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Understanding Risk



In a World of Short-Term Outlooks, Long-Term Opinions are Vital


In today's volatile markets, there is no shortage of financial commentators who are quick to respond to current events and to offer their short-term expectations. But most fixed-income market participants are also in for the long haul. Investors typically have long-term exposures to debt with maturities from several years to more than a century, while borrowers hope to maintain access to capital market funding for many years beyond their latest issue.


So Moody's takes a different perspective. We focus on the fundamental factors that will drive each rated entity's ability and willingness to meet its credit obligations over the long term.


As a rule of thumb, we look out over a time horizon of five-to-ten years at least through one full economic cycle. Moody's ratings do not ratchet up or down in response to short-term events such as quarterly earnings reports.


Rather, our emphasis is on a qualitative assessment of the "plausible crisis scenarios" that a rated borrower is likely to face and the fundamental investor protections that would enable management to continue to meet debt payments should the worst occur.


Moody's analysts look at each issuer's business and financial statistics. And they make extensive use of computer modeling techniques. But they spend most of their time sorting out the fundamental credit strengths and weaknesses unique to each entity and management team. Their aim is to understand the long-term risks specific to each borrower's industry, country, and region.


~Retrospective default studies provide the best measure of a rating agency's track record. Moody's annual default studies offer solid evidence that Moody's ratings have been highly reliable predictors of long-term credit risk and default.~