Rating agencies

Image provided to Microsoft by iStockphoto. Used with permission from Microsoft The role of the rating agencies is to measure with precision the risk of non-repayment of the debts or non-respect of the financial commitments of the organizations they audit.
  • Financial establishments: banks, insurance and reinsurance companies
  • Private or public industrial and commercial companies
  • Government agencies
  • Local communities: departments, regions or commune, ...
The main rating agencies are AM Best, Standard & Poor's, and Moody & Fitch.

Rating methods

They differ according to the nature of the audited institution. However, all of them will look into factors that reinforce or weaken the repayment or payment capacity. For the companies, financial analysis, ...

... is carried out using... and help evaluate
  • balance sheets over several years
  • provisional documents
  • tools for internal audit
  • discussions with the Management
  • risk coverage as compared to underwriting liabilities
  • competitive positioning
  • market trend strategy
  • prospects for growth
  • the perenniality of financial equilibrium

Ratings are established according to a predetermined scale. The scale is expressed in letters of the alphabet and varies according to agencies.

Impact on accounts

The downgrading or upgrading of a rating has a direct impact on the evolution of the company's activity. Going from "AA" (the equivalent of 17 to 19 out of 20) to "A" (14 to 16 out of 20) can cause a significant fall of the company's activity volume. Every time a rating is downgraded, the cost of its resources increases, and after a certain number of operations, the rating is definitely suspended.

Impact on the stock exchange rates

The attribution of a grade does not represent a suggestion to purchase or sell, but it has a considerable effect on the company's image. Thus, it is frequent to see a stock drop after a bad rating or a downgrading (and vice versa). However, rating agencies often react with some delay, which limits the negative impact. Thus, difficulties are already taken into account by the market and integrated in the rates.

By way of example, the charts below represent the rating scales concerning companies' financial growth used by AM Best and S & P respectively:

AM BEST Rating Scale
RatingMeaning
A++, A+Superior
A, A-Excellent
B++, B+Very good
B, B-Fair
C++, C+Marginal
C, C-Weak
DPoor
EUnder regulatory supervision
FIn liquidation
SRating suspended
Standard and Poor's Rating Scale
RatingMeaning
AAAExtremely strong
AAVery strong
AStrong
BBBGood
BBMarginal
BWeak
CCCVery weak
CCExtremely week
RUnder regulatory supervision
0
Your rating: None
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