Moody's Investors Service is a leading global credit rating, research and risk analysis firm which provides crucial benefits and valuable opportunities for issuers and investors alike.
Moody's credit analysis focuses on the fundamental factors and key business drivers relevant to an issuer's long-term and short-term risk profile. The foundation of Moody's methodology rests on two basic questions:
1. What is the risk to the debtholder of not receiving timely payment of principal and interest on this specific debt security?
2. How does the level of risk compare with that of all other debt securities?
Moody's measures the ability of an issuer to generate cash in the future. Determining the predictability of future cash generation is therefore the primary focus of Moody's analysis. This determination is built on a careful analysis of the individual issuer and of its strengths and weaknesses compared to those of its peers worldwide. An examination of factors external to the issuer is also conducted, including industry- or country-level trends that could impact the entity's ability to meet its debt obligations. Of particular concern is the ability of management to sustain cash generation in the face of adverse changes in the business environment.
MOODY'S RATING PROCESS
- In the course of the rating process, a Moody's analyst:
- Gathers information sufficient to evaluate risk to investors who might own or buy a given security,
- Develops a conclusion in committee on the appropriate rating,
- Monitors the security on an ongoing basis to determine whether the rating should be changed, and
- Informs the marketplace of Moody's actions.
The rating process involves an active, ongoing dialogue between the issuer and Moody's analysts. Once published, Moody's ratings are continuously monitored and updated through dialogues and regular meetings, during which issuers are encouraged to raise any concerns and present all materials that are pertinent to the analysis.
If an issuer is new to Moody's, the rating process begins with an introductory meeting or teleconference call. The purpose of this initial discussion is to introduce Moody's rating process and methodology, and to provide additional information regarding the specific sorts of data that will be most useful in developing an understanding of the organization. Our goal is to be as transparent as possible, and to ensure that issuers understand Moody's rating methodology and process.
1) Meeting with Management
For a first-time rating, the initial rating meeting is generally held at a company's head office location, and may last from a half day to a full day. Depending upon the nature of the entity being rated, site visits may also be involved. The Moody's analyst will discuss the meeting agenda with the issuer in advance of the meeting, to ensure the issuer is aware of the type of information Moody's typically receives at such a meeting. The discussion at the rating meeting will generally focus on the following subjects:
- Background and history of the company/entity
- Industry/sector trends
- National political and regulatory environment
- Management quality, experience, track record, and attitude toward risk-taking
- Management structure
- Basic operating and competitive position
- Corporate strategy and philosophy
- Debt structure, including structural subordination and priority of claim, and
- Financial position and sources of liquidity, including
(1) cash flow stability and predictability and ability to service debt obligations,
(2) operating margin, and
(3) a balance sheet analysis in terms of debt profile and maturity.
Following the meeting, the Moody's analyst will continue with the analysis, and will generally conduct further discussions with the issuer in order to obtain follow-up information and clarification. Upon completion of the analysis, the Moody's analyst will make a recommendation to a Moody's rating committee.
2) Moody's Rating Committee
A credit rating is forward-looking, and, by its very nature, subjective. The role of the Moody's rating committee is to introduce as much objectivity into the process as possible by bringing an understanding of the relevant risk factors and viewpoints to each and every analysis. For all sectors, the rating process is guided by a common set of basic analytical principles, including global consistency, an emphasis on qualitative factors, and a focus on the long-term.
For a first-time rating, the lead analyst will convene a rating committee once all analysis has been completed. It is his/her responsibility to include as many credit risk professionals as necessary who have the appropriate knowledge and experience to address all of the analytical perspectives relevant to the issuer. Factors considered in determining the make-up of a rating committee may include the size of the issue, the complexity of the credit, and the introduction of a new instrument. Also taken into account are any issues that will have ramifications in the market or any relevant sovereign issues. Moody's goal is to integrate the decision-making process on a global basis, to facilitate worldwide ratings consistency.
The role of the lead analyst at the rating committee meeting is to present the rating recommendation and rationale, and to ensure that all relevant issues related to the credit are presented and discussed. The discussions of Moody's rating committee are strictly confidential, and only Moody's analysts may serve on them.
3) Rating Process Timeline
Moody's rating process, from the time of the preliminary discussion to the public release of the rating, takes approximately 60-90 days. However, Moody's is sensitive to issuers' needs and timing concerns, and will be as flexible and responsive as possible in order to accommodate tighter financing schedules and other requirements.
4) Rating Dissemination and Publication
"Once the rating committee has made its decision, the issuer will be informed of the rating and Moody's rationale. For a public rating, the new rating is distributed by press release simultaneously to the major financial media worldwide. This press release will also appear on Moody's global website www.moodys.com, as well as other relevant regional and local Moody's websites."
5) External Rating Appeals
There may be instances in which the issuer has new or additional information that was not available to Moody’s for consideration by the rating committee in reaching its not-yet-published credit rating decision. In these circumstances, issuers may request that Moody’s reconsider its decision based on this new or additional information, a process that is commonly referred to as an “external appeal.”
Issuers may not “appeal” a credit rating simply because they do not agree with the rating outcome. Nor is the appeal process intended to enable a rated entity who is dissatisfied with the current credit rating decision to delay publication of the credit rating. Moody’s analysts work with the issuer throughout the rating process to obtain salient information for consideration by the rating committee and consequently, the criteria for an external appeal are not expected to be met frequently. If an issuer communicates to Moody’s its desire for an “external appeal” before the credit rating is published, Moody’s – if not precluded by other circumstances – will delay publishing the credit rating while it assesses the relevance and significance of the new information that has been received from the issuer or its agent(s). If Moody’s believes that the new information may reasonably lead the rating committee to reconsider the rating conclusion, the rating committee will be reconvened as quickly as possible to consider the impact of the information on the credit rating.
As a general rule, the issuer should provide Moody’s with documentation surrounding the new information promptly; that is to say, within several hours of the time the issuer informed Moody’s of the existence of the new information. The issuer may be given additional time to produce the necessary documents, if the reason for delay is determined by Moody’s to be valid and unavoidable. During the process Moody’s will protect the information provided in accordance with the Moody’s Investors Service Code of Professional Conduct.
6) Right of Refusal of the Moody's Rating in Asia Pacific
Moody's provides first-time rating applicants with the ability to determine whether their ratings will be made public, subject to certain limitations, in the event of a debt issuance by the applicant in any of the international capital markets at a later date. If applicants choose not to have their rating published, then both Moody's and the applicant will keep the rating confidential. Companies will not be permitted to disclose their Moody's rating on a selective basis.
7) Treatment of Confidential Information
Moody's recognizes that an issuer's trust in the confidential nature of the rating relationship is an essential component of the rating process. Confidential information will not be publicly disclosed, but, if relevant, will be used in the formulation of the public rating opinion.
8) On-Going Relationship
Following assignment and publication of the rating, Moody's will meet with management at least annually, or more frequently as events and industry developments warrant. The Moody's analyst will maintain regular contact with the issuer both electronically and via the telephone, and will be available at all times to respond to an issuer's needs or questions. Following publication of the press release announcing the initial assignment of the rating, Moody's will publish quarterly summary opinions on the issuer. For certain very active issuers, an annual in-depth analysis will also be published. Press releases will be issued to announce any subsequent rating actions or outlook changes.
MOODY'S RATING METHODOLOGY
Moody's analyzes all relevant risk factors and viewpoints in arriving at a rating opinion. Several analytical principles guide the process, including:
1. Focus on the long term - Moody's analytical focus is on fundamental factors that will drive an issuer's long-term ability to meet debt payments, such as major economic downturns, a radical change in management strategy, or major regulatory developments. The ratings are not intended to ratchet up and down with business or supply-demand cycles or to reflect short-term market movements.
2. Emphasis on stability and predictability of cash flow - One of Moody's main analytical concentrations is on understanding the drivers of cash flow generation and, in particular, the predictability and sustainability of cash flow. Moody's will conduct financial analysis to determine an issuer's cash flow resilience in the event of an economic downturn.
Specific risk factors likely to be weighed in a given rating will vary considerably by sector. Detailed methodology reports for all major sectors that we follow can be obtained in the Rating Methodologies section of this site.
WHAT TO EXPECT FROM THE MOODY'S RATING RELATIONSHIP
Moody's understands that issuers want timely and clear responses to their questions and concerns. These are essential elements for a positive professional relationship. To that end, we have developed some best practices for our analytical teams:
- The Moody’s analytical team will contact you ahead of meetings to let you know our agenda and to seek your agenda issues, tell you who will be attending from Moody’s, and confirm the time and place of the meeting.
- We will come prepared, having read recent materials about your organization, such as the presentation book for the meeting and the quarterly statement.
- We will strive to ensure that you know where we stand on key credit issues for your organization (both the strengths and challenges), our credit rating outlook, and the most important factors of our analysis.
- We will strive to ensure that you are familiar with our analytical methodologies.
- We will listen carefully to your views on your firm and your industry.
- We will keep open minds.
Moody’s asks issuers to let us know how we measure up on these commitments. Subsequent to most rating meetings, issuers receive a feedback form. We want to know an issuer’s opinion, to continuously ensure we provide the highest quality rating agency service.
THE BENEFITS OF A MOODY’S RATING
There are several ways in which investors use ratings that, in turn, provide value to issuers. For many investors, ratings are a critical element in pricing securities and are often used as a benchmark for setting investment guidelines. With dependable, globally comparable opinions on credit risk in hand, institutions may be open to a wider variety of securities investments from a broader array of firms.
1) Wider Access to Capital
Moody’s credit opinions are widely disseminated, broadly used and clearly understood by institutional investors in Asia and throughout the world, making an issuer’s debt more attractive to a wider range of potential buyers. In today’s global markets, a rating is effectively a “credit passport” that can provide access to both domestic and international pools of debt capital.
2) Financing Flexibility
This wider market access typically translates into reduced funding costs, particularly for higher-rated issuers. The credibility of Moody’s ratings may also allow rated issuers to enter the capital markets more frequently and more economically and to sell larger offerings at longer maturities.
3) Market Stability
Moody’s ratings and research reports help to maintain and stabilize investor confidence, especially during periods of market stress. For example, a news item could adversely affect the prices of a company’s outstanding bonds, even if the news has no real impact on the bonds\' long-term creditworthiness. The reassurance of a Moody’s rating and accompanying analysis of the situation can help to alleviate investor concerns about this type of “headline risk”.