Key words: Long-term and short-term ratings, history of rating agencies, Moody’s Investors Service, Fitch, Standard & Poor’s, joint distribution and correlations of ratings
Rating agencies

Credit rating agencies (CRAs) assess the likelihood of debt issuers defaulting on their repayments.
Moody’s and S&P are two agencies that dominate within the rating industry.
Fitch provides global coverage as well but it is now the smallest of the “big three” firms.

Moody’s Investors Service

• John Moody and Company was founded in 1900.
The first manual “Moody’s Manual of Industrial and Miscellaneous Securities” provided basic statistics on stocks and bonds

• From 1903 until the stock market crash of 1907, “Moody’s Manual” was a national publication

• Moody’s, the holding company for Moody’s Investors Service, was founded in 1909

• Moody’s Investors Service was incorporated on 1 July, 1914

Fitch Ratings
• 23 December, 1913, John Knowles Fitch founded Fitch Publishing Company and published financial statistics for use in the investment industry via “The Fitch Stock and Bond Manual” and “The Fitch Bond Book”

• In 1924, the company introduced grading rating system (AAA through D) based on the company’s ability to repay their obligations and currently used by major agencies

Standard & Poor’s
• The publication of Henry Varnum Poor’s «History of Railroads and Canals in the United States” in 1860 is the predecessor of Poor’s Manual of the Railroads of the United States in 1868

• Standard Statistics Bureau was formed in 1906 by Luther Lee Blake

• S&P was formed in 1941 when Poor merged with the Standard Statistics Bureau

• S&P was acquired by The McGraw-Hill Companies, Inc. in 1966

Credit ratings cover two distinct time horizons:

• Short term ratings show a probability of default within a year and generally assigned to those obligations considered short-term in the relevant market

• Long term ratings are assessments with maturities of longer than 12 months

In the 1960s, commercial papers were a new source of short term funds increasingly replacing bank loans. Unexpected collapse of Penn Central railroad announced June 21, 1970 was a trigger for leading investors to pull back from the commercial papers. This collapse was a watershed event and increased investor concern about the credit quality of commercial paper issuers.

Fitch and Moody’s introduced short term ratings in response to the default of the Penn Central railroad; S&P did the same a few years later.

Moody’s “Prime” short term rating system applies to all senior/unsecured obligations with maturities less than one year.
Moody’s short-term ratings Prime-1(P-1), Prime-2(P-2), Prime-3(P-3), and Not Prime (NP) concentrate only on the likelihood of default and do not explicitly address loss severity in the event of default.
The relationship between two ratings is highly positively correlated due to liquidity concerns which are important for short term ratings and also play an important role in long term ratings. The Table below shows Moody’s joint distribution of Short-Term and Long-Term Ratings.

Ratings probabilities

Issuers with Aaa and Aa long-term ratings have P-1 short-term ratings, 76.5% of A-rated issuers have P-1 short-term ratings, 23.4% are associated with P-2 short-term ratings and 0.1% with P-3.

Baa long-term rated issuers possess ratings range from P-2 to P-3, with more than 84% at P-2.
Speculative-grade Ba- and B have Not Prime ratings.

Each agency uses their own scale and standard set of symbols.

Ratings Moodys S&P Fitch