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S&P Global Ratings

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Standard & Poor's
Company typeDivision of the McGraw-Hill Companies
IndustryFinancial Services
Founded1860, present corporation status in 1941
FounderDaryl Lethbridge
Headquarters
New York City
,
United States
Key people
Deven Sharma (President)
RevenueIncrease$2.61 billion US$ (2009)[1]
Number of employees
approx. 10,000
Websitestandardandpoors.com
Headquarters, 55 Water Street

Standard & Poor's (S&P) is a United States–based financial services company. It is a division of the McGraw-Hill Companies that publishes financial research and analysis on stocks and bonds. It is well known for the stock market indices, the US-based S&P 500, the Australian S&P/ASX 200, the Canadian S&P/TSX, the Italian S&P/MIB and India's S&P CNX Nifty. It is one of the Big Three credit rating agencies (Standard & Poor's, Moody's Investor Service and Fitch Ratings).[2]

Corporate history

Standard & Poor's traces its history back to 1860, with the publication by Henry Varnum Poor of History of Railroads and Canals in the United States. This book was an attempt to compile comprehensive information about the financial and operational state of U.S. railroad companies. Henry Varnum went on to establish H.V. and H.W. Poor Co with his son, Henry William, and published updated versions of this book on an annual basis. [citation needed]

In 1906 Luther Lee Blake founded the Standard Statistics Bureau, with the view to providing financial information on non-railroad companies. Instead of an annually published book Standard Statistics would use 5" x 7" cards, allowing for more frequent updates. [citation needed]

In 1941, Poor and Standard Statistics merged to become Standard & Poor's Corp. Then in 1966 S&P was acquired by The McGraw-Hill Companies, and now encompasses the Financial Services division.[3]

Credit ratings

Standard & Poor's, as a credit rating agency (CRA), issues credit ratings for the debt of public and private corporations. It is one of several CRAs that have been designated a Nationally Recognized Statistical Rating Organization by the U.S. Securities and Exchange Commission.

It issues both short-term and long-term credit ratings.

Long-term credit ratings

S&P rates borrowers on a scale from AAA to D. Intermediate ratings are offered at each level between AA and CCC (e.g., BBB+, BBB and BBB-). For some borrowers, S&P may also offer guidance (termed a "credit watch") as to whether it is likely to be upgraded (positive), downgraded (negative) or uncertain (neutral).

Investment Grade

  • AAA: the best quality borrowers, reliable and stable (many of them governments)
  • AA: quality borrowers, a bit higher risk than AAA. Includes:
    • AA+: equivalent to Moody's and Fitch Aa1
    • AA: equivalent to Aa2
    • AA-: equivalent to Aa3
  • A: quality borrowers whose financial stability could be affected by certain economic situations
    • A+: equivalent to A1
    • A: equivalent to A2
  • BBB: medium class borrowers, which are satisfactory at the moment

Non-Investment Grade (also known as junk bonds)

  • BB: more prone to changes in the economy
  • B: financial situation varies noticeably
  • CCC: currently vulnerable and dependent on favorable economic conditions to meet its commitments
  • CC: highly vulnerable, very speculative bonds
  • C: highly vulnerable, perhaps in bankruptcy or in arrears but still continuing to pay out on obligations
  • CI: past due on interest
  • R: under regulatory supervision due to its financial situation
  • SD: has selectively defaulted on some obligations
  • D: has defaulted on obligations and S&P believes that it will generally default on most or all obligations
  • NR: not rated

Short-term issue credit ratings

S&P rates specific issues on a scale from A-1 to D. Within the A-1 category it can be designated with a plus sign (+). This indicates that the issuer's commitment to meet its obligation is very strong. Country risk and currency of repayment of the obligor to meet the issue obligation are factored into the credit analysis and reflected in the issue rating.

  • A-1: obligor's capacity to meet its financial commitment on the obligation is strong
  • A-2: is susceptible to adverse economic conditions however the obligor's capacity to meet its financial commitment on the obligation is satisfactory
  • A-3: adverse economic conditions are likely to weaken the obligor's capacity to meet its financial commitment on the obligation
  • B: has significant speculative characteristics. The obligor currently has the capacity to meet its financial obligation but faces major ongoing uncertainties that could impact its financial commitment on the obligation
  • C: currently vulnerable to nonpayment and is dependent upon favorable business, financial and economic conditions for the obligor to meet its financial commitment on the obligation
  • D: is in payment default. Obligation not made on due date and grace period may not have expired. The rating is also used upon the filing of a bankruptcy petition.

Stock market indices

Standard & Poor's publishes a large number of stock market indices, covering every region of the world, market capitalization level, and type of investment (e.g. indices for REITs and preferred stocks)

These indices include:

Governance Scores (GAMMA)

A GAMMA score reflects Standard & Poor’s opinion of the relative strength of a company’s corporate governance practices as an investor protection against potential governance-related losses of value or failure to create value. GAMMA is designed for equity investors in emerging markets and is focused on non-financial risk assessment, and in particular, assessment of corporate governance risk.

History of CGS and GAMMA Scores

Standard & Poor’s has developed criteria and methodology for assessing corporate governance since 1998 and has been actively assessing companies’ corporate governance practices since 2000.

In 2007, the methodology of stand-alone governance analysis underwent a major overhaul to strengthen the risk focus of the analysis based on the group’s experience assigning governance scores. GAMMA analysis focuses on a number of risks that vary in probability and expected impact on shareholder value. Accordingly, our analysis seeks to determine the most vulnerable areas prompt to potential losses in value attributable to governance deficiencies. Recent developments in the international financial markets emphasize the relevance of enterprise risk management and the strategic process to governance quality. GAMMA methodology incorporates two new elements, addressing these areas of investor concern. It also promotes the culture of risk management and long-term strategic thinking among companies.

GAMMA Methodology Components

  1. Shareholder influence
  2. Shareholder rights
  3. Transparency, audit, and enterprise risk managemet (ERM)
  4. Board effectiveness, strategic process, and incentives

GAMMA Scale

For the GAMMA score, Standard & Poor’s uses a numeric scale from one to 10 (with 10 being the best possible score). At the company’s discretion, a GAMMA score can be publicly disseminated or used privately.

  • GAMMA-10 and GAMMA-9 – in Standard & Poor’s opinion, the corporate governance processes and practices at the company provide a very strong protection against potential governance related losses in value. A company in these scoring categories has, in Standard & Poor’s opinion, few weaknesses in any of the major areas of governance analysis.
  • GAMMA-8 and GAMMA-7 – in Standard & Poor’s opinion, the corporate governance processes and practices at the company provide strong protection against potential governance related losses in value. A company in these scoring categories has, in Standard & Poor’s opinion, some weaknesses in certain of the major areas of governance analysis.
  • GAMMA-6 and GAMMA-5 – in Standard & Poor’s opinion, the corporate governance processes and practices at the company provide moderate protection against potential governance related losses in value. A company in these scoring categories has, in Standard & Poor’s opinion, weaknesses in several of the major areas of governance analysis.
  • GAMMA-4 and GAMMA-3 – in Standard & Poor’s opinion, the corporate governance processes and practices provide weak protection against potential governance related losses in value. A company in these scoring categories has, in Standard & Poor’s opinion, significant weaknesses in a number of the major areas of governance analysis.
  • GAMMA-2 and GAMMA-1 – in Standard & Poor’s opinion, the corporate governance processes and practices provide very weak protection against potential governance related losses in value. A company in these scoring categories has, in Standard & Poor’s opinion, significant weaknesses in most of the major areas of analysis.

Downgrade of US long term credit rating

On August 5, 2011, S&P lowered the United States long-term credit rating from AAA to AA+.[5] The decision was made based on the inability of the United States Congress to reach a more significant debt reduction plan and on the U.S. political climate.[5] The S&P has indicated that the U.S. can be revised upwards if it meets the goal of reducing the U.S. budget deficit by $4 trillion over the next decade.

Publications

Standard & Poor's publishes a near-weekly (48 times a year) stock market analysis newsletter called The Outlook which is issued both in print and online to subscribers. Standard & Poor's Governance Services analysts issue a monthly GAMMA Newsletter containing comments and views on corporate governance-related matters in emerging markets (BRIC and beyond).

Criticism

See also: Credit rating agency § Criticism

Credit rating agencies such as Standard & Poor's have been subject to criticism in the wake of large losses beginning in 2007 in the collateralized debt obligation (CDO) market that occurred despite being assigned top ratings by the CRAs.

Credit ratings of AAA (the highest rating available) were given to large portions of even the riskiest pools of loans. However, on August 6, 2011 US credit rating has fallen to AA+ from AAA, reported The News Tribe [6]. Investors, trusting the low risk profile that AAA implies, purchased large amounts of CDOs that later became unsellable. Those that could be sold often took staggering losses. For instance, losses on $340.7 million worth of CDOs issued by Credit Suisse Group added up to about $125 million, despite being rated AAA by Standard & Poor's.[7]

Despite common perception, Standard & Poor's didn't rate the two major Icelandic banks, Kaupthing and Landsbanki.[citation needed]

Companies pay Standard & Poor's to rate their debt issues. As a result, some critics have contended that Standard & Poor's is beholden to these issuers and that its ratings are not as objective as they should be.

See also: 2010 European sovereign debt crisis

In April 2009 Standard & Poor's called for "new faces" in the Irish Government, which was seen as interfering in the democratic process. In a subsequent statement they said they were "misunderstood".[8]

Some critics have pointed out that the S&P and other rating agencies were part of the cause of the global financial crisis of 2008–2009, for example rating Enron higher than it should have been. With the US downgrade some have accused the S&P of causing further damage for their own agenda. Also "A judgment flawed by a $2 trillion error speaks for itself,"[9] said a spokesman for the United States Department of the Treasury.

Standard & Poor's acknowledged making USD$2 trillion error in its justification for downgrading the U.S. credit rating. [10]

Another issue that has concerned commentators is that a Standard & Poor's rating - for example, of the United States government or any other world government - can have, and has had, a distinct effect on a truly global scale. But the decision on these ratings are made by employees of Standard & Poor's who are not elected by the public, and are not accountable for their decision making process. Importantly, there is no appeals process against credit rating decisions made by Standard & Poor's.

Antitrust Review

In November 2009, ten months after launching an investigation, the European Commission formally charged Standard & Poor's with abusing its position as the sole provider of international securities identification codes for U.S. securities by requiring European financial firms and data vendors to pay licensing fees for their use. "This behavior amounts to unfair pricing," the European Commission said in its statement of objections which lays the groundwork for an adverse finding against S&P. "The (numbers) are indispensable for a number of operations that financial institutions carry out — for instance, reporting to authorities or clearing and settlement — and cannot be substituted.”[11]

S&P has run the CUSIP Service Bureau, the only ISIN issuer in the United States, on behalf of the American Bankers Association. In its formal statement of objections, the European Commission alleges "that S&P is abusing this monopoly position by enforcing the payment of licence fees for the use of US ISINs by (a) banks and other financial services providers in the EEA and (b) information service providers in the EEA." It claims that comparable agencies elsewhere in the world either do not charge fees at all, or do so on the basis of distribution cost, rather than usage.[12]

See also

References

  1. ^ [1] Standard & Poor's, Key Statistics
  2. ^ http://www.juneauempire.com/stories/050509/opi_436594375.shtml
  3. ^ "A History of Standard & Poor's". Retrieved May 9, 2007..
  4. ^ "S&P SmallCap 600 – Overview". Standard and Poors. Retrieved June 29, 2009. {{cite web}}: Cite has empty unknown parameter: |coauthors= (help).
  5. ^ a b Swann, Nikola G; et al. (August 5, 2011). "United States of America Long-Term Rating Lowered To 'AA+' Due To Political Risks, Rising Debt Burden; Outlook Negative" (Press release). Standard & Poor's. Retrieved August 5, 2011. {{cite press release}}: Explicit use of et al. in: |author= (help)
  6. ^ http://www.thenewstribe.com/2011/08/06/standard-poor%E2%80%99s-cuts-us-credit-rating-for-first-time/
  7. ^ Tomlinson, Richard; Evans, David (June 1, 2007). "CDOs mask huge subprime losses, abetted by credit rating agencies". International Herald Tribune..
  8. ^ Irish National News April 1, 2009.
  9. ^ Goldfarb, Zachary A. (August 5, 2011). "S&P downgrades U.S. credit rating for first time". The Washington Post. Retrieved August 5, 2011.
  10. ^ Paletta, Damian (August 5, 2011). "U.S. Debt Rating in Limbo as Treasury Finds Math Mistake by S&P in Downgrade Warning". The Wall Street Journal. Dow Jones. Retrieved August 5, 2011.
  11. ^ . Securities Technology Monitor, ed. (2009). "EC Charges S&P With Monopoly Abuse".
  12. ^ . Finextra, ed. (2009). "European Commission accuses S&P of monopoly abuse over Isin fees".
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