Level 1 CFA® Exam:
Rating Agencies

Rating agencies give credit ratings to issuers and issues. Investors use these credit ratings in the investment decision process when they analyze the risk of investments.

The most important rating agencies are:

• Moody’s Investor Service (aka. Moody’s),
• Standard & Poor’s (aka. S&P),
• Fitch Ratings (aka. Fitch).

Examples of long-term ratings:

Please note that for long-term ratings:

• both S&P and Fitch use exactly the same symbols.
• the highest possible rating is Aaa for Moody’s and AAA for S&P and Fitch.
• the lowest possible rating (an issue in default) is C for Moody’s and D for S&P and Fitch.
• all agencies usually provide outlooks for the future: positive, stable, or negative.

The issue credit rating (aka. CCR = corporate credit rating) doesn’t have to be exactly the same as the issuer credit rating (aka. CFR = corporate family rating). The issuer credit rating usually applies to the issuer’s senior unsecured debt, whereas the issue credit rating depends on the terms like the priority of payments, etc. for a given issue.

We use the term notching to describe the process of adjusting the issue credit rating to reflect the credit risk of the issue.

1. The most important rating agencies are: Moody’s Investor Service (aka. Moody’s), Standard & Poor’s (aka. S&P), and Fitch Ratings (aka. Fitch).
2. We define investment grade bonds as bonds that meet the following condition: Moody’s >> Baa3 or higher; S&P >> BBB- or higher; Fitch >> BBB- or higher.
3. The issuer's credit rating usually applies to the issuer’s senior unsecured debt.
4. When using credit ratings an analyst should be aware of their limitations, e.g. credit ratings are usually a lagging indicator of the market evaluation of the credit risk.