An Explanation of Moody’s ratings

Moody’s ratings are given by Moody’s corporation. It is an American company, founded in 1909, and is associated with finance and services. Later, it was acknowledged as a Nationally Recognized Statistical Rating Organization (NRSRO) by US Securities and Exchange Commission in the year 1975. It was initiated by John Moody. Moody’s Investor Services issues detailed research on the stocks and markets. These ratings influence investment in the market. Moody’s covers under the ‘Big Three’ ratings, sharing the title with S&P and Fitch. These three tend to stand out in their prediction methodology. It is a standalone company, operating and functioning throughout the globe in 42 countries. 

Moody’s rating 

• Moody’s rating predicts the creditworthiness of the company. 
• They quantitatively determine the ability of a company to pay off its credit debts. 
• The calculations are based on the possible loss that the company may face. 
• According to these criteria, the company is rated by Moody’s Investor Services.

Moody’s rating range

• Moody’s ratings have a range of Aaa to C, carrying around 21 ratings within the given range.
• Aaa denotes a high valued company, whereas C shows the poor quality of the company. 
• A high-quality company means low risk in investment.
• The rating is not always accurate. They are always subjected to defaults.
• A highly-rated company has lesser default and lesser risk for investment.
• Whereas a poorly-rated company may have erratic defaults and is at greater risk for any investments.

Categories for Moody’s ratings

Moody’s ratings are based on two different periods. 

• One is for a shorter time range
• The second is for a longer-term range

Short term rating

• Short-term provides the rating on the worthiness of a company for a limited period of one year.
• In simple words, if the company can resolve its short term payments.
• The short-term ratings span 21 categories, from Aaa to C.

Long term rating 

• The long-term rating provides details of the credit risk for more than one year.
• The long-term ratings are across four categories, which list along with the long-term rating and range along with the grades of the company.
• These four categories are as follows. 

Prime-1 (P-1): Prime-1 falls under the long term grades of Aaa to A3. It is the highest quality rating.

Prime-2 (P-2): Prime-2 falls under the range of A2 to Baa2.

Prime-3 (P-3): Prime-3 carries the ratings Baa2 and Baa3. 

Not Prime: The Prime category carries around 11 grades from Ba1 to C. These are the poorer ones.

Types of Securities in Moody’s rating

Moody’s rating includes all possible professional debts of the company. These include:

• Asset-backed security
• Mortgage-backed security
• Bonds
• Convertible bonds
• Medium-term notes

Concerns under Moody’s Corporations

Moody’s Corporation is the head or the parent organisation of the following branches. 

• Moody’s Investor Services
• Moody’s KMV
• Moody’s Economy.com

The company has billions in turnover from credit ratings, the analysis of credit risks, and providing researched data on economic services. It employs thousands of full-time employees for the corporation. 

Impact of Moody’s ratings on our Economy

Moody’s rating decides not just the rating but also the partial fate of a company. They predict the worthiness of a company influencing, and even influencing the number of investments in the company.  

• Moody’s rating limits or enhances the total number of investors or investments made in a company.

• These are set as parameters by investors who don’t have a self-analysis of the market.

• They help the investors in widening the horizon of their investment.

• These ratings help investors to have an external third-party confirmation for their investment.
• They provide a prediction that serves institutions and banks that are present worldwide.
• If the corporation estimates risk in the market of a country, the country is rated poorly. It leads to a bad impression on the economy and the growth of the country. 
• False or erroneous predictions about companies or countries demote the economic standard of the investors.
• The Office of Credit Rating setup inside the Securities and Exchange Commission(SEC) supervises and rectifies such errors of the Nationally Recognised Statistical Rating Organisations (NRSROs). There is an annual check over these organisations to ensure legitimacy.
• Downgrading of a country affects its sovereignty.
• It increases funding for the private sector.
• It affects the growth of the country that has been downgraded. 
• In the year 2019, Moody’s corporation downgraded India’s rating from stable to negative.
• Since Moody’s ratings are accepted worldwide, global investors consider them when devising their investment schedules. 
• It helps them assess the stability of the country and its company in finance and creditworthiness. 
• Certain funds limit themselves to the top graded companies and countries while ignoring the companies graded below.
• A lower rating decreases the investments in a company, thus, affecting and restricting its financial stability.

Conclusion 

The Moody’s Rating grades the creditworthiness of companies based on their ability to pay off their debts and expected losses that the company would face. The rating is provided by Moody’s Investor Services, which is a concern under the parent company, Moody’s Corporation, which is a Nationally Recognised Statistical Rating Organisation. The method of such analysis was first devised by John Moody. The ratings are globally quantified and also viewed worldwide. It partially decides the fate of the investment in a company or a country by any investor.