The ‘Big Three’ & The ‘Triple B’

Rating agencies provide investment and credit opinions on the ability of companies and countries to meet their debt obligations – and their views are critical to investment decisions made by banks, pension funds and other financial institutions.

Their views can wipe millions off bond and share prices, as well as make credit more expensive.

The global credit-rating market is dominated to 95% by the ‘Big Three’.

Standard & Poor’s was founded in 1860 by Henry Poor, who wrote a history of the finances of railroads and canals in the US as a guide for investors. 1940, Poor partnered with the ‘Standard Statistics Bureau’ to become ‘Standard & Poor’s’ or S&P. 1966, S&P was acquired by McGraw Hill Financial.
Headquater: New York
Global marketshare: 40%.

Moody’s started in 1909 by John Moody who published an analysis of railway finances, thereby grading the value of its stocks and bonds. Owner: Moody’s Corporation.
Headquater: New York
Global marketshare: 40%

Fitch was set up in 1913 by John Fitch and is a smaller version of the other two. Fitch is owed by Hearst Corporation and french holding company Fimalac.
Headquaters: New York & London
Global marketshare: 15%

To overcome this western dominance, Russia and China announced to establish a joint rating agency, which both countries believe, will balance the global economic outlook.

The verdict of the ‘Big Three’ is essential for the conditions a country can tap the global debt markets.
The rating is usually based on the overall economic conditions of a country including the volume of foreign, public and private investment, capital market transparency and foreign currency reserves. The rating-agency also assess political conditions such as political stability and the level of economic stability a country will maintain during times of political transition.

For an easy overview, each rating-agency marks a country with a grade. S&P for instances uses the grades AAA to CCC-

AAA: The best quality borrowers, reliable and stable

The Netherlands just regained this grade due to economic recovery. Other members of the ‘Triple A’ -Club’ are for instance Australia, Canada, Denmark, Germany, Norway, Sweden, Luxembourg, Switzerland and the UK.

AA+/AA/AA-: Quality borrowers, a bit higher risk than AAA
AA+ Finland, Austria, USA
AA Belgium, France
AA- Czech Republic, China, Estonia

A+/A/A-: Economic situation can affect finance
A+ Japan, Ireland, Israel, Slovakia
A. Oman, Trinidad & Tobago
A- Poland, Slovenia, Latvia

BBB+/BBB/BBB-: Medium class borrowers, which are satisfactory at the moment
BBB+ Iceland, Spain, Mexico, Peru
BBB Columbia, Philippines
BBB- India, Italy, Romania

——– investment grade——–

BB: More prone to changes in the economy
BB+ Hungary, Bulgaria, Russia, Brazil
BB Macedonia, Portugal
BB- Serbia, Georgia, Cyprus

B: Financial situation varies noticeably
B+ Albania, Kenya
B Bosnia/Herzegovina, Ghana
B- Belarus, Egypt, Pakistan

CCC+/CCC/CCC-: Dependent upon favorable business, financial, and economic conditions to meet its financial commitments.
CCC+ Jamaica
CCC Venezuela
CCC- Greece, Puerto Rico

Crucial ‘Triple B’
In addition to the grade, S&P gives investors an ‘outlook’ regarding a potential up- or downgrade. The outlook can be ‘positive’, ‘stable’ or ‘negative’.
The outlook for Romania is ‘positive’ at the moment.

The most important issue for many countries, inclusive Romania, is to maintain or reach a rating above ‘investment grade’. In the case of S&P this is ‘BBB-‘ or higher.

The ‘Triple B’ is crucial, because many institutional investors with multi-billion-Dollar-portfolios are not authorized to invest in government-bonds of countries with a rating below ‘investment grade’.

Brazil just lost it’s ‘investment grade’ status, the country held since 2008. S&P downgraded Brazil’s debt-quality in September 2015 from ‘BBB-‘ to ‘BB+’ or ‘junk grade’. The outlook on the new rating is ‘negative’, meaning additional downgrades are possible in the near term.

The next day, the Brazilian Real fell to a 13-year low vs the US- Dollar.

———
So, as an investor, all you have to do is follow the verdict of these rating agencies to be on the safe side.

You better just delete this sentence. The ugly truth is that the rating giants often are too late, mislead investors and are to a certain degree responsible for the housing-bubble and the global financial crisis of 2008. More on that subject in the next chapter: http://www.theleader.ro/canary-in-the-coal-mine/

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