Guide-to-Read: 1st aritcle - EoE172 19.30-21.30 Wed May 13 2020
Guide-to-Read: 1st aritcle - EoE172 19.30-21.30 Wed May 13 2020
Title: Markers marked - Credit-rating agencies are back under the spotlight - This time is different from the financial crisis-sort of https://www.economist.com/node/21785981?frsc=dg%7Ce
Title: Markers marked - Credit-rating agencies are back under the spotlight - This time is different from the financial crisis-sort of https://www.economist.com/node/21785981?frsc=dg%7Ce
(1) Three-sentence Summary (TSS)
Thanks to business cycle changes that COVID-19 introduced, many bonds threaten to go bankrupt while the oligopolistic three credit rating agencies such as Moody's, S&P, and Fitch suddenly downgraded many investment-grade bonds (BBB) to junk bond grades (BB or below).
Some criticize that Issuer-pay business model and lack of fiduciary duties by the agencies made the problems worse but agencies argue that it's because of lower interest rate anomaly supported by the Central Banks.
Some criticize that Issuer-pay business model and lack of fiduciary duties by the agencies made the problems worse but agencies argue that it's because of lower interest rate anomaly supported by the Central Banks.
While those agencies are strengthening their moats and enjoying increased profits, escalating risks of default possibilities increases and downgrading are threatening the financial market.
(2) One-sentence Summary by Paragraph (OSP)
1. Throughout history, three (3) credit rating agencies such as Moody's, Fitch, and S&P got public attention every time the market went bad.
2. Suspiciously, the credit rating agencies are too generous in market booms while downgrading their ratings too easy when situations are not good such time as COVID-19.
3. The accuracy of their ratings is important because the downgrades mean a lot to companies in terms of favourable interest rates, bank runs, stock-borrowing(index).
4. While the rating agencies made lots of money by increasing the debt size, those ratings are important factors for the central bank to choose what to buy for QE.
5. Despite the risks of customers going to their competitors for generous ratings, the raters argue they made efforts like strengthening the wall between the sales and analysts as well as their remaining-strong ratings throughout business cycles.
6. Their arguments are not completely wrong in the fact they issued lower grades (below investment grades) from 33% to 66% of the US loans and also published warning reports regarding the absence of legal protections of lenders in bond contracts.
7. Some experts the blames are more on the central bank, not the raters as they are not thought leaders.
8. When commissions are high, good analysts expensive, and default probabilities low, ratings are less accurate.
9. Statistical evidence suggests relative to earnings, firms have been given more room for leverage while agencies it's because of lower interest rates and increase corporate diversification?
10. Another study suggests more than 33% of 'just above junk' grade bonds deserve downgrades.
4. While the rating agencies made lots of money by increasing the debt size, those ratings are important factors for the central bank to choose what to buy for QE.
5. Despite the risks of customers going to their competitors for generous ratings, the raters argue they made efforts like strengthening the wall between the sales and analysts as well as their remaining-strong ratings throughout business cycles.
6. Their arguments are not completely wrong in the fact they issued lower grades (below investment grades) from 33% to 66% of the US loans and also published warning reports regarding the absence of legal protections of lenders in bond contracts.
7. Some experts the blames are more on the central bank, not the raters as they are not thought leaders.
8. When commissions are high, good analysts expensive, and default probabilities low, ratings are less accurate.
9. Statistical evidence suggests relative to earnings, firms have been given more room for leverage while agencies it's because of lower interest rates and increase corporate diversification?
10. Another study suggests more than 33% of 'just above junk' grade bonds deserve downgrades.
11. What to do with BBB bonds which increased the size from 45% to 60%?
12. Downgrades from BBB to BB are rarer than anything else because of spikes in interest costs.
13. Challenge1: In March and April, 193bn of BBB bonds became junk bonds and over 20% of S&P500 index delayed earnings report.14. Challenge2: 50% of CLOs became CCC bonds with 22% of the default rates.
12. Downgrades from BBB to BB are rarer than anything else because of spikes in interest costs.
13. Challenge1: In March and April, 193bn of BBB bonds became junk bonds and over 20% of S&P500 index delayed earnings report.14. Challenge2: 50% of CLOs became CCC bonds with 22% of the default rates.
15. Challenge3: Downgrade risks of sovereign bonds such as the US, Italy, or France.
16. Unless then agencies cannot handle those challenges, the issuer-pay model would be challenged but the alternative investor-pay model is also flawed.
17. Over-using credit ratings such as on capital requirements, what mutual funds buy are a problem.
18. Competition is lacking in the current industry's structure.
19. Agencies like Moody's and S&P with their index business are driving roaring prosperous businesses.
20. Even in the pandemic, their business can prosper as many firms dash for cash requiring more investment grading
16. Unless then agencies cannot handle those challenges, the issuer-pay model would be challenged but the alternative investor-pay model is also flawed.
17. Over-using credit ratings such as on capital requirements, what mutual funds buy are a problem.
18. Competition is lacking in the current industry's structure.
19. Agencies like Moody's and S&P with their index business are driving roaring prosperous businesses.
20. Even in the pandemic, their business can prosper as many firms dash for cash requiring more investment grading
(3) Questions: Things to ponder (TTP)
Q1 Which of one is responsible for over-leveraging, Central Bank or Credit Raters?
Q2 Do you believe the oligopolistic playground requires root and branch reforms to invite more competitors?
Q3 Would those rating agencies be long-term winners if the current pandemic status gets extended?
Q3 Would those rating agencies be long-term winners if the current pandemic status gets extended?
* expressions
financial plenty: when the market is good
erstwhile: former
implausible: unlikely
cogs: a gear tooth
go sour: go bad
let slip: give away
go-go: boom years
scramble: rush
far from: instead of
cash in on: take advantage of an exploit, make money
sift: categorize, search, scrutinize
fodder: food for animal
asset-buying program: QE
hold up: endure
termite: white ants
leeway: discretion, freedom
on an even keel: function normally after a period of difficulty
rung: stage, level
in all but name: existing in a particular state but not formally recognized as such
precipice: cliff
hammering: criticizing
root-and-branch: complete, thorough
clamour: loud noise
tinker: temporary, sloppy fix
fertile: productive
elusive: hard to catch
eye-watering: enormous
let slip: give away
go-go: boom years
scramble: rush
far from: instead of
cash in on: take advantage of an exploit, make money
sift: categorize, search, scrutinize
fodder: food for animal
asset-buying program: QE
hold up: endure
termite: white ants
leeway: discretion, freedom
on an even keel: function normally after a period of difficulty
rung: stage, level
in all but name: existing in a particular state but not formally recognized as such
precipice: cliff
hammering: criticizing
root-and-branch: complete, thorough
clamour: loud noise
tinker: temporary, sloppy fix
fertile: productive
elusive: hard to catch
eye-watering: enormous
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