Credit Rating Agencies (CRAs) have attained a considerable media attention after the US financial crisis and the Eurozone crisis because of their importance in policy discussions and the center of attention are three great US based CRAs which are Moody’s, Standard & Poor’s and Fitch. Before Delving deep into the core subject matter let us refer to the history of Credit Rating Agencies. Publicly available bond ratings emerged in the year 1909 and that was the same year in which John Moody published a “rating manual” which housed ratings of bonds issued by railroad companies. Compared to other countries, the bond market was hugely established in the US because in other countries, lending was mostly done through banks and in the US, railroads were the largest companies. After Moody’s Entry in the public bond rating business, others who followed him were Poor’s which was established in 1916; Standard Statistics emerged in 1922; and Fitch came in 1924 and regarding all of these firms, investors were sold the ratings. (White, 2013) The other thing to be focused upon is how CRAs affect the financial system. And finally, a closer look on Moody’s itself is required.
Moody’s is one of the largest publicly traded CRAs in the financial world, previously a division of Dun & Bradstreet, but came out as a freestanding company in 2000. Currently, it has spread to 28 Countries and has issuers located in 110 companies. Moody wrote books like “The Masters of Capital: A Chronicle of Wall Street” and after some years he wrote the book “The Railroad Builders: A Chronicle of the Welding of the States“ for the Yale University Press which were published in 1919. In 1924, 100% of the US market for bonds was covered by Moody’s. Moody survived the great depression in 1929 and continued to write his evaluations. (Moody’s Corporation History, 2013) Moody’s spread around the world later on and it had a division in Japan in 1985, in 1986 it was in United Kingdom, in 1988 it reached France, Germany in 1991, emerged in Hong Kong, went on to India in 1998, and also to China in 2001.
To understand how any CRA works, first you have to understand why there was a need of Credit Rating Agencies. When a party lends another party an amount of money, he will be interested in the information about the borrower regardless of the fact that it is a business, an individual or a government unit. The lender would like to know about things like the borrower’s financial position, prospects, and the borrower’s past record in respect to his debts. And also, the borrower would like to monitor the borrower’s financial condition to check whether he will be able to repay on time and also would be able to know in advance if the financial condition is getting adverse so that the lender can salvage some amount of money from it. Small organizations may not be able to monitor lenders in such a manner but big financial bodies can afford to, that is when the role of a CRA steps in. The third party analysts fulfill the role of monitor in this scenario as “Creditworthiness advisory services”. Essentially, these agencies exist to analyze the creditworthiness of Bond Issuers, companies or countries. (de Haan & Amtenbrink, 2001) (Credit Rating Agency, n.d.)
Specifically , when we discuss about Moody’s then we have to address the fact that Moody’s is one of the oldest and acclaimed Credit Rating Agency in the world with gigantic coverage, figures and clients around the world as the role of CRAs in the world of finance is really huge. It contributes to being a part of global capital markets, credit ratings, has a wide research base, and analysis that covers financial markets. It is a Parent Company to its two major divisions, the first one is Moody’s Investor’s Service and the second is Moody’s Analytics. Moody’s Investor’s service is the major unit handling credit ratings, research and risk analysis. Moody’s Investor service covers more than 115 countries, 11,000 issuers in the corporate sector, 21000 issuers in the finance sector and 76,000 structured finance obligations. The overall Moody’s operating region covers 31 countries. The Analytics sector offers tools to companies to measure risks. Moody’s covers many Political/Economic groups too like European Union and Asia-Pacific Economic Co-operation. (Moody’s Corporation, 2014)
Moody’s role in global markets, especially in UAE
Moody’s is a globally renowned firm which is spread over global capital markets. Moody’s Investors Service (MIS) has made it as a mission to inculcate efficiency of Global capital by providing predictive and reliable opinions. MIS aims to achieve this through constant and clear analysis of debt securities. MIS also publishes research and data for financial market professionals to stay well informed. MIS’s ratings cover more than 110 countries. Its revenue has been increasing since 2008 and has reached above 1500 million USD which covers sectors like corporate finance, structured finance, public finance, project finance, infrastructure finance and financial institutions. Its total revenue in 2012 was 1886800000 USD. Moody’s also publishes a Global Macro Outlook every year which focuses on global risk perspectives. (Moody’s 2012 Annual Report, 2012)
Factors that affect the role of Moody’s
The Role of Moody’s will include what they provide to their customers, i.e. Credit analytic reports, Risk assessment reports of specific companies, research data, etc. The elements which would be considered as factors affecting the role of Moody’s would be their research team’s satisfaction and rigorous work. This is because they need a very strong research base, reliability in numbers because their whole organization depends upon them and the customers depend upon them , past credits of organizations they take into account, Current debts, etc. (Credit Research & Risk Measurement, 2014)
Factors addressed by Moody’s
A large organization such as Moody’s should address the factors which affect the company in any way. Factors faced by Moody’s are addressed by expansion of workforce and constant change in policies to ensure reliable rating and transparency. It assures rigorously that through constant efforts their workforce works for keeping track of numbers accurately. It handles the credit analytic reports through experienced and qualified workforce to ensure strong numbers.
Moody’s transparency and integrity maintenance in risk assessment/credit rating
Moody’s is able to maintain a level of transparency by consistently using policies, different kinds of practices and detailed methodologies. The credit rate options which come out of this and research rely on a quality and quantity based analysis by making use factual and statistical research and also due competent credit evaluation and highest standards of analysis are expected and adhered to. (Moody’s 2012 Annual Report, 2012)
It can be concluded from this case study that Moody’s is a global level agency for credit rating with enormous scale which impacts global capital markets and world finance through its analyzed ratings for companies and governments. It has a huge history as it is the part of a legacy which introduced ratings on bonds. It has many roles which have been discussed and it has a very huge reliance on research and analysis. Many factors that affect this agency have been analyzed and discussed and also how the factors are to be countered. Being a huge organization with strong roots and widespread network, it still manages to keep transparency and integrity. It has faced strong growth over the years and as one of the top agencies it doesn’t seem to be looking at any kind of decline for now.
My beliefs regarding the elements that can be improved to enhance the company’s quality and increase revenue are that Moody’s can first of all improving the quality of the ratings and extend the range of services provided like more in-depth analysis of companies and governments. Another thing which needs to be done is that Moody’s needs to expand its network to emerging markets. Proper investment in strategic growth opportunities would increase future revenue. Increment in the employee workforce should be done to meet with the new product demands.