Formal Credit Ratings

A summary of long-term ratings is shown at FIGURE 19.1. 

LONG ICODY S -TERM RATING Raa Hal ( a2 Ra3 SCALES COMPARISON R1 R2 R3 Eaal Eaa2 Eaa3  

LONG-TERM MOODY S Bn) BaO n3 RATING E) E7 SCALES COMPARISON RE Caal Can Caa3 Ca C  

When ratings agencies were first set up, the primary focus of credit analysis was on the default risk of the bond, or the probability that the investor would not receive the interest payments and the principal repayment as they fell due. Although this is still important, credit analysts these days 

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With regard to credit rating, the Jumbo market has developed considerably from its inception in 1995. In that year, only three of the issuers were formally rated. During 2003 all issuers were rated by one or more of the public rating agencies. 

Because the derivatives isolate credit risk from other factors, such as client relationships and interest rate risk, they offer a formal mechanism for pricing credit issues only. A market in credit alone can thus evolve, allowing still more efficient pricing and the modeling of a term structure of credit rates. 

Because the assets are held within an SPV framework, defined in formal legal terms, the originator s financial status and credit rating are almost irrelevant to the bondholders. There may also be a third-party guarantee of credit quality, which enables the securitized notes to be offered with an investment-grade credit rating up to AAA. FIGURE 14.1 shows a simplified process of securitization. 

Hazards surveys This can be as simple as an inventory of hazardous materials, or it can be as detailed as the Dow indexes. The Dow indexes are a formal rating system, much like an income tax form, that provide penalties for hazards and credits for safety equipment and procedures. 

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