Rating Definitions

Moody's Rating Definitions

Moody's Rating Scale

Moody's Credit Ratings
Introduction
Long-Term Obligation Ratings
Medium-Term Note Ratings
Short-Term Ratings
Issuer Ratings
US Municipal and Tax-Exempt Ratings
US Municipal Short-Term Debt And Demand Obligation Ratings
Corporate Family Ratings
Speculative Grade Liquidity Ratings
Bank Deposit Ratings
US Bank Other Senior Obligation Ratings
Bank Financial Strength Ratings
Insurance Financial Strength Ratings
Money Market and Bond Fund Ratings
National Scale Ratings
Country Ceilings for Foreign Currency Obligations
Country Ceilings for Foreign Currency Bank Deposits
Country Guidelines for Local Currency Obligations
Enhanced Canadian Short-Term Ratings
Market Risk Ratings

Other Ratings, Policies and Procedures
Provisional Ratings
Underlying Ratings
Withdrawn
Not Rated
Estimated Ratings
Indicative Ratings
Internal Ratings
Not Available
Terminated Without Rating
Rating Outlooks
Watchlist
Confirmation of a Rating
Affirmation of a Rating
Corporate Equivalent Ratings
Refundeds
Conditional Rating (*)

Rating Methodology
Guide to Moody's Ratings, Rating Process, and Rating Practices
Understanding Moody's Corporate Bond Ratings And Rating Process
The Bond Rating Process: A Progress Report
The Bond Rating Process In A Changing Environment
The Evolving Meaning of Moody's Bond Ratings

Moody’s Rating System in Brief

Please select from the following options:

What is a rating?
What a rating is not...
How do the capital markets use ratings?
What types of securities does Moody's rate?
What do credit ratings measure?
What is Moody's rating process?
How does a Moody's rating committee work?
What sources of information do analysts use?
How long has the rating system been in use?
How does the probability of default change as one moves down the rating scale?
Important definitions pertaining to the rating process
What is Moody's rating scale?

What is a rating?
A rating is Moody’s opinion of the ability and willingness of an issuer to make timely payments on a debt instrument, such as a bond, over the life of that instrument.

What a rating is not…
Ratings are not recommendations to buy or sell, nor are they a guarantee that default will not occur.

How do the capital markets use ratings?
Investors use ratings to help price the credit risk of fixed-income securities they may buy or sell. Many also use ratings as limits on their investment parameters and as means for expanding their investment horizons to markets or security types they do not cover by their own analysis. Because major investors globally rely on Moody’s ratings, the ratings help to provide issuers of debt with stable, flexible access to those sources of capital.

What types of securities does Moody’s rate?
Any type of debt or related obligation of interest to institutional investors, e.g., bonds, debentures, asset-backed and mortgage-backed securities, convertible bonds, medium-term notes, derivative securities, etc. Moody’s does not rate stocks, i.e. equities.

What do credit ratings measure?
Ratings are a forecast or indicator of the potential for credit loss due to a failure to make payment, delay in payment, or partial payment to the investor. Credit loss is the difference between what the issuer has promised to pay and what is actually received. Moody’s ratings measure total credit loss ? including both the probability an issuer will default and the expected severity of loss after a default occurs.

What is Moody’s rating process?

The rating process:

gathers information sufficient to evaluate risk to investors who might own or buy a given security,
develops a conclusion in committee on the appropriate rating,
monitors on an ongoing basis to determine whether the rating should be changed, and
informs the marketplace and market participants of Moody’s actions.

How does a Moody’s rating committee work?
Moody’s ratings are initially determined or subsequently changed through committee. The lead analyst for a given company, industry, country or asset type frames the discussion, including offering the rating recommendation and its rationale.

At minimum, the committee includes a managing director or other designated individual and the lead analyst. The committee may be expanded to include as many perspectives and disciplines as are needed to address all analytical issues relevant to the issuer and the security being rated.

Issues affecting the size of the committee may include the size of the issuer, complexity of the security, geography or whether a transaction of this type has ever been done before. The discussions of the committees are strictly confidential, and only Moody’s analysts may serve on them.

What sources of information do analysts use?

Publicly available data, e.g., annual reports.

Prospectuses, offering circulars, offering memoranda, trust deeds, or indentures of particular securities.
Market data, e.g., stock price trends, trading volume, data on bond price spreads.
Economic data from industry groups, associations or bodies, such as the World Bank.
Data from agencies, such as central banks, ministries, or regulators.
Books or articles from academic sources, financial journals, news reports.
Discussions with expert sources in industry, government, or academia.
Data that may come from meetings or conversations with the debt issuer. If the data are confidential, Moody’s strictly observes this.

How long has the rating system been in use?
John Moody introduced ratings to the U.S. bond market in 1909 when he published the first debt ratings in his Manual of Railroad Securities.

How does the probability of default change as one moves down the rating scale?
The historic default rate for Aaa-rated securities is very low. The average default rate from 1970- 2000 for Aaa-rated securities over a 10-year period was only 0.67%, well under 1%. However, as one descends the rating scale into the speculative-grade section, the default rate increases dramatically. For B-rated securities, the 10-year probability of default is 44.57%.

Important definitions pertaining to the rating process:

Rating outlooks: A Moody's rating outlook is an opinion regarding the likely direction of an issuer's rating over the medium term. Rating outlooks fall into the following four categories: Positive, Negative, Stable, and Developing (Contingent upon an event). In the few instances where an issuer has multiple outlooks of differing directions, Moody's written research will describe any differences in the outlooks for the issuer and the reasons for these differences. If no outlook is present, the following designations will be used: Rating(s) Under Review or No Outlook. Rating(s) Under Review indicates that the issuer has one or more ratings under review for possible change, and thus over-rides the Outlook designation. If an analyst has not yet assigned an Outlook, then No Outlook will be displayed.
Rating review/watchlist: A credit is placed on the watchlist when it is on review for possible upgrade, or on review for possible downgrade, or (more rarely) on review with direction uncertain. Moody's will attempt to conclude a formal review within 60 days.
Confirmation of a rating: A confirmation occurs following a formal rating review when it is decided that the rating will not change. Rating confirmations are formally entered in Moody's databases and rating action lists (rating release sheets), and are communicated via a press release.
Affirmation of a rating: An affirmation of a rating occurs when no review has taken place and does not involve an entry in a database or rating action lists. Affirmations are also communicated through a press release and may occur:
ㆍfollowing an annual review
ㆍfollowing the release of new information by the company
ㆍfollowing a major market event (such as regulatory changes, a major acquisition, and/or market turbulence, etc.)
There may also be other special situations in which ratings are affirmed.

What is Moody’s rating scale?
The rating scale, running from a high of Aaa to a low of C, comprises 21 notches. It is divided into two sections, investment grade and speculative grade. The lowest investment-grade rating is Baa3. The highest speculative-grade rating is Ba1.

Long-Term Debt Ratings (maturities of one year or more):

Investment Grade
Aaa - “gilt edged”
Aa1, Aa2, Aa3 - high-grade
A1, A2, A3 - upper-medium grade
Baa1, Baa2, Baa3 - medium grade

Speculative Grade
Ba1, Ba2, Ba3 - speculative elements
B1, B2, B3 - lack characteristics of a desirable investment
Caa1, Caa2, Caa3 - bonds of poor standing
Ca - highly speculative
C - lowest rating, extremely poor prospects of attaining any real investment standing

Short-Term Debt Ratings (maturities of less than one year):

Prime-1 (highest quality)
Prime-2
Prime-3
Not Prime (can be thought of as speculative grade)