high rating corresponds to a smaller investment. Based on the results of their research, rating agencies assign a rating to a particular company, and the rating is far from always being objective.

Investment ratings are from AAA to BBB. Ratings below these indicators are considered "junk". Companies with a junk rating receive less investment flow and less cash is invested in their securities.

The main disadvantage of such assessments of the effectiveness and solvency of an enterprise is the complete absence of guarantees for the result of research, especially since rating agencies do not disclose all information.

The negative outlook suggests that negative changes are likely in the company and the final rating may be revised downward.

Positive – the possibility of positive changes is likely, the current rating may be revised upwards.

Rating assignment is a commercial service. The main customers of rating agencies are states, companies and banks. Availability good rating helps the company to increase the value of its securities and attract investments. The rating forms the reputation of an enterprise, company, bank and the country as a whole.

Often, ratings compiled by reputable rating agencies are late. They failed to warn investors about problems in largest companies, such as: Parmalat, Enron, AIG, etc. As a result, the United States changed the legislation in order to reduce dependence on rating agencies when making investment decisions.

The main disadvantages of these organizations are: slow response to current market changes, outdated methodology for making forecasts, high competition between the rating agencies themselves, conflicts of interest and a high number of custom ratings.

Currently, there are about a hundred rating agencies in the world. The most authoritative of the international ones: Moody's, Standard & Poor's, FitchRatings.

Today we present a rating of... The largest rating agencies in the world. And what? Do they give ratings? So our experts decided to make a ranking of representatives of this business segment. As a result of the analysis and evaluation, we were able to select 15 companies with the largest customer base. US agencies dominate - as many as six companies (including one "joint venture" between the US and the UK); two organizations from Japan, and one more representative each from Canada, China, India, Kuwait, Russia and Ukraine. The first place in the ranking was taken by the S&P agency, having managed to attract 2,682 clients from all over the world. And the largest agency in the Russian Federation "Expert RA" took the penultimate, 14th place, with a figure of 350 clients. True, the ratings of this company, as a rule, are quoted only in the Russian Federation, and in Kazakhstan (where the Expert's subsidiary is located), and therefore the "weight" client base, if you can apply such an indicator to the quality of the portfolio of customers, is not comparable with the leaders. From now on, we will annually rank rating agencies, but we will expand the number of criteria: we will analyze not only the number of clients, but also their quality, and total assets client base.

“One American journalist once said that if earlier it was necessary to bring in tanks, now it is enough to lower the rating of the state, and this will be almost the same blow to the country” (Pavel Samiev, Deputy CEO rating agency "Expert RA")

What are rating agencies?

Rating agencies are commercial organizations, which evaluate solvency, debt obligations, as well as other important financial indicators issuers. They present their assessment in the form 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 probability to potential investors/lenders that the issuer will fulfill/fail to 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 originate in the 90s and the largest are the Expert RA Rating Agency and the NRA (National Rating Agency).

Agency credit ratings have a similar concept, but different designations and calculation methods. Basically, ratings are indicated in Latin letters in order of decreasing reliability level from A to C (for some agencies up 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 ones: Standard and Poor's, Moody's, and Fitch Ratings, one joint agency: RA MUDIS 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, great authority. The advantage of Russian agencies is their efficiency, seeing the situation from the inside, they can react faster, change the rating Russian companies. Western agencies usually look at IFRS, which are published quarterly/yearly, while Russian agencies look at the reports of some issuers 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 buying or selling securities. They reflect only one of the aspects necessary for making an investment decision, namely, creditworthiness. Companies with the highest AAA rating can have problems and default. However, if there are only a few such cases among AAA-rated companies, then companies with pre-default ratings will have hundreds and thousands of such bankruptcies.

Rating agencies continue to have a significant impact 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 a panic on the stock exchanges and a collapse in quotations around the world.

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