Understanding Credit Ratings
Overview
A Credit Rating is an Informed Opinion
Credit ratings are forward-looking opinions about an issuer’s relative creditworthiness. They provide a common and transparent global language for investors to form a view on and compare the relative likelihood of whether an issuer may repay its debts on time and in full. Credit Ratings are just one of many inputs that investors and other market participants can be considered as part of their decision-making processes.
The mission of S&P Global Ratings is to provide high-quality, objective, independent, and rigorous analytical information to the marketplace. The quality, integrity, and transparency of our ratings are at the heart of what we do.
Our credit ratings are designed to provide relative rankings of creditworthiness. They are assigned based on transparent methodologies available free of charge on our website. These methodologies are calibrated using stress scenarios (see Understanding Ratings Definitions and Ratings Definitions) and Credit Stability Criteria are designed to promote rating comparability across different sectors and over time. They are subject to a rigorous independent validation process.
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Performance of Ratings
Performance of Ratings
Higher ratings have shown lower defaults.
Our credit ratings have shown strong performance over time as effective measures of relative creditworthiness: Our studies have shown that the higher the ratings, the lower the default rates, and vice-versa.
For example, our historical statistics show a 3-year cumulative default rate for a ‘BBB’ rated company of 0.91%, vs 4.17% for a ‘BB’ rated one, 12.41% for a ‘B’ rated one and 45.67% for a ‘CCC/CC’ rated one.
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Rating Changes
Ratings Changes
Ratings change to reflect a current opinion of credit risks.
Credit ratings are designed to be dynamic, and evolve to reflect changes to market conditions or issuer-specific credit factors. They are not designed to be static. We change ratings if and when our view of credit risk changes.
We do this based on our analysis of relevant information, and in line with our published methodologies. Because ratings evolve over time to reflect economic and market developments or issuer-specific credit drivers, they are seen to provide valuable opinions about current credit risk.
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How We Have Evolved
How We Have Evolved
Ratings agencies: What has changed?
Driven by lessons learned from the financial crisis and new regulations introduced around the world, we invested heavily to further the quality, transparency, and integrity of our ratings.
We emerged as a stronger organization and encourage you to read on for additional detail on both action S&P Global Ratings has taken and the significant regulatory changes made globally.
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Business Model
Business Model
We believe in market choice.
S&P Global Ratings uses the issuer-pays business model. Under this model, rating agencies charge issuers for providing a rating. The model promotes transparency by allowing ratings to be released publicly free of charge- meaning they’re scrutinized every day by all corners of the market, the media, and academia. It also provides rating agencies with access to high-quality information from issuers that might not otherwise be available and enhances the quality of analysis.
We have safeguards to identify and manage potential conflicts of interest, from which no business model is immune. For example, we clearly separate out commercial and analytical functions, and restrict communications between sales personnel and ratings analysts. We comply with regulations around the globe, which impose strict rules on who we manage and disclose any conflicts.
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Use of Ratings
Use of Ratings
Credit ratings are one of several inputs investors (e.g., portfolio managers and analysts at mutual funds, pension funds, insurance companies, and university endowments, etc.) may use in their decision-making process. Other factors could include, for example, analyzing the issuer’s financial statements and SEC filings, meeting with company management, reviewing sell side analyst reports, conducting proprietary research, and building financial models. Credit ratings add to the mix of inputs available to investors’ objective, independent, forward-looking assessments on an ongoing basis of the relative likelihood of whether an issuer may repay its debts on time and in full.
Credit ratings do not speak to investment merits.
Our Values
S&P Global Ratings is committed to providing transparency to the market through high-quality independent opinions on creditworthiness. Safeguarding the quality, independence and integrity of our ratings, including by identifying and managing potential conflicts of interest, is embedded in our culture and at the core of everything we do.
We have been subject to regulatory oversight for over a decade. We are currently overseen by more than 20 regulators around the globe.
Ratings Process
There are 8 Steps in our Ratings Process
Credit ratings are assigned by committees composed of analysts, experts in each asset class, which consider a broad range of financial and business attributes, along with other factors, such as competitive position, business risk profile and the current economic environment, in the application of the relevant methodologies.
Ratings Scale
We continuously work to refine our ratings to uphold the highest level of excellence. To measure performance, we conduct studies that assess how much a rating has moved up or down over a given period, also known as its transition rate. As part of ratings surveillance, we continuously analyze real-time and historical data.
It is because our ratings evolve over time to reflect changes to market or issuer-specific credit drivers that they are seen to have value as one of several factors market participants may consider when assessing credit risk. If we see events taking place that impact our view on an issuer’s relative creditworthiness, we adjust our ratings accordingly to communicate our views so the market has the correct perception of how we view relative creditworthiness.
Videos
Access our library of videos to learn more about credit ratings and S&P Global Ratings process.
Guides
Scroll to read our guides explaining the credit ratings process.