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Moody's credit rating agency took 832 "ratings actions" between 20th March and 16:00 UK time on 31st March, mostly being either a downgrade or a putting on review with negative implications, a foretaste of a downgrade.

Just like in 2007/8, the main public credit rating agencies are struggling to catch up with events, and belatedly informing investors that a whole raft of debt issues and issuers are not quite a copper-bottomed as was earlier thought.

This presents an investor with a significant problem if they are running an investment book for which the Key Performance Indicators are based on public credit ratings.

Up until recently, when yields were reducing and prices increasing, it was not so difficult to present a rosy picture of investment performance: however paltry the current yield, the price of bonds in the secondary market will have been generally higher than the price at which the investor bought the bonds.

Now, with the ratings of issues coming under pressure, where the issue may have been used as a performance benchmark, the task gets harder, especially as yields are rising and prices falling.

For certain, investors will be needing to review which issues they are benchmarking performance to, and be ready to alter them if their ratings change.

The situation once again reveals the rating agencies as being behind the curve, especially as far as Eurozone member state governments are concerned. Now that the agencies are subject to EU supervision, it would hardly be regarded as helpful at the current time to downgrade the Republic of Italy from, in the Moody's system, Baa3 to Ba1, at which point the bonds cease to be "investment grade" and must be dumped by many investors.

Amazingly, while Moody's has placed numerous major Italian borrowers on negative watch, it has so far not added to its confirmation on 7th February 2020 of the Republic's ratings, in which COVID-19 is not mentioned.

Safety, yield and liquidity are the three aspects of an investor's appetite that need to be traded off with one another in determining a set of KPIs. Public credit ratings are used as the key to determine Safety, and Safety is the primary benchmark for most investors: KPIs on Yield and Liquidity are normally set with the KPI on Safety having already been set as the reference point.

That way of doing things is heavily challenged in the current environment, as the main public credit rating agencies are clearly struggling to catch up, and are bounded by political considerations as far as Eurozone bond issues are concerned.

Bob Lyddon is an author for accountingcpd. To see his courses, click here.

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