Editor’s Note: Related tickers include Morningstar, Inc. (NASDAQ:MORN), Moody’s Corporation (NYSE:MCO)
A credit rating agency (CRA) is a company that assigns credit ratings for companies, entities, governments, and state or local governments who are issuing some kind of debt obligations, like bonds that can be traded on secondary markets. A CRA often analyzes debt instruments themselves. Credit ratings involve opinions about credit risks. They refer to ability or obligations of the issuer to complete its financial responsibilities in accordance with the bonds that are issued.
Usually CRAs follow a simple, subscriber-based business model to achieve some income. This model involves releasing publications but not distributing them for free, but to receive a fee from its subscribers and provide the publications only for them.
Some of the largest credit rating agencies of the world include Morningstar, Inc. (NASDAQ:MORN), Moody’s Corporation (NYSE:MCO), S&P, and others.
In the most recent financial crisis, credit rating agencies played a major role, and some of them were heavily criticized. Delayed downgrades, too familiar relationships with companies’ management, and errors of judgement are just some of the criticisms which subjected credit rating agencies to criticism. It’s important to remember that a rating issued by a CRA must not be taken as an assurance of credit quality, but rather a relative level of credit risk, which is based on an agency’s careful, but not foolproof analysis.
An important point to also consider is that the analysis of historical data is not always a flawless guarantee of future behavior, and ratings are always changing due to shifts in the credit quality of the issuer. Some changes that maylead to an alteration of a credit rating are: changes of government policies, or changes in the credit market that could not be foreseen when the first rating was released.
Image: Morningstar, Inc. (NASDAQ:MORN)
Nonetheless, credit ratings are very important for investors, issuers of debt obligations, banks and even governments. They provide some alternatives for investing by giving an independent opinion on credit risk. At the same time they can lower costs for both borrowers and lenders.
We have compiled a list of the world’s 10 largest credit rating agencies.
Check it out on the following slides: