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What is a credit ratings agency, and what does its work mean for us as individuals and for South Africa as a whole?
The ultimate purpose of a ratings agency is to determine whether a country, corporation or any entity that wishes to issue a bond or debt can repay its debts when due.
Secondly, a score will be given to indicate what ability the entity has to repay debts.
This means that a specific type of rating will have far-reaching implications for any country’s cost of borrowing, which in turn will affect its economic outlook.
One can compare an agency to a bank.
If you apply for a loan, banks will review your financial status and creditworthiness.
The bank will give you a credit score and that score will be used to determine if you can afford a loan and what interest rate the bank will offer for a loan or a mortgage bond.
Similarly, once a credit ratings agency deems a country or organisation, through a compilation of data and research, worthy to raise debt, then investors will feel more comfortable buying an entity’s debt.
They will know the credit agency’s assessment level and whether the entity can repay its debt.
The world’s three biggest rating agencies are Moody’s Investors Service, Standard & Poor’s (S&P) and Fitch Ratings.
Moody’s and S&P control an average 40% of the world’s market, while Fitch controls 15%, according to an article in The Guardian. The remaining market share is apportioned among 150 smaller agencies.
The history of credit ratings agencies can be traced back to the year 1900, when John Moody, a Wall Street errand boy, saw a gap in the market.
At the age of 32, he published a book bursting with information about thousands of American financial institutions. It was called Moody’s Manual of Industrial and Miscellaneous Securities, according to The Guardian.
S&P traces its history back to 1860, while Fitch was set up in 1914 by John Fitch, who developed the financial securities rating system from AAA to D.
All three agencies have their headquarters in New York, while Fitch has dual headquarters its in London. All three have offices worldwide and in South Africa.
What factors are taken into account when a rating is given?
According to Moody’s website: “In the course of the rating process, a Moody’s analyst gathers information sufficient to evaluate risk to investors who might own or buy a given security, develops a conclusion in committee in the appropriate rating, monitors the security on an ongoing basis to determine whether the rating should be changed, and informs the marketplace of Moody’s actions.”
A similar methodology is applied across the board by other ratings agencies. Top of the credit rating scale is an AAA rating, while a default rating is the worst.
An investment grade rating is given to entities that are judged to meet their payment obligations.
South Africa’s rating by S&P is –BBB and Fitch is BBB, both one rating above junk status or speculative investment grade.
Moody’s has rated the country at Baa2, two scores above junk.
