Binary options glossary: What is a ratings agency?
Ratings agencies are companies that hold an important place in the economy. In fact, their mission is to determine the financial ability of a business, State or a territorial collective to repay its’ loans.
Ratings agency market: Currently, three large rating agencies share the market: Standard & Poor’s, Moody’s and Fitch. These rating agencies make up 90% of the world ratings’ market.
How rating a company works: Rating agencies rate the creditworthiness of a company. They attribute a ranking to the company and the company can request this, or not. Generally the rating is good if the company has made the request itself, and it will then have the ability to borrow at a low rate. It is important to note that the higher the company’s rating, the lower the risk of loan payment default in the years to come. However, the lower the rating, the more investors will require guarantees in terms of profitability, as the risk can be higher in this cases.
How do the issuers’ ratings work? The AAA or aaa rating is the highest rating and indicates a very low risk of bankruptcy, near 0.05% in a year. Ratings range from AAA to D, and there are rating differences between agencies as each has its’ own ratings system. They vary between A to D, with intermediate steps such as A+, A- or A1, A2, etc.
Several rating levels exist: From AAA to A signifies that investments are secure. From BBB to B, the investment is considered speculative. From CCC to C, the rating agency believes the company risks going bankrupt; and from DDD to D, the company is in the process of becoming bankrupt or is already bankrupt.
Impact of the ratings: The rating given by the agencies has a significant impact on the markets. For example, a State that receives a satisfactory rating will be able to borrow at more competitive rates, as investors will have more confidence. The ranking can change and is in no case definitive; it is linked to the financial health of company at a given time.
Ratings agency limitations: Since the 1970s ratings agencies no longer receive payment from investors. Businesses currently pay the ratings agencies, which might eventually become a conflict of interest.