Monday, March 4, 2013

Are the Rating Agencies in Sync?

This morning's Financial Times brought with it another wonderful article by Arturo Cifuentes.  Much of his commentary on ratings reform is not new - but it is important that we be reminded of the distance we have yet to travel.

We're going to examine one element of his piece, an element he has brought up before: the rather peculiar situation of credit rating agencies coming to the same conclusions (i.e., equivalent, mapped ratings) in the structured finance arena, despite the application of different methods and proprietary data (and different rating scales, and having different ratings meanings, but Prof. Cifuentes doesn't mention these here).

Digging a little deeper, we notice similar behavior in other spaces too.  In corporate finance space, Dell Corporation - the maker of laptop computers, among other things - had not had its rating visited by any of the "Big Three" credit rating agencies since 2007.  On February 5, 2013, all three rating agencies downgraded Dell. (See screenshots courtesy of Bloomberg LP.)

Equally interesting, the last time S&P and Fitch analyzed Dell was within a week of one another in August 2007.

Late last month, the Economist ran an article that tried to describe how the rating agencies rate sovereign debt.  What the article did do was show just how similar their opinions are of sovereign countries.

We did a back of the envelope analysis to establish whether they tend to share the same ways of looking at sovereign countries, by converting the ratings to a simple comparable scale, and measuring correlation using the excel function. (Moody's Aaa and S&P or Fitch AAA were all converted to a "21"; Moody's Aa1 and S&P/Fitch's AA+ were converted to a "20" and so on.)

We found the correlation to be extraordinary:

Of course, we're not saying the rating agencies always agree.  We covered in 2011 how in the realm of seasoned structured finance deals, they vary widely in their opinions.  But the concept here may be that there is less pressure to agree once the deal gets done or for securities over which the scrutiny is limited. When they're competing, however, they seem increasingly to agree.

1 comment:


How can the united states still have an investment grade credit rating when its debt is 100% of its GDP.