O understand the second reason companies care about

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~o understand the second reason companies care about their credit ratings, we see that - &P and Moody's provide ratings for "investment grade" bonds versus "non-investment _ - - bonds (also called speculative bonds or junk bonds). This is an important distinction for ies because many investors will not, or cannot, purchase non-investment grade bonds. example, CALPERS, the largest pension fund in the country, is prohibited by their board of _ ors from holding bonds with an S&P rating Jess than BBB. Companies seek large institu- investors such as CALPERS because they trade more carefully and less frequently than idual investors and liquidity traders. Thus, companies are extremely averse to falling from ~~rnent to non-investment grade. Evidence suggests that companies try to maintain investment grade bond ratings. Fol- . g is a graph of the distribution of companies across bond ratings. Ratings of A and Baa nt for nearly half of all corporate issuers while those issuers in the top ratings catego- Aaa and Aa) account for 14% of corporate issuers (source: Moody's Financial Metrics o.
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Rating Distribution-2010 4-25 Module 4 I Credit Risk Analysis and Interpretation 10% 25% 20% 15% 5% DO/orc ( ( ( (' (' (' ( Aaa Aa A Baa Ba B Caa-C ANALYSIS DECISION You Are the Vice President of Finance Your company is currently rated 81/8+ by the Moody's and S&P credit rating agencies, respec- tively. You are considering possible financial and other restructurings to increase your company's credit rating. What types of restructurings might you consider? What benefits will your company receive from those restructurings? What costs will your company incur to implement such restruc- turings? [Answer, p. 4-33] How Credit Ratings Are Determined Each credit rating agency has its own unique approach to credit rating. Recall that credit rating agencies have access to information not available to other lenders because Regulation FD does not apply to credit rating agencies. Typically the agencies create analyst teams that comprise a pri- mary analyst (team leader) and other analysts and specialists. During the rating process, members of this team often meet face to face with managers of the company being rated. Such meetings can provide insight into managers' expectations about future demand and industry conditions as well as detailed information on operating and investment plans. Each rating agency has its own proprietary, analytical models and methodologies but these models all include at least three types of inputs: macroeconomic statistics, industry data, and company specific information. It should not be surprising that credit rating agencies employ macroeconomists as economy-wide changes can have a considerable impact on the financial position of individual companies. These economists monitor unemployment statistics, consumer confidence metrics, Federal Reserve Bank announcements (about interest rates and adjustments), regulatory pronouncements, and related events. These macroeconomic events are common across individual issue and issuer ratings.
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