Moody's Ratings

Moody's Ratings
Company type	Subsidiary
Industry	Financial services
Predecessor	Moody's Investors Service
Founded	1909
Founder	John Moody
Headquarters	New York City, United States
Area served	Worldwide
Products	Bond credit ratings, financial analyses
Parent	Moody's Corporation

Moody's Ratings, previously and officially known as Moody's Investors Service, represents the bond credit rating segment of Moody's Corporation, reflecting the company's foundational business and longstanding heritage. Moody's Ratings provides comprehensive global financial analyses on bonds issued by both governmental bodies and commercial organizations. Alongside Standard & Poor's and Fitch Group, it ranks among the Big Three credit rating agencies and was listed on the 2021 Fortune 500.

The organization evaluates the creditworthiness of borrowers through a uniform rating scale designed to estimate potential investor losses resulting from default. Moody's Ratings spans various sectors within the bond market, including government, municipal, and corporate bond categories; investment vehicles such as money market funds and fixed-income funds; financial institutions encompassing banks and non-bank lenders; as well as structured finance products. Its rating spectrum extends from Aaa, denoting the highest quality, down to C, indicating the lowest.

Established in 1909 by John Moody with the purpose of publishing data on stocks, bonds, and bond assessments, Moody's was recognized as a Nationally Recognized Statistical Rating Organization (NRSRO) by the U.S. Securities and Exchange Commission in 1975. After many years under the ownership of Dun & Bradstreet, Moody's Investors Service became an independent entity in 2000, with Moody's Corporation serving as its parent company. On March 6, 2024, the firm transitioned its name from Moody's Investors Service to Moody's Ratings.

Role in capital markets

Known collectively with S&P and Fitch as the Big Three credit rating agencies, Moody's operates alongside these firms but employs unique methodologies that distinguish its analyses. All three maintain a global presence with offices spanning six continents and assess securities valued in the tens of trillions of dollars. Notably, only Moody's Corporation functions as an independent corporation.

Moody's Ratings and its counterparts play a crucial role within worldwide capital markets by delivering independent credit evaluations that assist banks and financial institutions in gauging credit risk. This external assessment is particularly valuable for smaller or less experienced investors and provides a standardized reference point for all market participants.

Credit rating agencies are embedded within regulatory frameworks across the United States and other jurisdictions such as the European Union. In the U.S., their ratings are utilized by the U.S. Securities and Exchange Commission as part of their designation as Nationally Recognized Statistical Rating Organizations (NRSROs) for regulatory functions. This regulatory acceptance has allowed companies with lower ratings to access bond markets by differentiating them from higher-rated issuers rather than excluding them outright. Nonetheless, dependence on these ratings has been linked to "pro-cyclical" dynamics and abrupt "cliff effects" during downgrades. To address this, the Financial Stability Board introduced guidelines in 2010 aimed at diminishing reliance on credit rating agencies among G-20 nations. Since the early 1990s, NRSRO ratings have also been employed by the SEC to assess commercial paper held by money market funds.

Besides Moody's, seven other entities have been designated as NRSROs by the SEC, including A. M. Best, which focuses on insurance company obligations. Moody’s competes with firms such as investment research provider Morningstar, Inc. and financial data companies like Thomson Reuters and Bloomberg L.P..

Beginning in the early 2000s, Moody’s enhanced its transparency by granting media access to analysts and issuing frequent public updates on credit market conditions. It also offers public seminars aimed at educating novice securities issuers about its debt evaluation standards.

In 2019, Moody’s expanded into environmental risk analysis through acquiring a majority interest in climate risk data company Four Twenty Seven.

Moody's credit ratings

Moody's credit ratings are designed to offer investors a straightforward framework to assess the prospective relative creditworthiness of various securities. Ratings from Aa down to Caa are further differentiated by numerical suffixes 1, 2, and 3, where a smaller number corresponds to a superior rating. The ratings Aaa, Ca, and C remain unmodified. Moody's emphasizes that these ratings should not be interpreted as investment recommendations or used as the exclusive factor in making investment choices; they do not represent market prices, although market dynamics can influence credit risk.

Moody's credit rating scale
Investment grade
Rating	Long-term ratings	Short-term ratings
Aaa	Highest credit quality with minimal credit risk.	Prime-1 Superior capacity to meet short-term financial obligations
Aa1	Very high quality and very low credit risk.
Aa2
Aa3
A1	Upper-medium grade with low credit risk.
A2		Prime-1/Prime-2 Strong or high capacity to repay short-term debt
A3
Baa1	Medium-grade status with some speculative characteristics and moderate credit risk.	Prime-2 Strong ability to fulfill short-term obligations
Baa2		Prime-2/Prime-3 Strong or acceptable capacity to meet short-term debt
Baa3		Prime-3 Acceptable capacity for short-term debt repayment
Speculative grade
Rating	Long-term ratings	Short-term ratings
Ba1	Speculative elements present with considerable credit risk.	Not Prime Outside of prime rating categories
Ba2
Ba3
B1	Speculative status with elevated credit risk.
B2
B3
Caa1	Low quality accompanied by very high credit risk.
Caa2
Caa3
Ca	Considered highly speculative, close to or in default, but with some potential for recovery.
C	Represents the lowest quality, generally in default with minimal chance of recovery.

Founding and early history

The inception of Moody's dates back to John Moody, who is recognized as a trailblazer in the field of bond credit ratings. In 1900, he introduced Moody's Manual of Industrial and Miscellaneous Securities and established John Moody & Company. This publication provided comprehensive data on stocks and bonds from various industries and rapidly gained nationwide acclaim by 1903. Nevertheless, Moody was compelled to sell the enterprise due to financial difficulties following the Panic of 1907.

Moody made a comeback in 1909 with Analysis of Railroad Investments and founded Moody's Analyses Publishing Company. Although bond ratings had been present earlier in Europe, Moody was the first to widely distribute them in an accessible manner and pioneered charging subscription fees to investors. By 1913, Moody's Manual had extended its coverage to include industrial companies and utilities, employing a letter-based rating system adapted from mercantile credit assessments. Moody officially incorporated Moody's Investors Service in 1914.

Soon after, competitors such as Poor's (1916), Standard Statistics Company (1922), and Fitch Publishing Company (1924) appeared, eventually forming the "Big Three" credit rating agencies. By 1919, Moody's had expanded its ratings to include bonds issued by U.S. state and local governments and by 1924 was evaluating nearly the entire American bond market.

1930s to mid-century

During the 1930s, as the U.S. bond market grew beyond traditional investment banks, investor demands for greater transparency led to the enactment of mandatory disclosure regulations and the establishment of the Securities and Exchange Commission (SEC). In 1936, legislation prohibited banks from investing in "speculative investment securities" (commonly known as "junk bonds"), restricting them to "investment grade" bonds rated by Moody's, Standard & Poor's, and Fitch. Subsequently, similar standards were adopted by state insurance regulators.

In 1962, Moody's Investors Service was acquired by Dun & Bradstreet, a company specializing in credit reporting; however, both entities largely maintained independent operations.

1970s to 2000

By the late 1960s and throughout the 1970s, rating agencies broadened their scope to include commercial paper and bank deposits. To address increasing free rider challenges exacerbated by photocopying technology and growing market complexity, agencies began charging fees to issuers as well as investors—Moody's initiated this practice in 1970. The number of issuers expanded significantly both domestically and internationally, greatly enhancing profitability; by 2005, Moody's reported that issuer fees comprised approximately 90% of its total revenue.

The dissolution of the Bretton Woods system in 1971 catalyzed financial deregulation and accelerated growth in global capital markets. In 1975, the SEC officially designated Moody's and other agencies as "nationally recognized statistical ratings organizations" (NRSROs), thereby integrating their ratings into broker-dealer capital adequacy requirements.

Throughout the 1980s and 1990s, Moody's extended its international presence with offices opening in Japan (1985), the United Kingdom (1986), France (1988), Germany (1991), Hong Kong (1994), India (1998), and China (2001). By 1997, Moody's had rated securities totaling approximately $5 trillion from over 21,000 issuers worldwide. However, this period also brought increased regulatory scrutiny including lawsuits and investigations led by the U.S. Department of Justice, particularly following incidents such as the Enron collapse, subprime mortgage meltdown, and the financial crisis of 2008.

In 1998, Dun & Bradstreet divested Moody's publishing division to Financial Communications (which later became Mergent). Under shareholder pressure, Dun & Bradstreet announced in December 1999 plans to spin off Moody's Investors Service as an independent publicly traded company. Despite having fewer than 1,500 employees at that time, Moody’s accounted for about 51% of Dun & Bradstreet’s profits. The separation was finalized on September 30, 2000; over the subsequent five years, Moody’s stock value surged more than threefold.

Expansion and Subsequent Decline of Structured Finance

Between 1998 and 2007, structured finance surged from representing 28% to nearly half of Moody's total revenue, serving as the primary engine for the firm's expansion during that timeframe. The Financial Crisis Inquiry Report highlights that ratings for structured finance instruments, such as mortgage-backed securities, made up approximately 50% of Moody's rating income between 2005 and 2007. During this period, revenue generated from these products increased more than four times compared to 2000. Nevertheless, Moody's methodologies for assessing structured products attracted significant criticism. In June 2005, shortly before the subprime mortgage turmoil, Moody's updated its default correlation framework for non-prime mortgages within structured products, basing it on data spanning two decades characterized by rising home prices, minimal delinquencies, and a limited presence of nontraditional mortgages.

On July 10, 2007, Moody's took an unprecedented step by downgrading 399 subprime mortgage-backed securities issued in the previous year. Within three months, it downgraded an additional 2,506 tranches amounting to $33.4 billion. By the conclusion of the financial crisis, Moody's had downgraded 83% of all Aaa-rated mortgage-backed security tranches from 2006 and every Baa tranche issued that year.

In June 2013, Moody's Investor Service issued a warning regarding Thailand’s credit rating, indicating a potential downgrade linked to a costly rice-pledging program that resulted in losses of approximately 200 billion baht ($6.5 billion) during 2011–2012.

Sovereign Credit Downgrades

Moody's, alongside other leading credit rating agencies, frequently encounters criticism from nations following sovereign debt downgrades, with affected countries often attributing higher borrowing costs to such actions. High-profile sovereign downgrades that attracted considerable media scrutiny include Australia during the 1980s, Canada and Japan in the 1990s, Thailand amid the 1997 Asian financial crisis, and Portugal in 2011 during the European sovereign debt turmoil.

Ratings Issued Without Solicitation

Moody's has been subject to lawsuits and regulatory probes concerning unsolicited bond ratings. For instance, in 1995 Jefferson County, Colorado initiated legal action against Moody's after receiving a "negative outlook" on a bond issued in 1993 without having requested the rating; this downgrade increased its borrowing expenses by $769,000. Moody’s defended its actions as protected expressions of opinion—a stance upheld by judicial rulings.

During the mid-1990s, the U.S. Department of Justice examined whether unsolicited ratings represented unlawful market dominance but ultimately did not pursue charges. Moody’s emphasized that unsolicited ratings have been part of its practice since 1909 and viewed them as a safeguard against issuers selectively seeking favorable evaluations. Beginning in 1999, Moody’s started labeling unsolicited ratings explicitly to improve transparency.

Comparable grievances emerged in the mid-2000s; for example, German insurer Hannover Re experienced bond downgrades to junk status without solicitation, which negatively affected its market capitalization by $175 million. In 2005, unsolicited ratings underwent scrutiny through a subpoena from the New York Attorney General but did not lead to formal charges.

Following the financial crisis of 2008, the Securities and Exchange Commission implemented regulations encouraging unsolicited ratings as a means to reduce conflicts inherent in the issuer-pays model and to foster a broader spectrum of creditworthiness opinions.

Allegations of Conflicts of Interest

The "issuer pays" framework, which Moody's and other rating agencies implemented during the 1970s, has been criticized for potential conflict of interest concerns, implying that agencies might elevate ratings to satisfy issuers. The SEC pointed out in 2011 that the earlier subscriber-pays approach also contained inherent conflicts, as subscribers could exert pressure on agencies to secure favorable ratings. During the 1990s, a Department of Justice inquiry examined whether Moody's coerced issuers into purchasing its consulting services by threatening to assign lower ratings. Moody's has highlighted its market reputation as a critical counterbalance, with a 2003 study suggesting that "reputation effects" outweighed any conflicts. Former Executive Vice President Thomas McGuire emphasized in 1995 that maintaining Moody's track record was of utmost importance.

In March 2021, Moody's resolved disputes with the European Union over alleged conflicts of interest by agreeing to a penalty of 3.7 million euros (approximately $4.35 million).

2008 financial crisis

The 2008 financial crisis brought increased examination of credit rating agencies’ evaluations of complex structured finance products. Moody's and its peers faced significant criticism following substantial downgrades beginning in July 2007. According to the Financial Crisis Inquiry Report, 73% of mortgage-backed securities rated triple-A by Moody's in 2006 had been downgraded to junk status by 2010. The Commission underscored a breakdown in corporate governance at Moody's concerning the quality assurance of ratings on mortgage-backed securities and collateralized debt obligations (CDOs).

As institutions such as banks and pension funds encountered heightened capital requirements for lower-rated assets, they began selling residential mortgage-backed securities (RMBS) and CDOs, which led to declining market values and a halt in new subprime securitizations. Some experts contend that the widespread downgrades issued by rating agencies played a role in deepening the crisis.

A 2008 report from the Committee on the Global Financial System (CGFS) concluded that rating agencies underestimated the extent of the subprime crisis due to insufficient data and a failure to fully account for originator risk. The CGFS recommended that ratings serve as a complement to investor due diligence and called for improved disclosure of critical risks. In response, Moody's updated its originator criteria toward the end of 2007 and suggested incorporating volatility scores and loss sensitivity metrics in 2008. Despite critiques regarding technical limitations, the Financial Stability Board recognized that reputational concerns drove agencies to implement changes. Moody's saw a decline in market share within sectors such as commercial mortgage-backed securities (CMBS) following the adoption of more stringent rating standards.

In April 2013, Moody's, along with Standard & Poor's and Morgan Stanley, reached settlements in fourteen lawsuits accusing them of inflating ratings on structured investment vehicles.

By January 2017, Moody's agreed to pay close to $864 million to resolve claims brought by the Department of Justice, multiple states, and Washington D.C., which included a $437.5 million DOJ fine and $426.3 million allocated among states including California and Missouri.

Global Credit Research

In March 2013, Moody's Investors Service published findings in their Global Credit Research series revealing that US non-financial corporate sector (NFCS) firms held $1.45 trillion in cash at the close of 2012—a 10% rise from $1.32 trillion recorded in 2011, itself a record level. Moody's estimated that approximately $840 billion, or 58%, of this cash was held outside the United States.

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