• Home
  • News
    • People moves
    • Africa
    • Asia
    • Australia
    • Canada
    • Caribbean
    • Domicile
    • Europe
    • Latin America
    • North America
    • Middle East
    • US
    • US
    • UK
  • Products
    • Funds
    • Pensions
    • Platforms
    • Insurance
    • Investments
    • Private Banking
    • Citizenship
    • Taxation
  • Fintech
  • Regulation
  • ESG
  • Expats
  • In Depth
  • Special Reports
  • Directory
  • Video
  • Advertise with us
  • Directory
  • Events
  • European Fund Selector
  • Newsletters
  • Follow us
    • Twitter
    • LinkedIn
    • Newsletters
  • Advertise with us
  • Directory
  • Events
    • Upcoming events
      event logo
      International Investment Nordic Forum 2021

      International Investment is delighted to announce the 2021 International Investment Nordic Forum which will take place on Tuesday March 9, at 9am (GMT). This curated virtual event will be broadcast live and will feature a series of fund manager interviews and presentations, as well as interviews with some of the Nordic regions top fund selectors.

      • Date: 09 Mar 2021
      • ONLINE, ONLINE
      event logo
      Sustainable Investment Festival 2021

      The Sustainable Investment Festival will run online from 22-25 June and will include thought-provoking presentations from renowned keynote speakers, innovative breakout events and sessions specifically tailored to meet the information needs of fund selectors, financial advisers, pension consultants, trustees and scheme managers.

      • Date: 22 Jun 2021
      • Online, Online
      View all events
  • European Fund Selector
International Investment
International Investment

Sponsored by

Sharing Alpha
  • Home
  • News
  • Products
  • Fintech
  • Regulation
  • ESG
  • Expats
  • In Depth
  • Special Reports
  • Video
  • Fixed Income

Yann le Pallec at S&P's Ratings Service identifies 10 biggest misconceptions

  • Investment Europe
  • 04 December 2013
  • Tweet  
  • Facebook  
  • LinkedIn  
  • Send to  

Yann le Pallec, EMEA head of Standard & Poor's Ratings Services, has addressed 10 of the most common misconceptions about credit ratings.

Yann le Pallec, EMEA head of Standard & Poor’s Ratings Services, has addressed 10 of the most common misconceptions about credit ratings.

1: Credit ratings tell me if I have a good investment

Related articles

  • S&P puts 15 eurozone nations on negative credit watch
  • Time to buy corporate bonds approaching, says Kames Capital's Milburn
  • Feri plans expansion to Pfandbriefe and structured finance
  • Focus on corporate bonds - Nordic supply and demand to increase, says S&P

Ratings are an opinion about the capacity and willingness of a borrower to meet its financial obligations. They are not buy or sell recommendations, nor are they substitutes for independent investment analysis. While creditworthiness is often a key consideration for investors, there are a number of other considerations not addressed by ratings; for example, market price, liquidity and investment strategy. The performance of European securitised bonds early in the financial crisis illustrates this point – the market price of many issues fell sharply, even though the asset class experienced a relatively low level of defaults.

2: High credit ratings, such as “AAA”, are guarantees against default

Ultimately, an “AAA” credit rating means that, in S&P’s view, the issuer has a stronger capacity to meet its financial commitments than other more lowly rated borrowers – it is not a guarantee against default. Even an issuer or security originally rated AAA might, over time, default – though experience shows that default rates for AAA-rated debt are generally lower than for other rated debt.

3: A credit rating is a poor indicator of default risk

In fact, correlations between credit ratings and rates of defaults are strong, historically. Only 1.1% of companies rated investment grade have defaulted within 5 years since 1981, compared to 16.4% of companies that were rated sub-investment grade. And every sovereign borrower to default in the last 40 years was given a sub-investment grade rating at least a year prior.

We regret that we – like others – did not anticipate the scale of the problems that emerged in the US housing market. As a result, the performance of many US mortgage-related securities issued before the crisis has been very disappointing.

However, ratings have a strong track record elsewhere. Extensive data on the historical performance of ratings is available from a number of sources, such as regulators and ratings agencies themselves. It shows that default rates generally rise with each step down the scale and that higher ratings correlate to greater credit stability.

4: Markets ignore ratings

It is true that market prices can and do diverge from ratings. Of course, this is because markets are driven by many factors beyond credit risk. For many years before the recent debt crisis in Europe, markets valued bonds of countries such as Greece and Italy broadly on a par with AAA-rated German government bonds, while their ratings were considerably lower (and were downgraded further from 2004/5). In recent years, sovereign bonds spreads have moved closer to ratings.
Indeed, studies by the IMF and others suggest that markets react more to changes in rating Outlooks or other forward-looking signals from ratings agencies, rather than actual downgrades or upgrades.

While ratings are not short-term investment signals and should not be the driving factor behind investment decisions, many investors do value them as an independent and comparable benchmark of credit risk. As such, many investors choose to make use of ratings as one of many inputs in their investment process, or to screen possible investments.

5: Credit ratings destabilise markets

Sharp market movements are sometimes blamed on ratings, even if many other factors are driving investor behaviour – including investors’ own credit risk analyses.

In reality, ratings are far more stable than market prices. Ratings can and often do change during any credit cycle, but the changes are broadly incremental.

Meanwhile, investment managers usually have the flexibility to respond to rating changes with due consideration over a period of time. And there is scant evidence of significant forced selling of bonds downgraded below certain ratings (such as from AAA or from “investment grade” to “speculative grade”).

12
  • Tweet  
  • Facebook  
  • LinkedIn  
  • Send to  
  • Topics
  • Fixed Income
  • Fixed Income

More on Fixed Income

Investors Trust launches fixed-income plans for int'l investors

  • Fixed Income
  • 12 June 2020
Insight Investment introduces new ESG risk rating for fixed income investors

  • ESG
  • 09 June 2020
Eaton Vance appoints business development director for Germany and Austria

  • People Moves
  • 02 June 2020
European ETFs survive the redemption test, finds report

  • Fixed Income
  • 27 May 2020
AMX adds two to Irish operations

  • Alternative
  • 18 March 2020
Back to Top

Most read

HSBC appoints CEO for the Middle East region
HSBC appoints CEO for the Middle East region
People moves: Phoenix Group, Franklin Templeton, TMF Group, AJ Bell, Arete, Just Group
People moves: Phoenix Group, Franklin Templeton, TMF Group, AJ Bell, Arete, Just Group
Nordic Fund Selector of the Year 2021 shortlist announced
Nordic Fund Selector of the Year 2021 shortlist announced
UK Budget: Sunak freezes lifetime allowance for pensions contributions
UK Budget: Sunak freezes lifetime allowance for pensions contributions
Europe's wealth mangers increasingly focusing on Bitcoin: survey
Europe's wealth mangers increasingly focusing on Bitcoin: survey
  • Contact Us
  • Marketing solutions
  • About Incisive Media
  • Terms and conditions
  • Policies
  • Careers
  • Twitter
  • LinkedIn
  • Newsletters

© Incisive Business Media (IP) Limited, Published by Incisive Business Media Limited, New London House, 172 Drury Lane, London WC2B 5QR, registered in England and Wales with company registration numbers 09177174 & 09178013

Digital publisher of the year
Digital publisher of the year 2010, 2013, 2016 & 2017
Loading