Ratings seem to be attached to so many items these days.
Movies are rated as “Adults Only”, food is A-1 quality, soap is 99.4 per cent pure (whatever that means) and gold is 99.1% gold content.
Perhaps none of these should be dismissed lightly. However, rating agencies classify some companies as Triple A? How relevant is that?
It should be recognized that a corporate designation affects its credit standings. The rating agencies such as Moody’s and Standard and Poor’s should determine the true financial position of the company under review, which is then widely noted. Unfortunately, frequently classifications are not pertinent and entail financial losses by investors.
History reveals that failures abound. The problems of the past decade with the sub-prime mortgage crisis served as reminders. Just prior to its final collapse and bankruptcy, Enron, a huge company, was given the highest possible grade, AAA.
In view of the many errors, why should anybody listen? Even companies with a moderately good score still ran a significant risk of default.
Some rating organizations prostitute themselves by offering a good rating so that they will be utilized again by the corporation when it issues more debt or common shares.
Hence, for an investor to rely solely on agencies and their estimate of credit worthiness would be foolish indeed. Clearly investors should disregard the grading of some companies. Instead speculators must do their own homework.
It must be acknowledged when it comes to governments the record of the agencies is satisfactory. Some charge that the agencies’ rating of local currency debt is pointless. Countries that issue bonds in their local currency have no need to default because of currency fluctuations. They simply create more currency to repay the debt.
What is surprising is the willingness of lenders to purchase the bonds of some who chronically default on their bonds. Time and time again certain nations have defaulted, but lenders believe, “This time is different.” Rating agencies do not evaluate those risks.
The final charge against the agencies, often put about by aggrieved investors, is that the ratings reflect malign intent rather than reasonable analysis. On this view ratings are driven by the demands of speculators who want to put the interests of borrowers ahead of basic integrity.
Ratings should reveal reasonable analysis and try not to succumb to the lure of trying to get more business from companies under review.
Trustworthiness simply must be paramount for the investment industry to fulfill its purpose.