Issuer Credit Ratings Research Articles

Factors influencing the pricing of credit risk mitigation warrants in corporate bond financing

AbstractIn 2022, various Chinese regulatory authorities, including the China Securities Regulatory Commission (CSRC) and the State‐owned Assets Supervision and Administration Commission (SASAC), jointly issued documents and convened seminars at the Shanghai and Shenzhen Stock Exchanges to highlight the importance of credit protection tools, particularly credit risk mitigation warrants (CRMWs), to bolster corporate bond market financing. However, empirical research on the factors influencing CRMW prices in the Chinese market remains scarce. This study examines the factors affecting CRMW creation prices using a sample of CRMWs issued between 2018 and 2023 and analyzes the macroeconomic factors, characteristics of the underlying issuers, and related financial instruments. This study employs Shapley decomposition to evaluate the contribution of each variable. The findings reveal that, on the macroeconomic front, the year‐on‐year GDP growth rate from the previous quarter and the loan balance of financial institutions significantly and negatively impact CRMW prices. Regarding the underlying issuers, the issuer's credit rating and return on net assets significantly negatively affect CRMW prices, whereas the asset–liability ratio and issuer age have a significant positive impact. Additionally, related financial instruments such as bond interest rates and the risk mitigation certificate term positively contribute to the coverage of the underlying bond term and have a significant positive impact on CRMW prices.

Credit rating downgrades and systemic risk

We examine whether changes in issuer credit ratings by the three main providers are associated with changes in systemic risk. First, we find that rating downgrades result in an increase in bank systemic risk, whereas upgrades do not proportionally reduce systemic risk. Second, we document that the positive relationship between rating downgrades and systemic risk can be mitigated by accounting-based stability factors, such as profitability and capital, but also enhanced by sovereign rating downgrades. Finally, we show that sovereign rating downgrades have a greater effect on bound banks’ systemic risk compared to non-bound banks.

Do credit rating agencies listen to investors’ voices on social media? Evidence from China

We examine the impact of social media on credit rating agency practices, as measured by issuer credit ratings. Information dissemination on social media increases the visibility of issuers, which is expected to exert reputational pressure on rating agencies. Consistent with the aim of rating agencies to mitigate such pressure, we find that credit ratings are lower for issuers with higher levels of information dissemination on social media. This result is more pronounced when online information contains negative sentiment, attracts more interactions, and is disseminated during the period of improvements in online environments. Our analysis confirms that reputational pressure is the mechanism through which social media affects credit ratings. Finally, we show that ratings quality increase with the level of information dissemination on social media. Overall, our results contribute to the literature on the economic benefits of social media, which acts as an informal institution to ensure the effectiveness of credit ratings in emerging economies.

Information flow and credit rating announcements

We employ the implied volatility spread (IVS) and the short lending fee as measures of private information conveyed by their respective markets. Using issuer credit rating announcements as an informational event, we find that both IVS and the short fee have significantly higher predictive power for returns on event days versus non-event days. Both also predict the direction and magnitude of credit rating changes. Consistent with the linkage between the short sale and options markets, in models with both explanatory variables, the short fee remains significant in all specifications, while IVS loses explanatory power.

Impact of COVID-19 on European banks’ credit ratings

The aim of this paper is to analysis the impact of the COVID-19 pandemic on European banks’ default risks, as measured by foreign long-term issuer credit ratings published by the main credit rating agencies. Two hypotheses are put forward: (1) The macroeconomic situation has a stronger negative impact on banks’ financial conditions during COVID-19; (2) changes in the capital adequacy, assets, management, earnings, and liquidity indicators have a significant impact on changes in banks’ credit ratings. The analysis has been prepared for the 2000–2021 period for listed and unlisted banks on the European stock exchanges, that received long-term issuer credit ratings from the main credit rating agencies. To the analysis have been used the ordered logit panel data models and the research has been made on the first differences to analyse the impact of the changes of the financial and macroeconomic conditions on the credit ratings changes. The obtained results suggest a direct and significant impact of the COVID-19 pandemic on the credit rating changes, but a delayed reaction.

Predicting credit ratings and transition probabilities: a simple cumulative link model with firm-specific frailty

There has been a relatively large body of literature addressing the question of predicting credit ratings and transition probabilities. Using frailties to model and predict credit events has generally been shown to provide better prediction outcomes than models without frailties. The paper takes this approach and uses it to extend the general class of cumulative link models (CLM). In particular we impose a positive correlation structure on CLM between repeated ratings from the same firm by assigning an unobservable frailty variable to each firm. We first apply the resulting model to predict credit rating distributions for individual firms and then transform the results to make our target predictions of credit ratings and transition probabilities. Our predictions enjoy using firm-specific and macroeconomic covariate information and having simple computation and interpretation. As an empirical illustration, S&P long-term issuer credit rating (LTR) examples are provided. Using an expanding rolling window approach, our empirical results confirm that the extended model provides better and more robust out-of-time performance than its alternatives because the former yields more accurate predictions of S&P LTRs and transition probabilities.

Bankruptcy courts and the marketization of bond issuance

PurposeThis paper aims to study the effect of the establishment of bankruptcy courts on bond issuance market. This paper helps to predict that the introduction of bankruptcy courts in China can mitigate price distortions caused by the implicit government guarantees and promote the development of the high-risk bond market.Design/methodology/approachThis paper exploits the staggered introduction of bankruptcy courts across cities to implement a differences-in-differences strategy on bond issuance data. Using bonds issued in China between 2018 and 2020, the impact of bankruptcy courts on the bond issuance market can be analyzed.FindingsThis paper reveals that bond issuance credit spreads increase and is more sensitive to firm size, profitability and downside risk of issuance entity after the introduction of bankruptcy courts. It also reveals a substantive increase in bond issuance quantity and a decrease in issuer credit ratings following the establishment of bankruptcy courts. In addition, the increase of credit spreads is more prominent for publicly traded bonds, those whose issuers located in provinces with lower judicial confidence, bonds issued by SOEs and bonds with stronger government guarantees. Finally, the role of bankruptcy courts is more pronounced in regions with higher marketization.Originality/valueThis paper relates to previous studies that investigate the impact of laws and institutions on external financing. It helps provide new evidence to this literature on how improvements of efficiency and quality in bankruptcy enforcements relate to the marketization of bond issuance. The results provide further evidence on legal institutions and bond financing.

Environmental, Social, and Governance Impact on Energy Sector Default Risk—Long-Term Issuer Credit Ratings Perspective

The aim this study is to analyze the impact of environmental, social, and governance (ESG) measures on energy sector credit ratings. The main hypothesis is as follows: The ESG measures have had a significant impact on energy sector credit ratings during the COVID-19 crisis. The analysis has been conducted by using long-term issuer credit ratings presented by the main credit rating agencies. To verify the hypothesis, quarterly data from financial statements, macroeconomic data, and ESG measures for all companies listed on the stock exchanges from all over the world for the 2000–2021 period were collected. The sector was divided into sub-samples according to the type of sector and the moment of the COVID-19 crisis. It was noticed that a stronger reaction of credit ratings during the COVID-19 crisis on ESG factors, than that before it, was also observed, and confirms the increasing role of ESG measures in the financial market. On the other hand, credit rating agencies take into consideration ESG factors during the first estimation. Later, the mentioned variables lose their importance. This is based on a few reasons. It is still a small sample of entities that publish non-financial statements connected with ESG. Some countries have yet to implement regulations associated with climate risk. The significance of electricity power consumption and CO2 emissions confirms the significance of the mentioned direct or indirect impact of ESG factors. Credit rating agencies are not willing to change credit ratings because usually companies from the energy sector, especially from coal and oil and gas subsectors, are large entities. They sometimes receive financial support from governments. Governments are also stakeholders that create a lower risk of default. In less developed countries, coal is one of the main energy sources, and costs connected with alternative, renewable energy are more expensive. The prepared research also suggests that particular ESG measures have varying significance on credit ratings. Therefore, it can help to analyze and build models by investors. It will not be without significance for estimating the default risk and the cost of the capital. In most cases, the most significant measure is the E factor.

ESG as a Measure of Credit Ratings

The aim of this study was to examine the impact of environmental, social, and governance (ESG) measures on credit ratings given to non-financial institutions by the largest credit rating agencies according to economic sector divisions. The hypotheses were as follows: a strong negative impact on non-financial institutions’ credit rating changes will result from ESG risk changes, and the reaction of credit rating changes will vary in different sectors. Panel event models were used to verify these hypotheses. The study used data from the Thomson Reuters Database for the period 2010–2020. The analysis was based on the literature on credit rating determinants and on papers and reports on COVID-19, ESG factors, and their impact on credit rating changes. Linear decomposition was used for the analysis. To verify these hypotheses, long-term issuer credit ratings presented by Moody’s and Fitch for European companies listed on these stock exchanges have been used. In the analyses, financial and non-financial factors were also considered. The results suggested that, within the last year, the methodology presented by credit rating agencies has changed, and ESG factors are one of the basic measures that are used to verify credit rating changes, especially those related to the pandemic.

Credit Ratings of Issuers of Green Debt Instruments

Purpose: The purpose of this article is to assess whether having a creditworthiness assessment from more than one credit rating agency by issuers of green debt instruments affects the number of issues and the average amount issued. This objective was achieved through the process of analysis of the ratings assigned by the rating agencies. Methodology: Due to the complexity of the data, mixed research methods were used such as observation, analysis, and inference. The study used data from Refinitiv Eikon. The credit ratings for the issuers, announced on the issue date, have been analyzed. The analysis covered debt instruments issued in all currencies in the years 2010-2020. The empirical research was carried out using the observation method, the analysis of source documents, and the method of deduction. Findings: In the analyzed period only 44.22% of issuers had credit ratings. The results of the conducted research indicate that the number of green debt instruments and the average issue amount were affected by the number of ratings given to the issuer. Because the largest number of green debt instruments and the highest average issue amount was held by green debt issuers with three ratings, there is a need for an additional creditworthiness assessment. Practical implications: The conclusions of this study can be used in the process of obtaining financing from capital markets on green projects. The content of the article concerns the conclusions from the analysis of the credit ratings of the issuers of green debt instruments. Originality/Value: The theoretical and empirical literature does not provide guidance on the impact of the issuer's credit rating on the success of issuing debt instruments, in particular green ones.

Corporate risk-taking with long-term, short-term and subordinate credit ratings

PurposeThis study empirically examines, from the first quarter of 1981 until the fourth quarter of 2017, the relations across customary domestic issuer credit ratings (long-term, short-term and subordinate) and three popular corporate risk-taking measurements (the variability of operating profitability, net profitability, and research and development expenses).Design/methodology/approachThe author deploys categorical regressions and robustness tests with control variables, interaction terms, fixed effect variables, lag variables and delta variables.FindingsThe author documents that both short-term and subordinate domestic credit ratings are key determinants of the volatility of operating profitability. The author also identifies long-term credit ratings as secondary factors, yet they do affect broader corporate risk-taking behavioral features (along all three measurements). Furthermore, the author finds that the higher (lower) the credit ratings assigned, i.e. the superior (inferior) the credit quality externally judged, the more (less) overall risk firms tend to undertake.Originality/valueIt is the first research to examine both the inclusive influence and the granular effects of credit ratings on corporate risk-taking (CRT) behavior. It is also the only enquiry to inspect the specific relationships along three types of domestic issuer credit ratings: long-term, short-term and subordinate ratings.

Testing Russian Stock Market Efficiency Using Event Studies: Impact of Credit Ratings Changes

Event study is a widespread technique for testing the semi-strong form of the market efficiency hypothesis. Among traditionally studied events, changes in corporate credit ratings by rating agencies have a special importance, since rating agencies use both publicly available and insider information. Studies of developed and emerging markets point to different reactions of stock prices to rating upgrades and downgrades and identify several factors affecting the scale of this effect, including the size and liquidity of the stock market, the level of regulation of the industry, the market capitalization of the company, the status of the rating agency, and others.
 
 On the Russian market, the impact of credit rating upgrades and downgrades on stock prices has not been investigated so far. Ongoing studies of other events affecting stock prices show that the market’s reactions are pretty much in line with those of developed markets, despite its immaturity, limited transparency, high volatility, narrowness and low liquidity, as well as the small number of significant events.
 
 In this article, we evaluate the level of efficiency of the Russian stock market and analyse the reaction of stock prices to changes in issuer credit ratings by international rating agencies using the traditional event study methodology in a narrow event window of 31 days over the period 2016–2020 on a sample of 49 public companies. We show that credit rating upgrades do not lead to statistically significant positive abnormal returns. Visual analysis demonstrates that rating downgrades result in substantial negative abnormal returns. This effect varies for financial and non-financial companies and companies with low and high capitalization yet differs from the effects observed for developed markets; nevertheless, these abnormal returns are not statistically significant. Still, there are grounds to conclude that the Russian stock market
 is not efficient in the semi-strong form and is closer in its characteristics to emerging markets, which is important information for investors, as it permits them to develop profitable trading strategies.

Embedded value reporting quality and credit risk: evidence from life insurance companies

This study investigates the effects of releasing embedded value (EV) reports and EV report disclosure quality on life insurance companies’ credit risks, using issuer credit rating and bond yield spread data from 2001 to 2010. Results show that releasing an EV report and EV report disclosure quality are both significantly and negatively associated with life insurance companies’ credit risks. In addition, the CFO Forum (2004a, 2004b, European Embedded Value) significantly strengthens the negative effect of releasing an EV report on firm credit risk while the subprime crisis has the opposite effect in Europe. Finally, the results are robust to endogeneity issues and different model specifications of fixed effects.

CREDIT RATINGS AND THE COST OF ISSUING SEASONED EQUITY

AbstractI examine the effects of issuer credit ratings on the costs associated with seasoned equity offerings (SEOs). The evidence from a panel of SEOs from 1990 to 2014 shows that when firms issue seasoned equity, those with issuer credit ratings pay reduced investment banking fees. I confirm these results by conducting a propensity‐score matched‐sample comparison analysis of firms that obtain new, long‐term issuer credit ratings with an unrated control group. Controlling for known determinants of SEO fees, I find that firms that obtain a new credit rating before issuing seasoned equity pay significantly reduced investment banking fees. In economic terms, underwriting fees for newly rated firms are 7.2% lower than those for similar, yet unrated firms. Finally, I examine the indirect costs of issuance and find evidence that credit‐rated firms face reduced market‐based costs to issue. Rated firms incur lower dilutionary costs to issue and have more positive abnormal returns surrounding the issue.

The effect of corporate governance on credit ratings: Evidence from China's bond market

AbstractThis paper examines the association between firms’ corporate governance and credit ratings (both bond ratings and issuer ratings) in China. In addition to considering the financial attributes of bond issuers, we ask to what extent do credit rating agencies consider the corporate governance attributes of issuers? In concept, bondholders are concerned with the financial effects of how corporate governance resolves the agency conflicts between bondholders and managers, majority and minority shareholders, and shareholders and bondholders. We find that corporate governance affects bond issuer credit ratings in China. After controlling for firms’ financial attributes, we find that issuer ratings are positively related to dual‐listing, whether the firm is a state‐owned enterprise, the ownership of the second to the tenth largest shareholder; and negatively related to the relative scale of audit fees. We attribute the positive association between dual‐listing and credit rating to higher quality and transparency of information reported by the dual‐listed firm. The value to bondholders of the implicit government guarantee of debt payments more than offsets the negative association between firm value and being an SOE. Bond rating agencies expect that the change in agency costs with a reduction in the ownership of the largest shareholder benefits bondholders. To credit rating agencies, the scale of audit fees (relative to total assets of the accounting firm) signals interest binding between the client firm and the accounting firm that threatens the independence of auditing and the quality of financial reporting. We also find that bond‐specific attributes: collateral and issue size, are positively related to bond credit ratings.

신용등급 하락 조건부 채권의 가치평가(A Practical Valuation of the Rating-triggered Bond)

Korean Abstract: 본 연구는 발행자의 신용등급이 일정한 등급 이하로 하락할 경우 1) 높은 등급의 채권을 담보로 제공할 발행자의 의무 또는 2) 조기상환을 요구할 투자자의 권리가 발생하는 채권의 가치평가 방법을 실무적인 각도에서 제시한다. 국내에서 발행된 이와 같은 채권을 5가지 유형으로 분류한 후 평가과정에서 적용하는 전이행렬의 형태에 차이가 있음을 보여주었다. 또한 등급하락 확률을 계산하기 위해 신용평가사에서 제공하는 역사적 전이행렬을 사용하여 계산의 용이성을 확보하였다. 분석 결과 등급하락에 연계된 조건부 조항은 일정 부분 가치가 있는 것으로 평가되었다. 따라서 신용등급 하락 조건부 채권을 평가할 때 등급 하락 조건부 조항을 제외하고 일반채권과 동일한 방법으로 평가하는 것은 지양해야 할 것으로 보인다. 향후 경기 둔화 및 신용 상황 악화 등 금융불안이 발생하면 부도율 및 등급하락 확률이 상승하고 금리변동성이 높아지면 조건부 조항의 가치는 중첩적으로 높아질 것이다. 따라서 선제적인 채권 포트폴리오 위험관리를 위해 신용등급 하락 조건의 가치를 명시적으로 고려할 필요가 있다. English Abstract: The purpose of this paper is to present a practical approach to do valuation of rating-triggered bond, which provides a higher-rated bond as collateral that allows the investors to exercise the right of early redemption when an issuer's credit rating falls below some predetermined threshold rating. The domestic rating-triggered bonds are classified into five categories and we stress that there are differences in calculating rating downgrade probability according to five categories in the process of valuation. Historical average transition matrix is used conveniently from credit rating companies for calculating the rating downgrade probability. Empirical valuation study shows that additional values from rating triggered clauses are not negligible. Therefore, it should include rating-triggered clauses in the process of the valuation of rating-triggered bond. It is expected that if default rates and rating downgrade probability are high when economic or credit condition gets worse, rating-triggered clauses will increase in value. Therefore it is necessary to consider rating-triggered clauses appropriately in the process of valuation.

Multivariate ordinal regression models: an analysis of corporate credit ratings

Correlated ordinal data typically arises from multiple measurements on a collection of subjects. Motivated by an application in credit risk, where multiple credit rating agencies assess the creditworthiness of a firm on an ordinal scale, we consider multivariate ordinal regression models with a latent variable specification and correlated error terms. Two different link functions are employed, by assuming a multivariate normal and a multivariate logistic distribution for the latent variables underlying the ordinal outcomes. Composite likelihood methods, more specifically the pairwise and tripletwise likelihood approach, are applied for estimating the model parameters. Using simulated data sets with varying number of subjects, we investigate the performance of the pairwise likelihood estimates and find them to be robust for both link functions and reasonable sample size. The empirical application consists of an analysis of corporate credit ratings from the big three credit rating agencies (Standard & Poor’s, Moody’s and Fitch). Firm-level and stock price data for publicly traded US firms as well as an unbalanced panel of issuer credit ratings are collected and analyzed to illustrate the proposed framework.

Istotność wskaźników finansowych a credit rating banku w czasie kryzysu

Głównym celem artykułu jest analiza zachowania credit ratingu banku w czasie koniunktury i dekoniunktury gospodarczej, przy uwzględnieniu wskaźników finansowych. Na podstawie przeglądu literaturowego postawiono następujące hipotezy badawcze: „Podczas kryzysu w sektorze bankowym występuje silniejszy wpływ wskaźników adekwatności kapitałowej” oraz „Noty ratingowe banków podczas dekoniunktury są niższe niż w okresie prosperity”. Do badania wykorzystano dane kwartalne z lat 1998–2016 dla europejskich banków. Postawione hipotezy zostały zweryfikowane przy użyciu panelowych uporządkowanych modeli probitowych dla długoterminowych credit ratingów banków. Przeprowadzone badania dowodzą, że w momencie kryzysu rating nadawany przez Fitch i Moody bankom jest niższy niż w okresie koniunktury w sektorze bankowym. Ponadto zauważono, iż noty S&P są niewrażliwe na analizowane zmiany.

Banks’ Credit Ratings – Domestic and Foreign Notes

The aim of the paper is to analyse the differences between foreign and domestic notes given to banks by credit rating agencies. Following a literature review, the following hypothesis was proposed: Financial indicators have a stronger impact on the credit ratings of domestic rather than of foreign banks. The hypothesis was verified using panel ordered probit models. The analysis was based on European banks’ long-term issuer credit ratings given by S&P, Fitch and Moody between 2000 and 2015.

The information content of issuer rating changes: Evidence for the G7 stock markets

We study the firm-specific and intra-industry stock market effects of issuer credit rating changes and negative watch list placements for the G7 countries. We show that both the information content and the information transfer effects of these rating signals differ considerably in terms of magnitude and in terms of direction across the G7 countries. In particular, conditional on the type of rating change we find significant contagion effects for the US, the UK and Italy, but not for the other G7 countries. Moreover, we show that in some countries abnormal industry portfolio returns associated with rating downgrades and negative watch list signals tend to be more negative for more concentrated and more heavily levered industries. Overall, our results shed new light on country-specific differences in the relevance of credit ratings as risk indicators from an equity investor's perspective, and they may also be of interest to both risk managers and financial market supervisors striving to develop more accurate credit risk models and to better assess the systemic relevance of credit ratings.