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Bond credit rating business of Moody's Corporation

The company ranks the creditworthiness of borrowers using a standardized ratings scale which measures expected investor loss in the event of default. Moody's Ratings rates debt securities in several bond market segments. These include government, municipal and corporate bonds; managed investments such as money market funds and fixed income funds; financial institutions including banks and non bank finance companies; and asset classes in structured finance. In Moody's Ratings system, securities are assigned a rating from Aaa to C, with Aaa being the highest quality and C the lowest quality. Moody's was founded by John Moody in 1909, to produce manuals of statistics related to stocks and bonds and bond ratings. In 1975, the company was identified as a Nationally Recognized Statistical Rating Organization (NRSRO) by the U. S. Securities and Exchange Commission. Following several decades of ownership by Dun & Bradstreet, Moody's Investors Service became a separate company in 2000. Moody's Corporation was established as a holding company. On 6 March 2024, Moody's Investors Service was renamed to Moody's Ratings.

Together, they are sometimes referred to as the Big Three credit rating agencies. While credit rating agencies are sometimes viewed as interchangeable, Moody's, S&P and Fitch in fact rate bonds differently; for example, S&P and Fitch Ratings measure the probability that a security will default, while Moody's ratings seek to measure the expected losses in the event of a default. All three operate worldwide, maintaining offices on six continents, and rating tens of trillions of dollars in securities. However, only Moody's Corporation is a free standing company. Credit rating agencies also play an important role in the laws and regulations of the United States and several other countries, such as those of the European Union. In the United States their credit ratings are used in regulation by the U. S. Securities and Exchange Commission as Nationally Recognized Statistical Rating Organizations (NRSROs) for a variety of regulatory purposes. However, another aspect of mechanical use of ratings by regulatory agencies has been to reinforce "pro cyclical" and "cliff effects" of downgrades. In October 2010, the Financial Stability Board (FSB) created a set of "principles to reduce reliance" on credit rating agencies in the laws, regulations and market practices of G 20 member countries. including, for example, A. M. Best, which focuses on obligations of insurance companies. Companies with which Moody's competes in specific areas include investment research company Morningstar, Inc. and publishers of financial information for investors such as Thomson Reuters and Bloomberg L. P.

Especially since the early 2000s, Moody's frequently makes its analysts available to journalists, and issues regular public statements on credit conditions.

According to Moody's, the purpose of its ratings is to "provide investors with a simple system of gradation by which future relative creditworthiness of securities may be gauged". To each of its ratings from Aa through Caa, Moody's appends numerical modifiers 1, 2 and 3; the lower the number, the higher end the rating. Aaa, Ca and C are not modified this way. As Moody's explains, its ratings are "not to be construed as recommendations", nor are they intended to be a sole basis for investment decisions. In addition, its ratings don't speak to market price, although market conditions may impact credit risk. Moody's credit ratings Investment grade Rating Long term ratings Short term ratingsAaa Rated as the highest quality and lowest credit risk. Prime 1Best ability to repay short term debtAa1 Rated as high quality and very low credit risk. Aa2Aa3A1 Rated as upper medium grade and low credit risk. A2 Prime 1/Prime 2Best ability or high ability to repay short term debtA3Baa1Rated as medium grade, with some speculative elements and moderate credit risk. Prime 2 High ability to repay short term debtBaa2 Prime 2/Prime 3High ability or acceptable ability to repay short term debtBaa3 Prime 3Acceptable ability to repay short term debt Speculative grade Rating Long term ratings Short term ratingsBa1 Judged to have speculative elements and a significant credit risk. Not PrimeDo not fall within any of the prime categoriesBa2Ba3B1 Judged as being speculative and a high credit risk. B2B3Caa1 Rated as poor quality and very high credit risk. Caa2Caa3Ca Judged to be highly speculative and with likelihood of being near or in default, but some possibility of recovering principal and interest. C Rated as the lowest quality, usually in default and low likelihood of recovering principal or interest.

Moody's traces its history back to two publishing companies established by John Moody, the inventor of modern bond credit ratings. In 1900, Moody published his first market assessment, called Moody's Manual of Industrial and Miscellaneous Securities, and established John Moody & Company. Moody was forced to sell his business, due to a shortage of capital, when the 1907 financial crisis fueled several changes in the markets. Moody returned in 1909 with a new publication focused solely on railroad bonds, Analysis of Railroad Investments, and a new company, Moody's Analyses Publishing Company. Moody was also the first to charge subscription fees to investors. and the increased complexity of the financial markets. Rating agencies also grew in size as the number of issuers grew, both in the United States and abroad, making the credit rating business significantly more profitable. In 2005 Moody's estimated that 90% of credit rating agency revenues came from issuer fees. The end of the Bretton Woods system in 1971 led to the liberalization of financial regulations, and the global expansion of capital markets in the 1970s and 1980s. The 1980s and beyond saw the global capital market expand; Moody's opened its first overseas offices in Japan in 1985, followed by offices in the United Kingdom in 1986, France in 1988, Germany in 1991, Hong Kong in 1994, India in 1998 and China in 2001. as well as criticism following the collapse of Enron, the U. S. subprime mortgage crisis and subsequent late 2000s financial crisis. In 1998, Dun & Bradstreet sold the Moody's publishing business to Financial Communications (later renamed Mergent). Following several years of rumors and pressure from institutional shareholders, in December 1999 Moody's parent Dun & Bradstreet announced it would spin off Moody's Investors Service into a separate publicly traded company. Although Moody's had fewer than 1,500 employees in its division, it represented about 51% of Dun & Bradstreet profits in the year before the announcement. The spin off was completed on September 30, 2000, and, in the half decade that followed, the value of Moody's shares improved by more than 300%. According to the Financial Crisis Inquiry Report, during the years 2005, 2006, and 2007, rating of structured finance products such as mortgage backed securities made up close to half of Moody's rating revenues. From 2000 to 2007, revenues from rating structured financial instruments increased more than fourfold. However, there was some question about the models Moody's used to give structured products high ratings. In June 2005, shortly before the subprime mortgage crisis, Moody's updated its approach for estimating default correlation of non prime/nontraditional mortgages involved in structured financial products like mortgage backed securities and Collateralized debt obligations. Its new model was based on trends from the previous 20 years, during which time housing prices had been rising, mortgage delinquencies very low, and nontraditional mortgage products a very small niche of the market. On July 10, 2007, in "an unprecedented move", Moody's downgraded 399 subprime mortgage backed securities that had been issued the year before. Three months later, it downgraded another 2506 tranches ($33.4 billion). By the end of the crisis, Moody's downgraded 83% of all the 2006 Aaa mortgage backed security tranches and all of the Baa tranches. In June 2013, Moody's Investor Service has warned that Thailand's credit rating may be damaged due to an increasingly costly rice pledging scheme which lost 200 billion baht ($6.5 billion) in 2011–2012.

Moody's, along with the other major credit rating agencies, is often the subject of criticism from countries whose public debt is downgraded, generally claiming increased cost of borrowing as a result of the downgrade. Examples of sovereign debt downgrades that attracted significant media attention at the time include Australia in the 1980s, Canada and Japan in the 1990s, Thailand during the 1997 Asian financial crisis, <! Downgrades of non sovereign debt include those of U. S. automobile manufacturers General Motors and Ford, and major U. S. cities including New York City and Philadelphia. Moody's argued that its assessment was "opinion" and therefore constitutionally protected; the court agreed, and the decision was upheld on appeal. In 2005, unsolicited ratings were at the center of a subpoena by the New York Attorney General's office under Eliot Spitzer, but again no charges were filed.

The "issuer pays" business model adopted in the 1970s by Moody's and other rating agencies has been criticized for creating a possible conflict of interest, supposing that rating agencies may artificially boost the rating of a given security in order to please the issuer. Other alleged conflicts of interest, also the subject of a Department of Justice investigation the mid 1990s, raised the question of whether Moody's pressured issuers to use its consulting services upon threat of a lower bond rating. Moody's has maintained that its reputation in the market is the balancing factor, and a 2003 study, covering 1997 to 2002, suggested that "reputation effects" outweighed conflicts of interest. Thomas McGuire, a former executive vice president, said in 1995 that: "[W]hat's driving us is primarily the issue of preserving our track record. That's our bread and butter". In March 2021, Moody's reached a settlement with the European Union regarding alleged conflicts of interest. Moody's was fined 3.7 million euros ($4.35 million).

The global financial crisis of the late 2000s brought increased scrutiny to credit rating agencies' assessments of complex structured finance securities. Moody's and its close competitors were subject to criticism following large downgrade actions beginning in July 2007. According to the Financial Crisis Inquiry Report, 73% of the mortgage backed securities Moody's had rated triple A in 2006 were downgraded to junk by 2010. In its "Conclusions on Chapter 8", the Financial Crisis Inquiry Commission stated: "There was a clear failure of corporate governance at Moody's, which did not ensure the quality of its ratings on tens of thousands of mortgage backed securities and CDOs." Faced with having to put more capital against lower rated securities, investors such as banks, pension funds and insurance companies sought to sell their residential mortgage backed securities (RMBS) and collateralized debt obligation (CDO) holdings. The value of these securities held by financial firms declined, and the market for new subprime securitizations dried up. Some academics and industry observers have argued that the rating agencies' mass downgrades were part of the "perfect storm" of events leading up to the financial crisis in 2008. In 2008, a study group established by the Committee on the Global Financial System (CGFS), a committee of the Bank for International Settlements, found that rating agencies had underestimated the severity of the subprime mortgage crisis, as had "many market participants". According to the CGFS, significant contributing factors included "limited historical data" and an underestimation of "originator risk" factors. The CGFS also found that agency ratings should "support, not replace, investor due diligence" and that agencies should provide "better information on the key risk factors" of structured finance ratings. In October 2007, Moody's further refined its criteria for originators, "with loss expectations increasing significantly from the highest to the lowest tier". In May 2008, Moody's proposed adding "volatility scores and loss sensitivities" to its existing rankings. Although the rating agencies were criticized for "technical failings and inadequate resources", the FSB stated that the agencies' "need to repair their reputation was seen as a powerful force" for change. In April 2013, Moody's, along with Standard & Poor's and Morgan Stanley, settled fourteen lawsuits filed by groups including Abu Dhabi Commercial Bank and King County, Washington. The lawsuits alleged that the agencies inflated their ratings on purchased structured investment vehicles. In January 2017, Moody's agreed to pay nearly $864 million to settle with the Department of Justice, other state authorities and Washington. A fine of $437.5 million would be paid to the DOJ, and the remaining $426.3 million penalty would be split among 21 states and the District of Columbia. Then California Attorney General Kamala Harris and then Missouri Attorney General Joshua Hawley were among the state signatories to the settlement.

In March 2013 Moody's Investors Service published their report entitled Cash Pile Grows 10% to $1.45 Trillion; Overseas Holdings Continue to Expand in their Global Credit Research series, in which they examined companies they rate in the US non financial corporate sector (NFCS). According to their report, by the end of 2012 the US NFCS held "$1.45 trillion in cash", 10% more than in 2011. At the end of 2011, US NFCS held $1.32 trillion in cash which was already a record level. "Of the $1.32 trillion for all the rated companies, Moody's estimates that $840 billion, or 58% of the total cash, is held overseas."