The role of ratings agencies is to assess the credit worthiness of companies and government agencies that issue debt instruments to investors. Although the issuers actually pay for the privilege of having their business scrutinized, the agencies provide a neutral analysis of a debt issuer's ability to repay its obligations.
The debt ratings sector is dominated by three companies: Standard & Poor's (S&P), Moody's Investors Service and Fitch Ratings. With analysts based in business centers worldwide, S&P and Moody's are by far the largest, holding about 75 percent of the business. Fitch, the smallest of the three, has grown larger in recent years through acquisitions.
Another well-known agency, A.M. Best, specializes in rating insurance companies -- both their debt and their "financial strength," or the ability to pay policy claims. Best also rates U.S. banks and bank holding companies, including small and mid-sized community banks. The company touts its location in the bucolic horse country of central New Jersey as being perfect for people seeking a "stable environment, without the inconvenience of commuting to a major urban center."
All four companies issue debt rankings in a similar format, which makes it easy for investors to compare the ratings of one organization to the other. A debt issuer rated AAA (in the format used by S&P and Fitch) or Aaa (in the Moody's version) is judged to be almost certain to repay its debts. Any bonds rated Ba by Moody's and BB by Fitch and S&P are considered to be speculative grade, or "junk." While debt consigned to this category will attract investors, the issuing company will have to pay higher yields in order to get them. The lowest possible ranking is "C." Buyers of these bonds face the greatest prospect of not getting their money back.
Debt ratings aren't static. Bonds that may have started out with an investment grade rating can be downgraded if the fortunes of a company, industry or government take a turn for the worse.
The nature of debt financing has changed dramatically over the years and the ratings agencies have had to adapt accordingly. For example, Moody's notes on its Web site that its analysts follow the debt of 100 countries, 11,000 companies and 25,000 public finance issues. On top of that, it follows 70,000 structured finance deals, a number that is undoubtedly growing because structured finance - which refers to the exotic credit-derivative instruments that have become hugely popular tools for managing risk - is the fastest-growing segment of Moody's business, according to a company spokesperson.
Plus, Wall Street has figured out ways to securitize everything from credit card debt to cosmetic surgery receivables. Figuring out the level of risk associated with those kinds of deals falls to the analysts in the structured finance ratings teams, who are generally quantitative specialists. Lawyers are also a part of the analytical teams.
During 2006, Fitch Ratings created a group for rating U.S. commercial real estate collateralized debt obligations due to increased volumes of issuance. CDOs are pools of debt instruments repackaged into components carrying different levels of risk.
Roles and Career Paths
Ratings agencies look for people with training in finance, mathematics, economics and similar quantitative disciplines. Advanced degrees aren't always required but they can be helpful in landing a job. (In the words of one analyst: "We have people who have come in with a bachelor's degree and a thirst for knowledge.")
Typically, analysts at ratings agencies specialize in particular product types such as corporate finance, which is rating particular companies; public finance, which follows local, state and provincial governments; sovereign debt, which is issued by countries; infrastructure debt, which might be issued by a utility company or a government agency that funds development projects like road construction; financial institutions; or the structured finance arena. Depending on their area of specialization, staffers can expect some element of travel to go along with their work.
Most agencies offer young talent considerable opportunity to grow and take on new responsibilities as their careers progress.
Skills and Qualifications
- Analytical, statistical and quantitative skills are most desirable.
- MBAs or other graduate degrees useful and sometimes required.
- Strong written and oral communication skills.
- Ability to clearly express complex issues.
- Self-motivation and the ability to meet deadlines without direct supervision