email case 2 - credit rating research w vid

8/3/2019 Email Case 2 - Credit Rating Research w Vid

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Case 2: Research on Credit Rating

AgencyBrandon Crook, Lora Helmich, Danielle Holt,Danny Kruoch, and Johnathan Sanders


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What is a Credit Rating Agency?

A potential source of information formarket participants who are trying todetermine the creditworthiness ofborrowers


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History of Credit Rating Agency

First Published in1909

SEC changed therules in 1975

Introduction of theNRSRO


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What Factors Determine aCompanys Bond Rating?

Likelihood of default Repayment priority ranking

History of payments

Ability to overcome past difficulties

Risk Taking philosophy Industry default patterns


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Global Credit RatingAgencies

Global credit ratingagencies assign ratings togovernments andcountries based uponsovereign risk

Creditworthiness as anissuer and credit qualityof debt issues; Probabilityof default

capacity andwillingnessto service itsdebt with maturity datesand in accordance withthe conditions agreed

with the creditors


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What Factors Determine aCountrys Bond Rating?

Macroeconomic Variables Available stock of foreign currency reserves

Balance of payment flows

Economic growth prospects

Capacity to generate tax receipts Budget deficit, measures, burden

Economic state

Effective government

Country Risk Broader term; includes political, social, transfer,

exchange rate risk


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S&P Sovereign CreditRatings


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Credit Rating Agencies Role in2008 Financial Crisis

From 2002-2007 - HomeMortgage Loans given to homeowners with

bad credit andundocumented incomes.

F-rated securities to A-rated securities without

reason.

Sacrificed quality ratingsfor large share ofstructured productsbusiness.

Until 2008, their earningswere up Millions of dollars in

revenue from structuredfinance.


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Credit Rating Agencies Role in2008 Financial Crisis

In 2008 Agencies downgradedalmost all securitiesfrom AAA to F

Estimated LoanAmounts $3 trillion.

Blamed Agencies OverBanks Banks need approval

from agencies to loan

money CRA failed to publish

any verifiable dataabout their ratingperformance

Just very complexmodels


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Securities and Credit RatingAgencies

Must RegisterSecurities

Long, tedious process

Short Forms

Dodd-Frank WallStreet ConsumerProtection Act

Improve financialaccountability

Protect Tax payersfrom bailouts

Required Credit RatingAgencies


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Short Form Registration

Two Types of ShortForms S-3 for domestic

companies

F-3 for foreignprivate users

Allow companies touse SEC filedreports for futureregistration

PreviousRequirements forShort Forms Must have

investment gradeby NRSRO

For non-assetbacked securities Timely SEC

reporting for 1 year

Meet minimum of 1transactionalrequirements


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New Rules : Short FormRegistration

July 26, 2011 Remove Credit Ratings to Determine

Eligibility Replaced with Four Tests

Issued at least $1 billion over the prior threeyears. Has outstanding at least $750 million of non-

convertible securities other than commonequity,

A wholly-owned subsidiary of a well-knownseasoned issuer as defined under the SecuritiesAct.

A majority-owned operating partnership of areal estate investment trust that qualifies as awell-known seasoned issuer.


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Benefits of the New Short FormRule

Tremendous Costand Time Saving

Easier to registersecurities

Shelf Registration Register future or

multiple offeringson the same

registration

Flexibility

Issuing Securities


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New Rules : Large TraderReporting

Unanimous Vote : July 26, 2011 Establish large trader reporting

requirements

Identify large market participants Collect information on trading

Analyze trading activity

SEC assigns ID number Benefits

SEC accurately monitor market events


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Impact of U.S. Credit RatingDowngrade


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Questions?

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