Ethics discussion: Bonds

Go to the website of Moody's Investors Service at http://www.moodys.com/. You will need to register at this site in order to access information. Once you have registered, login to the Moody's site. Then click on Ratings News, where you will see several announcements of recent bond rating changes. Open and read 3-4 of these announcements and note the reasons for the rating downgrades or upgrades.
If you were a bond investor, would you care if Moody's changed the rating on your bonds? Why or why not? If you were a bond issuer, would you care if Moody's changed the rating on your bonds? Why or why not?

My Response:
Jill Stidd
12 Oct 08 3:52 PM MST

Initial Post: Jill Stidd

After looking at the four or so announcements and notes it was obvious that Moody was very thorough in there analysis and reasons for their rating. Their descriptions were straight forward and easy to understand as to why they were downgrading or upgrading the ratings.After going to Mood’s website and researching the Moody company it was very interesting to go to their “about us” page and their rating philosophy, “that is why Moody's uses a multidisciplinary or "universal" approach to risk analysis, which aims to bring an understanding of all relevant risk factors and viewpoints to every rating analysis. We then rely on the judgment of a diverse group of credit risk professionals to weigh those factors in light of a variety of plausible scenarios for the issuer and thus come to a conclusion on what the rating should be. Several analytical principles guide that reasoning process.”
(http://www.moodys.com/moodys/cust/aboutmoodys/aboutmoodys.aspx?topic=rapproac)

I also found their ratings descriptions easy to understand and informative. (http://www.moodys.com/moodys/cust/AboutMoodys/AboutMoodys.aspx?topic=rdef&subtopic=moodys%20credit%20ratings&title=View+All+Rating+Definitions.htm)Some Basic Principles According to Moody Co.1. Emphasis on the Qualitative, 2. Focus on the Long-Term, 3. Global Consistency, 4. Level and Predictability of Cash Flow, 5. Reasonably Adverse Scenarios, 6. "Seeing Through" Local Accounting Practices.

I found it interesting in # 4 Level and Predictability of Cash Flow that this is their approach, “In every sector, the foundation of Moody's rating approach rests on the answer to one question: What is the level of risk associated with receiving full and timely payment of principal and interest on this specific debt obligation and how does that risk compare with that of all other debt obligations? When we speak of "risk to timely payment," we are measuring the ability of an issuer to generate cash in the future. Our analysis focuses, therefore, on an assessment of the level and predictability of an issuer's future cash generation in relation to its commitments to repay debtholders.”
(http://www.moodys.com/moodys/cust/aboutmoodys/aboutmoodys.aspx?topic=rapproach)

It seems given this description of how Mood’s ratio analysis works, along with the experts that are involved with this diagnosis that they have a reputation for accurate data. It seems that it is data that both the bond issuer and the bond investor would hold very valuable in terms of making decisions. The change in ratings would absolutely be important to both. Obviously and investor would think twice about a transaction with a company that has a low rating. However the low rating might indicate that an investor watch this company for a time to see If there are any good deals to be had. So it is a tool an investor can use on many levels. As for the bond issuer, well seeing how their company is being evaluated is always good information to have. As the saying goes, “someone from the outside looking inside”. They would not want a lower rating so I would assume it would be this kind of “watchdog” shall we say that might make a company think twice of inappropriate actions.

http://www.moodys.com/moodys/cust/aboutmoodys/aboutmoodys.aspx?topic=rapproac retrieved, October 12, 2008.http://www.moodys.com/moodys/cust/AboutMoodys/AboutMoodys.aspx?topic=rdef&subtopic=moodys%20credit%20ratings&title=View+All+Rating+Definitions.htm retrieved, October 12, 2008.