ResearchTalks Vol. 3 - Dependency on rating agencies : Can we trust them?

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by Sylvie Focquet

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ResearchTalks Vol. 3 - Dependency on rating agencies : Can we trust them?

  1. 1. Dependency on rating agencies: can we trust them?Sylvie FocquetMarch 2012
  2. 2. Rating agencies have a huge influence on the market …
  3. 3. …but why are they so powerful?... …but why are they so powerful?...Moody’s headquarter
  4. 4. …and can we trust them?2008 Rating agencies hearing
  5. 5. Companies Low Interest % Investors and states Could you lend me money? Our opinion: “It is good quality debt” Is it risky? Rating agenciesWhat do the rating agencies?
  6. 6. Companies High Interest % Investors and states Could you lend me money? Our opinion: “It is junk debt” Is it risky? Rating agenciesMore risk more return.
  7. 7. Rating agencies give an opinion about the debt risk AAA C
  8. 8. Who are they? >90% of revenuesmostly paid by the corporate issuers
  9. 9. Why are they so powerful? Insufficient informationLegislation Investor Strategy
  10. 10. Cascade effectCascade effect
  11. 11. Rating agencies Cascade effect Investors Attention danger Debt Debt
  12. 12. Can we trust them? : Performance?Some big failures……however they can add value
  13. 13. Can we trust them? Conflicts of interestIssuerpaid Shareholders
  14. 14. Can we trust them: civil liability?How to distinguish betweenBad luck, negligence or bad intent? Who will take the risk to give a different opinion?
  15. 15. Can we better trust them with investors paid agencies?Who is willing to pay?Some investors…but they can also influence ratings Free rider problem
  16. 16. Can we better trust them with more competition?I will give more Company can rate-shop nice ratings I will need less info
  17. 17. How to reduce our dependence? Legislation changeOwn risk assessment
  18. 18. What are the alternatives?Market based indicators Accounting ratios Alternatives are Complement not perfect ratings
  19. 19. Conclusion Improving ratings will be difficult and trickyHaving perfect ratings is idealistic We gave too much importance to rating agencies
  20. 20. Ratings should be only one piece

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