Assessing the Creditworthiness of Corporate Bond Rates

To assist investors determine the risks of investing in a particular bond issue, rating agencies such as Standard & Poor’s, Moody’s and Fitch Ratings conduct research into many of the corporate bond issues available to institutional investors. Through this research, which includes assessing the financials of the issuing company and its ability to meet its obligations to bondholders, the ratings agencies provide a credit rating. These credit ratings represent an assessment of the ability of the bond issuer to meet its obligations, including its ability to pay interest and to repay the principal on maturity. Credit ratings assigned by ratings agencies represent their opinions of the quality of the bonds, but not their market risk. It should also be remembered that ratings do not offer an assessment of the value of any particular corporate bond as an investment. Also, ratings agencies can downgrade the rating on any bond at any time. Rating agencies generally adopt differing terminology to indicate their ratings for particular issues. It should also be noted that whilst credit rating agencies did a terrible job in assessing the risk in complex securities such as CDOs, CLOs, RMBS and CMBS issues that caused the credit crisis, their ratings of actual operating companies fared much better. The one exception was the financial sector which they over-rated, ironically because of the ratings on all of the complex securities held on balance sheet at the right level.