Standard and Poor's Ratings - Explained
What is an S&P Rating?
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What is a Standard & Poor's Rating?
Standard & Poor's, known as S&P Global in the corporate world, facilitates credit ratings based on investments in bonds, and a lot more. Known for ascertaining over 1 million indices in share market, it offers personalized analysis with the help of the data and insights available.
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How Do the Standard and Poors Ratings Work?
Standard and Poor, operating as two commercial organizations, got merged in the year 1941. One of the organizations founders named Henry Varnum Poor was more interested in offering premium quality information to investors. And therefore, his book History of Railroads and Canals of the United States that got published in 1860, aimed to give an in-depth overview of the corporate world to the general public. The S&P rating refers to a credit score that throws light on how quickly a company, region, or nation can repay the debt, or to assess it creditworthiness. However, these ratings mere pieces of information, and dont recommend investors to invest in a specific investment or bond. Also, they evaluate the creditworthiness of 5 types of bonds varying in the context of risks and returns. If you are iffy about investing in a certain bond, a nations economy, or foreign trade scenarios, S&P ratings can be a great help. Lets have a look at how S&P analysts formulate ratings. First of all, they collect data from published annual reports, news articles, etc. They also conduct interviews with the management of the organization that theyll be rating. Then, they take a sneak-peek into organizations financial and operational performance, and further assess how effectively the company is following and executing its risk management strategies. S&P brought some changes in its policy of selling reports to investors at the time copy machines entered the market. They took this step in order to prevent the crucial reports from reaching out to general public. S&P began charging money from the companies it evaluated. However, they have been criticized for this change. Many believe that it gives a heads up to customers who pay it well. A bond with a higher letter grade enjoys the privilege of paying lower interest rate than the one with a lower one. They are less risky, and provides lower returns. Every company has the objective of reaching that high letter grade in order to finance themselves and pay lower rates of interest. Short-term loans are eligible for S&P ratings. It also proffers outlook ratings (positive, negative, neutral or developing) for a period ranging between 6 months to 2 years. S&P offers ratings for over 130 nations and ascertains if a specific nation will be able to repay its sovereign borrowings/debt or not. It analyses its ratings on the following factors:
- It checks how stable the government of that nation is, and if they follow regulatory policies.
- It analyzes the economic strength of the nation, and assesses how likely it is for the country to grow.
- It ascertains foreign direct investment of the nation.
- Also, it identifies if the central bank of country depends on its government, and follows an effective monetary policy.
Many critics believe that many rating companies such as S&P were responsible for the major financial crisis in 2008. S&P resisted offering a low grade to its clients. The deregulation policy of financial sector was the reason behind this crisis. This gave financial institutions the authority to indulge in hedging activities, and indulge in excessive subprime lending. In the year 2011, S&P demoted the US Treasury debt from AAA to AA+. S&P was of the view that the debt reduction plan was not strong enough. This demotion in credit downgrade reduced the Dow steadily in August 2011. Because of the lesser revenues generated and increased expenditures during recession, the US debt further increased 40%.