Credit Ratings: Myth vs Reality

by Yann le Pallec, Executive Managing Director, EMEA Ratings Services, Standard & Poor’s

Credit ratings agencies have received a lot of attention in recent years, yet confusion remains about their role and how they operate. In this article the EMEA head of Standard & Poor’s Ratings Services addresses 10 common myths about the industry.

Myth 1

A credit rating tells me whether or not I have a good investment

Credit ratings are not buy or sell recommendations, nor are they substitutes for independent investment analysis. Instead, ratings are an opinion about the capacity and willingness of a borrower to meet its financial obligations in full and on time.

Creditworthiness can be an important consideration in a decision on whether or not to invest. However, there are numerous other factors that investors should consider, including market price, liquidity and investment strategy. Early in the financial crisis, for example, the market price of many European securitised bonds fell sharply despite the relatively low level of defaults they subsequently experienced.

Myth 2

A high credit rating, such as ‘AAA’, is a guarantee against default

An ‘AAA’ credit rating means that, in S&P’s view, the debt issuer has a stronger capacity to meet its financial commitments than other more lowly rated borrowers. It is not, however, 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.

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