Moody’s Rating

The ability to issue debt securities and well-functioning capital markets are the two most influential components of any economic system. They help the governments and companies to raise capital to develop and improve infrastructure, pay employees, innovate, expand their operations, and much more. Moody’s ratings are based on two aspects: First, how much is the severity of any financial losses in the event of any default. Second, how much is the likelihood of financial obligations and default of issuers over the short-term and long-term. Unlike other credit ratings, which rate the companies in absolute terms, Moody’s rating is comparative.

What is a Credit Rating?

A credit rating can be defined as an opinion or a rating given by a particular credit rating agency to some company/organisation based on its willingness and ability to fulfil its finance-related obligations completely within the due dates. A credit rating, we can say, also signifies the goodwill of a company. With the help of credit rating, a company can easily identify the likelihood of a debtor to do a default. 

There are eight different kinds of credit ratings.

1. Borrowers rating
2. Bond / Debenture rating
3. Preference share rating
4. Commercial paper rating
5. Individuals rating
6. Equity rating
7. Fixed deposits rating 
8. Structured obligation 

What is Moody’s?

Moody’s comprises two divisions: Moody’s Investors Services and Moody’s Analytics. MCO or Moody’s Corporation is the company that holds and owns both of them. It is an American financial services company. Moody’s Analytics provides research and software for credit analysis, risk management, and economic analysis, and Moody’s Investors Services rates fixed-income debt securities. It also provides research for government entities and stocks.

Moody’s Ratings have become so reliable over time that many investors closely observe these. They pay close attention to Moody’s ratings to government entities, bonds, and preferred stock. The main basis on which Moody assigns its ratings is the borrower’s ability to make interest payments and the assessed risks.

Moody’s approach to credit rating:

Nobody can ever predict with full certainty whether a borrower will or will not default with full certainty. To overcome thin uncertainty, Moody’s rating is full-fledged. It doesn’t won’t default or will default but rather rates the borrower after observing and analysing information collected from reliable sources about the issuer. It uses a 21-level global long-term rating scale ranging from Aaa to C. The terms in the middle signify the probability of the lowest default risk to the highest default risk.

In addition, Moody also has a Prime rating scale (global short-term) used for commercial paper issued by US nonprofits and governments. In certain local capital markets, where the investors are not satisfied with other global ratings, Moody assign national scale ratings. 

Moody’s rating is designed to showcase stable trends for various companies and provide the investors with the most accurate rating. The ratings, however, are expected to remain stable most of the time and can change only when enduring, fundamental credit drivers warrant such changes. Moody makes its information reliable and proves itself from time to time by regularly analysing its credit ratings and publishing metrics that help the investors or market professionals to judge their performance. 

Uses of Moody’s credit rating: 

Moody does not intend on replacing the various forms of credit analysing processes conducted by market participants and sophisticated investors. Rather, Moody’s rating tries to augment them. Uses of credit rating are often used by the following:

1. Financial institutions like banks support or challenge internal risk management assumptions about a given asset or borrower.
2. Investors to support their own credit analysis of debt instruments and issuers.
3. Pension trustees as a risk management tool that helps define their risk appetite for their interactions with their investment managers. 
4. Issuers to signal their credit quality and attract investors.

Moody’s rating in India:

Last year, Moody’s rating for India was downgraded to ‘Baa3’ from ‘Baa2’. Moody’s Investors Services mentioned that there would be challenges in implementing the policies in such conditions of deteriorating fiscal position and low growth. 

The topic was hot for a long time because the government agencies were not happy with lowering the Moody credit rating in India despite its emerging market economy. The rating agency and its peers were criticised for the same. India and other countries with booming market economies were assigned a low Moody rating.

There was a contract of 7.3% in the Indian Economy in the 2020-21 fiscal, so the growth estimate was sharply cut to 9.6% for the calendar year 2021. However, the economy grew 20.1% in the April-June quarter of the last fiscal. 

Therefore, when the finance ministry officials highlighted the above-mentioned growth in the fiscal trajectory of the June 2021 quarter in the meeting with Moody’s, a  9.3% growth was projected by Moody’s in the fiscal ending March 2022. 

Conclusion:

Moody’s is included in the Fortune 500 list of 2021 and is considered one of the Big Three Credit Rating Agencies and Fitch Group and Standard & Poor. Moody explains that its ratings are not considered recommendations since they are based on deep studies and analyses from reliable sources. They are neither a sole basis for investment decisions. Its customers include various governmental and corporate issuers of securities and investment banks, investors, commercial banks, depositors, creditors, and other financial intermediaries. In this unpredictable time of the pandemic, Moody’s rating has greatly supported corporates.