Moody's Investors Service Research Articles

Effects of Türkiye’s Credit Rantings and Credit Default Swaps (CDS) on BIST ALL

In the study, the relationship between Turkey's Credit Default Swaps (CDS) premiums and credit ratings of Standard and Poor's (S&P), Moody's Investors Service (Moody's) and Fitch Ratings (CRA) and the BIST ALL index listed in Borsa Istanbul and The aim is to observe their effects on each other. The universe of the study; consists of 3956 daily Turkey CDS credit risk premiums and BIST ALL data and 93 credit ratings given by CRAs in the period 2009:1–2024:4. The effect of the increase or decrease in CDS and credit scores on the closing values of the BIST ALL index was analysed with Johansen cointegration and Granger causality tests. Findings obtained in the study; Increasing the credit rating and outlook of CRAs causes an increase in BIST ALL closing values in the short term. The change in Türkiye CDS premiums triggers changes in BIST ALL closing values in the short and long term. Finally, the study concluded that the change in CDS premiums has a negative effect on BIST ALL, while the increase in credit score and outlook has a positive effect on BIST ALL.

The impact of institutions on regional credit ratings in Russia

Relevance. Institutions of a fiscal system play a significant role in regional credit ratings. This is reflected in the low creditworthiness of Russian regions from the international perspective. Research objective. The paper discusses the role of the institutional factors in the credit ratings assigned to Russian regions by Russian and international agencies. Data and Methods. The study analyzes the rating methodology adopted by Russian and international credit rating agencies and tests the presence of the institutional factors by conducting a formal regression analysis based on the data from the budgetary systems of Russia and the United States. Results. We demonstrate that international agencies value institutional factors, while Russian agencies use formal quantitative indicators. By applying comparative regression analysis to the economic and fiscal indicators of Russian regions and U.S. states, we found that The Big Three (Fitch Ratings, S&P Global Ratings and Moody's Investors Service) rate Russian regions lower than U.S. states, although the formal indicators between the two fiscal systems at the regional level do not differ as much. Conclusions. We conclude that the lower creditworthiness of Russian regions in the international perspective reflects the weakness of the institutions in the Russian budgetary system. Practically, the assessment of regional creditworthiness in Russia by the international agencies highlights the areas of intergovernmental fiscal relations that need improvement, most notably the insufficient tax and spending autonomy of local and regional governments.

Determinants of Credit Ratings of Russia’s Regions

Introduction. A credit rating reflects the degree of debt sustainability of the region, but the issue of its factors at the regional level has been under-researched. The article is based on the conducted study and reveals the major factors that influenced the assignment of credit ratings by Russian and international rating agencies to the regions of Russia. Materials and Methods. The methodology of both Russian (ACRA and Expert RA) and foreign (Fitch Ratings, S&P Global Ratings, and Moody's Investors Service) rating agencies were analyzed. Factor and correlation analysis was used to group the factors; their quantitative indicators were selected. Ordinal and multinomial logistic regressions (logits) were used to test the explanatory power of the factors. Results. The negative impact on the rating of the factors of debt, deficit, and the size of the public sector, as well as the positive impact of the size and dynamics of the region’s economy has been corroborated. The negative impact of poverty, as well as the positive impact of life expectancy and the size of capital budget expenditures has been highlighted. Differences in using the indicator of the region’s dependence on subsidies have been revealed: it has been regarded as an insignificant factor by international agencies, but as a negative one by Russian agencies. Discussion and Conclusion. The authors have established that Russian agencies give priority to quantitative budget indicators, while international ones give priority to traditional economic indicators. The identified significance of the indicators of life expectancy and poverty has become a particularly valuable result as it indicates a direct dependence of the credit rating on the quality of life in the region. The results obtained make it possible to formulate regional budget policy measures aimed at reducing credit risk, expanding debt financing, and increasing the effectiveness of budget policy. The results of the study will be useful not only in the practice of public administration, but also in further scientific research, as they open the way to the analysis of the interdependence between the credit rating and countercyclical fiscal policy measures, as well as to clarify the role of other factors in creditworthiness, especially those of an institutional nature.

The Impact of Hospital and Health System Leadership Development Practices on Bond Ratings.

Shifts in healthcare policy, patient consumerism, and organizational consolidation are driving the need for hospitals and health systems to adapt if they are to achieve sustainability. Prior research has suggested that businesses with strong leadership development practices also demonstrate greater financial success and competitive performance. However, few studies have examined the impact of leadership development on organization-level outcomes, generally, or in the healthcare industry, specifically.Our goal in this study was to examine the association between organizational leadership development practices and external perceptions of creditworthiness in the form of bond ratings. Data were drawn from the 2014 and 2016 distributions of the National Center for Healthcare Leadership's National Health Leadership Survey; organizational credit ratings were obtained from Moody's Investors Service and S&P Global Solutions. Spearman's rho correlations and polynomial ranked regressions were used to determine the significance of the relationships between leadership development practices and bond ratings. Results provide preliminary evidence of associations between investing in leadership development and organizational creditworthiness. They also suggest, however, that the most financially successful health systems may de-emphasize certain kinds of leadership development practices relative to their peers. We discuss implications of these findings for organizational leaders investing in human capital as well as healthcare executives evaluating the development potential of prospective employers.

A Red Flag for the Licensing Regime (A Postscript to ‘A Red Flag for Hong Kong Credit Ratings’)

In July 2011 Moody's Investors Service Hong Kong issued a report that used a system of red flags to highlight corporate governance and accounting risks in a specified population of listed companies. Although the report is not itself a credit rating, it remains unclear whether Moody’s publication of it should be subject to the disciplinary powers of the Securities and Futures Commission (“SFC”). At issue is the construction of section 193(1)(d) of the Securities and Futures Ordinance (“SFO”), which provides that an act or omission relating to the carrying on of a regulated activity is liable to be regarded as misconduct subject to the disciplinary powers of the SFC under section 194 SFO. The earlier determination of the Securities and Futures Appeals Tribunal and the judgment of the Court of Appeal both supported a broad, purposive interpretation of relation to find that the SFC’s disciplinary oversight applied. Moody’s appeal to the Court of Final Appeal is likely to have ramifications that go well beyond the credit rating industry. As the case concerns the interpretation of a disciplinary provision that all regulated persons are subject to, the Court’s ruling will have significant implications on the ambit of the SFC’s disciplinary powers over all companies engaging in regulated activities that require a license from or registration with the SFC. This article examines the approach taken by the Tribunal and the Court of Appeal and suggests it is flawed and ill suited to the complexities of the business environment surrounding the undertaking of regulated activities. In the absence of an acceptable degree of legal and commercial certainty, there is a risk that regulatory oversight of a wide range of activities other than statutorily defined regulated activities may be introduced via a backdoor opened by the prospect of the SFC’s discipline. An alternative view of relation is proposed that may assist develop a test of relation that better serves statutory purposes, as well as regulatory and commercial needs. It is hoped the Court of Final Appeal will take the opportunity to clarify the law in this area in order to facilitate greater certainty as to the extent of the regulatory obligations of licensed corporations as well as the ambit of the SFC’s disciplinary powers.

INTERNATIONAL RATING AGENCIES APPROACHES TO THE EVALUATION OF INSURANCE COMPANIES

Growing need for an independent evaluation of the performance results of insurance companies is due to the need to meet the needs of stakeholders to reliable information about the evaluation results of insurers. It makes sense to study the approaches of international rating agencies to assess insurance companies. In the article the list of users (investors and management of insurance companies, insurance consumers and reinsurers) and purposes of rating insurance companies by international rating agencies, depending on the users of its results were deterined. The article presents a description of methods of international rating agencies: A. M. Best, Moody's Investors Service, Standard & Poor's, Fitch Ratings, which are used by insurance companies in Ukraine to determine the requirements for non–resident reinsurers. Analyzed methods of the international rating agencies: A. M Best, Moody's Investors Service, Standard & Poor's, Fitch Ratings on the main directions of evaluation scales and criteria of international rating agencies of long–term financial reliability (stability) of insurers provided to determine the most informative method for users is methods of international rating agency Standard & Poor's.

Deciphering Tax Avoidance: Evidence from Credit Rating Disagreements

AbstractThis study investigates the role of tax avoidance in the credit‐rating process and whether differences exist in how rating agencies account for the risk relevance of tax avoidance. Using a sample of initial credit ratings assigned to public debt issuances during 1994–2013, our evidence is consistent with Moody's Investors Service and Standard & Poor's assessing the costs and benefits associated with tax avoidance differently from one another, resulting in more frequent and pronounced rating agency disagreement. Rating agency disagreement over tax avoidance is most evident when it is accompanied by relatively high levels of uncertain tax positions, foreign activities, research and development activities, or tax footnote opacity. We also find evidence that decreases (increases) in tax avoidance or tax footnote disclosure opacity are positively (negatively) associated with the convergence of split ratings. This suggests that firms can exacerbate or mitigate rating agency disagreement subsequent to bond issuance. Our study complements prior research by examining why sophisticated information intermediaries disagree about the risk relevance of tax avoidance. It also sheds light on how firms can influence rating agencies’ understanding of tax avoidance.

Russia's State Budget in January-November 2014

According to data released by the RF Federal Treasury, Russia’s federal budget revenue over the period of January–November 2014 increased by 0.5 p.p. of GDP on the same period of 2013 due to growth, by 0.5 p.p. of GDP, of the volume of oil and gas revenue.The main factor responsible for the upward movement of the oil and gas revenue index (and the corresponding upward movement of federal budget revenue) in face of plummeting world oil prices (to $60 per barrel) was the ruble’s dramatic weakening against the USD and euro. Thus, the federal budget surplus of 1.9 % of GDP achieved over the first eleven months of 2014, as well as the surplus of 0.4 % of GDP in the consolidated budget of RF subjects achieved over the ten months of 2014, can by no means be regarded as manifestations of the budget system’s sustainability as a whole. As early as late October 2014, Moody's Investors Service rating agency downgraded Russia’s credit rating index from Baa1 to Baa2, pointing out in this connection that any further weakening of this country’s national currency will have an extremely negative effect on the economy.

Do Bond Covenants Affect Borrowing Costs?

High yield bond investors spend a great deal of time studying covenants. They even hire specialized consultants to help them interpret the dense language of indentures. But for all that, does a company's decision to offer strong rather than weak covenants—or to offer covenants at all—have a measurable impact on its borrowing costs?There is surprisingly little evidence that variation in credit risk premiums reflects the presence or absence of covenants. Taking advantage of a newly available kind of data—Moody's Investors Service's Covenant Quality (CQ) ratings, which were initiated in 2011—the authors studied each newly issued U.S. high yield bond beginning in 2011 using Moody's CQ ratings, where a rating of “1” represents the strongest covenant rating and “5” the weakest. The authors hypothesize that if investors are willing to pay for covenant protection, bonds with weak CQ scores should have spreads that are higher, on average, than the medians of the bonds in their rating group. What they found, however, was that even bonds rated CQ5, indicating negligible protection, had spreads that were only 9.54 basis points higher than the median of companies with the same credit rating. The authors also found, contrary to their initial supposition, that higher yields were associated with stronger covenants, suggesting that investors demand more protection on issues they view as having greater credit risk than other equivalently rated issues.

THE IMPACT OF FALLEN ANGELS ON INVESTMENT GRADE CORPORATE BONDS PORTFOLIOS: EVIDENCE FROM THE EUROPEAN MARKET

ABSTRACTThis work examines the impact on the price of corporate bonds denominated in Euro of a downgrade to high yield announced by Standard & Poor's and/or Moody's Investors Service. In particular, we observe the bond price behaviour around three events. The first event is the first downgrade announcement from one of the rating agencies, and we find significant cumulative abnormal returns before and at around the event. The second event is the downgrade announcement by the second rating agency: in this case, the security becomes a fallen angel and must leave the institutional portfolios constrained to investment grade (IG) securities. We record again a significant negative price reaction but larger than in the previous case and significantly higher when preceded by a widening of the credit spread in the corporate bonds market. Broadening the existing literature, we perform a third event study, focused on the subsequent bond deletion from an IG benchmark. In this case, our results show positive and significant excess returns after the month‐end index rebalancing, revealing a price reversal pattern of the fallen angel after its release from the index. This price rebound is the higher, whereas the stronger was the bond price pressure at the downgrade announcement. These insights offer some practical guideline for those professionals that manage IG and high‐yield portfolios. Copyright © 2014 John Wiley & Sons, Ltd.

The path to impairment: do credit-rating agencies anticipate default events of structured finance transactions?

The global financial crisis (GFC) has led to a general discussion of the accuracy and declining standards of credit-rating agency ratings. Substantial criticism has been directed towards the securitisation market, which has been identified as one of the main sources of the crisis. This study focuses on the ability of rating agencies to adjust their ratings prior to impairments of structured finance transactions. We develop a new measure that quantifies a rating agency's performance in advance of defaults. By analysing a large number of impaired transactions rated by Moody's Investors Service, we find that rating quality deteriorated during the GFC. Furthermore, we identify tranche-specific and macroeconomic factors that explain differences in Moody's performance.

International Real Estate Review

We have analyzed the market reaction to REIT preferred stock ratings announced by Moody's Investors Service from 1999 to 2009 that are related to four types of rating events; first time ratings, outlook changes, reviews and actual rating changes. The results suggest a significant market reaction to rating upgrades of 1.08% abnormal return, and downgrades and negative outlooks of -2.28% and -2.67% abnormal returns, respectively. Compared to the non-REIT literature, the abnormal returns are smaller in magnitude which implies a relatively smaller information asymmetry within the REIT market with diversification opportunities for global investors.

Travel Nurses and 21st Century Nurse Staffng

In the wake of the 2012 US presidential election, hospitals are taking action to mitigate the anticipated financial impact of the 2010 Affordable Care Act. “Over the next 10 years, the federal government will cut reimbursements to hospitals by over $150 billion.” 1 Gralia J Moody's sees affordable care act pressuring hospitals. Reuters Business & Financial News. http://www.reuters.com/article/2012/06/28/us-usa-healthcare-moodys-idUSBRE85R1KD20120628Date: June 28, 2012 Google Scholar According to Moody's Investor Service, the newly expanded Medicaid program for the care of formerly uninsured patients will not balance the scale. 1 Gralia J Moody's sees affordable care act pressuring hospitals. Reuters Business & Financial News. http://www.reuters.com/article/2012/06/28/us-usa-healthcare-moodys-idUSBRE85R1KD20120628Date: June 28, 2012 Google Scholar Financial leaders are merging their expertise with clinical nurse leaders to design new infrastructures for nurse staffing to meet increasingly complex needs of patients via a fiscally sustainable model. Embedded in this activity is a call to action for a new worldview underlying the theories and methodologies of nurse staffing. Stability in nurse staffing supports a practice environment that enables registered nurses (RNs) to maintain a sense of autonomy, to perform productively, and to think more critically. 2 Duffield C Diers D O'Brien-Pallas L et al. Nurse staffing, nursing workload, the work environment and patient outcomes. Appl Nurs Res. 2011; 24: 244-255 Abstract Full Text Full Text PDF PubMed Scopus (302) Google Scholar , 3 Tuttas C Robbing Peter to pay Paul: breaking the RN “recruitment cycle.”. J Nurs Care Qual. 2002; 16: 39-45 Crossref PubMed Scopus (3) Google Scholar Old staffing strategies (“the way we have always done it”) will not suffice in the new milieu of healthcare delivery. With declining reimbursement on the horizon, some hospitals have already initiated preparation. In November 2012, a North Carolina academic medical center announced the elimination of 950 full-time jobs, including full-time nursing positions. 4 Garloch K Wake Forest Baptist Medical Center announces eliminations of 950 positions, 7 percent of staff. Charlotte Observer. http://www.charlotteobserver.com/2012/11/15/3665739/wake-forest-baptist-medical-center.htmlDate: November 15, 2012 Google Scholar An article in News & Record quoted North Carolina State economics professor Michael Walden: “I think this is a bellwether announcement likely to be repeated across the state and nation.” 5 Associated Press Update: Wake Forest Baptist Medical Center to cut 950 jobs. News & Record. http://www.charlotteobserver.com/2012/11/15/3665739/wake-forest-baptist-medical-center.htmlDate: November 14, 2012 Google Scholar In the wake of the 2012 US presidential election, hospitals are taking action to mitigate the anticipated financial impact of the 2010 Affordable Care Act. “Over the next 10 years, the federal government will cut reimbursements to hospitals by over $150 billion.” 1 Gralia J Moody's sees affordable care act pressuring hospitals. Reuters Business & Financial News. http://www.reuters.com/article/2012/06/28/us-usa-healthcare-moodys-idUSBRE85R1KD20120628Date: June 28, 2012 Google Scholar According to Moody's Investor Service, the newly expanded Medicaid program for the care of formerly uninsured patients will not balance the scale. 1 Gralia J Moody's sees affordable care act pressuring hospitals. Reuters Business & Financial News. http://www.reuters.com/article/2012/06/28/us-usa-healthcare-moodys-idUSBRE85R1KD20120628Date: June 28, 2012 Google Scholar Financial leaders are merging their expertise with clinical nurse leaders to design new infrastructures for nurse staffing to meet increasingly complex needs of patients via a fiscally sustainable model. Embedded in this activity is a call to action for a new worldview underlying the theories and methodologies of nurse staffing. Stability in nurse staffing supports a practice environment that enables registered nurses (RNs) to maintain a sense of autonomy, to perform productively, and to think more critically. 2 Duffield C Diers D O'Brien-Pallas L et al. Nurse staffing, nursing workload, the work environment and patient outcomes. Appl Nurs Res. 2011; 24: 244-255 Abstract Full Text Full Text PDF PubMed Scopus (302) Google Scholar , 3 Tuttas C Robbing Peter to pay Paul: breaking the RN “recruitment cycle.”. J Nurs Care Qual. 2002; 16: 39-45 Crossref PubMed Scopus (3) Google Scholar Old staffing strategies (“the way we have always done it”) will not suffice in the new milieu of healthcare delivery. With declining reimbursement on the horizon, some hospitals have already initiated preparation. In November 2012, a North Carolina academic medical center announced the elimination of 950 full-time jobs, including full-time nursing positions. 4 Garloch K Wake Forest Baptist Medical Center announces eliminations of 950 positions, 7 percent of staff. Charlotte Observer. http://www.charlotteobserver.com/2012/11/15/3665739/wake-forest-baptist-medical-center.htmlDate: November 15, 2012 Google Scholar An article in News & Record quoted North Carolina State economics professor Michael Walden: “I think this is a bellwether announcement likely to be repeated across the state and nation.” 5 Associated Press Update: Wake Forest Baptist Medical Center to cut 950 jobs. News & Record. http://www.charlotteobserver.com/2012/11/15/3665739/wake-forest-baptist-medical-center.htmlDate: November 14, 2012 Google Scholar

Estimating the Costs of Issuer-Paid Credit Ratings

We compare the stability and timeliness of credit ratings produced by a traditional issuer-paid rating agency (Moody's Investors Service) and a subscriber-paid rater (Rapid Ratings). Moody's ratings exhibit less volatility but are slower to identify default risk. We control for Moody's aversion to ratings volatility and still find its ratings lag Rapid Ratings'. More importantly, accuracy ratios indicate that Rapid Ratings provides a better ordinal ranking of credit risk. We quantify the loss avoidance associated with Rapid Ratings'signals to estimate costs associated with regulatory and contractual systems based on issuer-paid ratings. The Author 2013. Published by Oxford University Press on behalf of The Society for Financial Studies. All rights reserved. For Permissions, please e-mail: journals.permissions@oup.com., Oxford University Press.

Hedge Funds' NAV Modeling Using Extreme Value and Lévy Copulas Techniques with Application to Securitization

A crucial need for Hedge Funds Investors is bridge financing loans. As the market leader servicing the alternative world, Citco, through its Financial Products division (CFP), provides those credit facilities via a very sophisticated securitization platform. More precisely, CFP issues rated notes backed by loans granted to Hedge Funds Investors; each loan being collateralized by the Hedge Fund shares. Moody's Investor Service rates those tranches using a simple Monte Carlo simulation where the NAV's portfolio is assumed to follow a Multivariate Geometric Brownian Motion, a very strong assumption. In this Master Thesis, we merge the theories of Levy processes, copulas and extreme values to define a new tailored-made multivariate stochastic process that will eventually model the portfolio of Hedge Funds, taking thus into account (hierarchical dependents) jumps and extreme events, two essential features for both modeling financial assets and securitization.

Clinical Quality Is Independently Associated With Favorable Bond Ratings

The relation between clinical quality and bond rating for nonprofit hospitals has been proposed but never fully studied. We analyzed the relation between bond rating, clinical quality measures (The Joint Commission/Centers for Medicare and Medicaid Services [CMS] core measures), and balance sheet and income statement financial measures of 236 hospitals across the United States that are rated by Moody's Investors Service and that reported clinical quality measures to CMS during the study period. We found a statistically significant relation between higher quality measures and more favorable bond ratings. This association remained significant after controlling for traditional financial parameters.

Round Up the Usual Suspects: Blame and the Subprime Crisis

One of the remarkable things about financial crises is that they often give rise to a political process with uncanny similarities to the hunt for a dangerous felon, or the showdown with the bad guy in an old-time Hollywood movie. In the Asian crisis of the late 1990s the culprit was ‘crony capitalism’, and rich country politicians pursued this target zealously, deflecting any blame they might have taken for the financial catastrophe that afflicted that region. The failure of Enron Corporation in 2001 caused the spotlight to shift to various institutions, including the American wholesale credit rating agencies, Moody's Investors Service and Standard & Poor's. With the return of dramatic financial volatility in the summer of 2007, the American agencies seemed to become public enemy number one. This article suggests that moral panic serves key political objectives in fragile times, in this instance disciplining some of the most extreme forms of financial innovation, but also undermining counter-hegemonic claims about the inherent problems of global finance.

The Pursuit of (Past) Happiness? Middle-class Indebtedness and American Financialisation

The Pursuit of (Past) Happiness? Middle-class Indebtedness and American Financialisation

Models for Moody's Bank Ratings

The paper presents an econometric study of the two bank ratings assigned by Moody's Investors Service. According to Moody’s methodology, foreign currency long-term deposit ratings are assigned on the basis of Bank Financial Strength Ratings (BFSR), taking into account “external bank support factors” (joint-default analysis, JDA). Models for the (unobserved) external support are presented, and we find that models based solely on public information can approximate the ratings reasonably well. It appears that the observed rating degradation can be explained by the growth of the banking system as a whole. Moody’s has a special approach for banks in developing countries in general and for Russia in particular. The models help reveal the factors that are important for external bank support.

Sovereign rescheduling probabilities in emerging markets: a comparison with credit rating agencies’ ratings

This study estimates default probabilities of 124 emerging countries from 1981 to 2002 as a function of a set of macroeconomic and political variables. The estimated probabilities are then compared with the default rates implied by sovereign credit ratings of three major international credit rating agencies (CRAs) – Moody's Investor's Service, Standard & Poor's and Fitch Ratings. Sovereign debt default probabilities are used by investors in pricing sovereign bonds and loans as well as in determining country risk exposure. The study finds that CRAs usually underestimate the risk of sovereign debt as the sovereign credit ratings from rating agencies are usually too optimistic.