Credit Rating Case Study

Credit ratings are opinions about credit risk and convey the agency’s opinion about the capacity and readiness of an issuer to meet its financial requirements on time. Each agency has its own individual structured assessment process and rating systems, however the overall outcome is provide companies with an average calculation of credit risk (Viney, 2012). Different factors affect a company’s credit rating, for example country risk which includes the economic, business and social environment and sovereign risk which includes direct/indirect political interventions. However BHP Billiton is currently under pressure due to the market environment, in particular relation to the current economic conditions.

The research shows that the earnings announcements of firms within an industry can impact the share prices of other firms in the same industry. This effect has been labelled as the ‘information transfer effect’. The ‘information transfer effect’ highlights the belief that share prices react to public information emanating from various sources—including

What does this tell you about the perceived risk of the bonds in these rating categories?

Jules Kroll is planning to enter into the ratings industry. To determine whether it is a good idea and a good time for him to enter into the new business, we project the 5-year NPV for KBRA and apply SWOT analysis to KBRA. The 5-year projected NPV is $341.1 million, a positive number. It is a good time and a good idea for KBRA to enter the business. However, through our SWOT analysis, it would be difficult for KBRA to become competitive in a short time. Thus we suggest it add a credit rating division into the company to make attempts to it but not start up a

Rating agencies also had a strong motivation to compete for market share by catering to their clients. In 2000, Moody’s became an independent, publicly owned firm after being released by its parent company, Dun & Bradstreet. This placed even more pressure on Moody’s managers to increase revenues and improve their shareholder’s returns. (Lawrence, p. 456) From this point on, we begin to see the credit rating agencies drastically underestimate the risks of mortgage-backed securities in a selfish attempt to further their own bottom lines. The birth of structured finance came from new techniques of quantitative analysis used by Wall Street investment banks, and suddenly, Moody’s was not just evaluating corporate, municipal, state and federal government bonds. Structured finance consisted of combining income-producing assets—everything from conventional corporate bonds to credit card debt, home mortgages, franchise payments, and auto loans—into pools and selling shares in the pool to investors. (Lawrence, p. 456)

With the recent election of Donald J. Trump as president of the United States has also come with it changes in the stock market. One stock in particular that has benefited from this result is Caterpillar. Many of the plains outlined in Trumps campaign included improvements to infrastructure, less regulations on mining and energy production, and the wall that is said to be constructed along the U.S Mexico border. This has caused an increased interest in this company as its products or products similar to these products will be required in the construction of these projects. In anticipation for these projects investors have responded by purchasing Caterpillar stock. It appears as though investors believe that it is indeed a good time to own stock

Brandt Cornell’s paper “Is the response of analyst to information consistent with fundamental valuation?” reveals that analyst recommendations are pro cyclical. As bad news arrives and the underlying price of the firm’s stock goes down , analyst downgrade company , the opposite effect arises when good news arrives. As Cornell

This document is authorized for use only by Yen Ting Chen in FInancial Markets and Institutions taught by Nawal Ahmed Boston University from September 2014 to December 2014.

In conclusion, we could say it is a good time for Kroll to enter credit rating business since the big three agencies lost considerable investor confidence during the financial crisis, and that the sector is ripe for new blood. However, based on our SWOT analysis, we don’t think it

Standard & Poor’s, Moody’s Investors Service, and Fitch Ratings are still suffering from their role in the crisis. These credit-rating companies would mark many bad investments with “AAA” ratings even though more than 70 percent of their collateralized debt obligations (CDOs) defaulted. They would ignore the major risks and marketed the risky CDOs because they were being paid to get the deals (Krantz, 2013). To decrease the probability of inappropriate ratings from happening again, there should be more regulations and monitorizations of all the credit-rating agencies. Revenues of credit-rating agencies should also not be allowed to be based on how many investments they can rate highly. Furthermore, before the crisis, investors would rely too greatly on ratings instead of doing their own due diligence. Therefore, investors should also rely less on the

Landry’s Debt to Asset ratio also increased from year 2002 to 2003. In 2002 Landry had a debt to asset ratio of 0.39. In 2003 Landry’s debt to asset ratio increased to 0.45. While both numbers are acceptable and considerably low, the increase from 2002 to 2003 could influence potential investors to not invest in Landry’s stock. This increase also suggests that Landry’s debt also increased from 2002 to 2003. Overall, while there was a slight increase from 2002 to 2003 Landry’s still had a good debt to asset ratio. We think that a contributing factor to the debt

Efficient capital market “It was generally believed that securities markets were extremely efficient in reflecting information about the stock market as a whole” (Fama 1970). To extent that when there is new information about stock rise, the news was dispersed immediately and it affects the security 's price at that time.

From the perspective of the most recent S&P Bond Guide, due to the financial problem in 1994, three-level downgrading was applied to the B Bond yield rate that results in the rating position change in industry average yield into BB by 8.8%. Therefore, the different BB yield and the industry average rate indicated that the investor required a higher return on B bond since it is more risky than that in the previous year. There is a restriction in decision making of buying the B bonds in this

As indicated by the case study S&P 500 index was use as a measure of the total return for the stock market. Our standard deviation of the total return was used as a one measure of the risk of an individual stock. Also betas for individual stocks are determined by simple linear regression. The variables were: total return for the stock as the dependent variable and independent variable is the total return for the stock. Since the descriptive statistics were a lot, only the necessary data was selected (below table.)

Congress is continuously attempting to decide if Fannie Mae should be privatized or owned by the government. One thing the government should focus on is reducing the monopoly characteristics in Fannie Mae. With government intervention, Fannie Mae should be broken up into many smaller companies. This would spread the risk among the financial market and Fannie Mae would have to compete against other companies to stay in business. If unfortunate events lead to another economic crisis, the financial pressure would be placed on more than one company and investors would not have to rely on Fannie Mae to stay afloat (Reiss, David, 951-952). This idea was recently discussed among two senators, Bob Corker and Mark Warner who consider splitting Fannie’s single-family business from their multifamily business. They think the single-family businesses could then be split again into smaller companies (www.money.cnn.com).