Just wondering about some practicalities in credit ratings for financial institutions: 1. Are financial institutions rated by all three credit rating agencies or does a financial finstitution choose who they want to be rated by? 2. If let's say, the credit rating insitutions come up with ratings that deviate from each other, than what happens?
1. An institution actually pays the agency to rate them, so an agency will only rate a company which has been paid to be rated. They pay because if they don't then they won't have a rating and this is far worse than being rated. Example: Catlin has ratings from S&P and A.M. Best but not Moody's. 2. This happens fairly regularly, often they don't use the same system (e.g. AAA=A++ etc) but even if they did judgement would be made. Usually erring on the side of prudence.
Ratings from different rating agencies can differ. My company for example, pays S&P and A.M.Best for rating opinions. From the trend i observed over about 13 years of rating by both firms, their rating opinions are usually similar. Where they differ, its usually by a notch. Another observation is that S&P is usually more cautious than A.M.Best and usually take more them to upgrade, but eventually they upgrade to same grade as A.M. Best. Then A.M. Best moves again, and then S&P follows a year or 2 later. It goes on like that!
Just curious - if that is the case, why would a company pay two credit rating agencies (to get similar result)? I am pretty sure some monitoring of the rating moving trend and cost and benefit analysis has been done.
I would expect that more ratings mean more confidence about the possible level of default. Hence - investors have better information, especially since the ratings agencies are effectively competing to give the "best" estimate, which means - the company can issue debt more cheaply. Bear in mind that the potential conflict of interest that arises as ratings agencies are paid by the company being issued. An agency who is known to be negative may not be invited to rate a debt issue.
