What Is S&P Global Ratings?
S&P Global Ratings is a leading global credit rating agency that provides independent credit ratings, research, and analytics on the creditworthiness of companies, governments, and various debt obligations within the broader financial services industry. It is one of the "Big Three" credit rating agencies, alongside Moody's and Fitch Ratings39. S&P Global Ratings assesses the ability of obligors to meet their financial commitments and the likelihood of default, offering forward-looking opinions that are crucial for investors in the global capital markets37, 38.
S&P Global Ratings plays a significant role in market transparency by publishing its assessments, which are used by participants to make informed decisions regarding investments and risk management36. The agency's work falls under the umbrella of financial information and analytics, a key component of the broader financial services sector.
History and Origin
The origins of S&P Global Ratings can be traced back to 1860, when Henry Varnum Poor published "History of Railroads and Canals in the United States," which provided comprehensive financial and operational information on U.S. railroad companies34, 35. This foundational work evolved, and in 1868, Henry Varnum Poor and his son, Henry William Poor, established H.V. and H.W. Poor Co., publishing annually updated guidebooks for the railroad industry32, 33.
Separately, the Standard Statistics Company was founded in 1906, focusing on financial information for non-railroad companies and launching its first stock market indicator in 192330, 31. The pivotal merger occurred in 1941, combining Poor's Publishing and the Standard Statistics Bureau to form Standard & Poor's28, 29. In 1966, The McGraw-Hill Companies acquired Standard & Poor's, with the parent company later rebranding as S&P Global in 201627.
Following the 2008 financial crisis, credit rating agencies, including S&P Global Ratings, faced significant scrutiny for their role in the meltdown26. The Securities and Exchange Commission (SEC) and the Department of Justice initiated investigations into the agencies' ratings practices, particularly concerning mortgage-backed securities (MBS) and collateralized debt obligations (CDOs)24, 25. In 2015, S&P Global Ratings settled allegations with the U.S. government and several states, agreeing to pay a substantial sum to resolve claims that it had issued inflated ratings for certain structured financial products21, 22, 23. This period highlighted the need for enhanced regulatory oversight of nationally recognized statistical rating organizations (NRSROs), a role primarily carried out by the SEC's Office of Credit Ratings19, 20.
Key Takeaways
- S&P Global Ratings provides independent assessments of creditworthiness for various entities and debt instruments.
- The agency's ratings are used by investors to evaluate investment risk and inform decision-making in financial markets.
- S&P Global Ratings is one of the "Big Three" credit rating agencies globally.
- The company has a history dating back to 1860 with the publication of railroad financial information.
- Following the 2008 financial crisis, S&P Global Ratings faced legal and regulatory actions related to its ratings practices.
Interpreting S&P Global Ratings
S&P Global Ratings assigns letter grades to companies, countries, and debt instruments, ranging from AAA (highest credit quality) to D (in default). These ratings represent a forward-looking opinion on the capacity and willingness of an obligor to meet its financial obligations18. An understanding of these ratings is fundamental to fixed income investing and credit analysis.
For instance, a bond with an AAA rating indicates an extremely strong capacity to meet financial commitments, signifying very low credit risk. As the rating moves down the scale (e.g., AA, A, BBB), the perceived creditworthiness decreases, and the associated risk profile increases. Ratings of BBB- or higher are generally considered "investment grade," while those below this threshold are often referred to as "non-investment grade" or "junk bonds," carrying higher default risk17.
Investors utilize S&P Global Ratings to gauge the likelihood of an issuer defaulting on its debt. For example, a decrease in an issuer's credit rating, known as a downgrade, can signal deteriorating financial health and may lead to a higher cost of borrowing for the issuer. Conversely, an upgrade can indicate improved financial stability. These ratings influence bond yields and overall market sentiment toward a particular issuer or sector.
Hypothetical Example
Imagine "GreenTech Innovations Inc." is a new company seeking to raise capital by issuing corporate bonds. To attract investors, GreenTech applies to S&P Global Ratings for a credit rating. S&P Global Ratings conducts a thorough analysis of GreenTech's financial statements, business model, industry outlook, and management team.
After its assessment, S&P Global Ratings assigns GreenTech Innovations Inc. a preliminary long-term credit rating of "BBB-". This rating signifies that GreenTech is considered "investment grade," meaning it has adequate capacity to meet its financial commitments, though it may be more susceptible to adverse economic conditions than higher-rated entities.
If GreenTech Innovations Inc. later experiences robust growth and significantly strengthens its balance sheet and cash flow, S&P Global Ratings might review its financial performance and potentially upgrade its rating to, say, "A-". This upgrade would indicate a stronger capacity to meet obligations and could result in GreenTech being able to issue future bonds at a lower interest rate, reducing its cost of capital. Conversely, if GreenTech faces unforeseen challenges, leading to declining revenues and increased debt, S&P Global Ratings could downgrade its rating, signaling higher risk to bondholders.
Practical Applications
S&P Global Ratings serves various practical applications across the financial landscape. Its credit ratings are integral to the issuance and trading of debt instruments in the bond market. For corporations, a favorable S&P Global Ratings assessment can facilitate access to capital markets, enabling them to borrow funds at more attractive interest rates16. Governments and municipalities also rely on these ratings to assess their sovereign debt and municipal bonds, which impacts their ability to fund public projects and manage national budgets.
In investment management, portfolio managers frequently use S&P Global Ratings as a key input for asset allocation decisions and risk assessment. For instance, many institutional investors, such as pension funds and insurance companies, have mandates to invest primarily in investment-grade securities, directly referencing ratings from agencies like S&P Global Ratings. Furthermore, these ratings contribute to regulatory capital requirements for financial institutions, influencing how banks and other regulated entities hold capital against their credit exposures. The SEC's Office of Credit Ratings oversees the activities of agencies like S&P Global Ratings to ensure compliance and transparency in the credit rating industry14, 15.
Limitations and Criticisms
Despite their widespread use, S&P Global Ratings and other credit rating agencies have faced limitations and criticisms, particularly regarding their methodologies and potential conflicts of interest. One significant area of concern highlighted after the 2008 financial crisis was the "issuer-pay" model, where the entities issuing the debt pay the rating agencies for their assessments12, 13. Critics argue that this model can create a conflict of interest, potentially incentivizing agencies to provide overly favorable ratings to secure business11.
During the financial crisis, S&P Global Ratings, along with other major agencies, was criticized for assigning high ratings to complex structured financial products like mortgage-backed securities and collateralized debt obligations that subsequently performed poorly or defaulted10. This led to questions about the accuracy and reliability of their ratings and their contribution to systemic risk9. While agencies contend that their ratings are independent opinions, the controversy underscored the need for enhanced oversight and regulatory reform within the credit rating industry. The U.S. Congress, through legislation such as the Dodd-Frank Wall Street Reform and Consumer Protection Act, has introduced measures aimed at improving accountability and transparency for nationally recognized statistical rating organizations (NRSROs)7, 8.
S&P Global Ratings vs. Moody's Ratings
S&P Global Ratings and Moody's Ratings are two of the three primary credit rating agencies globally, often referred to as the "Big Three"6. While both provide independent opinions on creditworthiness, they have distinct rating scales and analytical approaches.
Feature | S&P Global Ratings | Moody's Ratings |
---|---|---|
Rating Scale | Uses letters (e.g., AAA, AA+, AA, AA-, A+, A, A-, BBB) | Uses letters and numbers (e.g., Aaa, Aa1, Aa2, Aa3, A1, A2, A3, Baa1) |
Highest Rating | AAA | Aaa |
Investment Grade | BBB- and above | Baa3 and above |
Approach | Focuses on likelihood of default and recovery rate | Emphasizes expected loss, combining default probability and loss severity |
While both agencies aim to provide an assessment of credit risk, their nuanced methodologies can sometimes lead to slightly different ratings for the same entity or debt instrument. Investors and financial professionals often consider ratings from both S&P Global Ratings and Moody's Ratings, along with other qualitative and quantitative factors, to form a comprehensive view of credit quality.
FAQs
What does S&P Global Ratings do?
S&P Global Ratings assesses the creditworthiness of entities like corporations and governments, as well as the debt they issue, by assigning credit ratings5. These ratings provide a forward-looking opinion on the likelihood of an obligor meeting its financial commitments4.
How does S&P Global Ratings determine a credit rating?
S&P Global Ratings analyzes a variety of factors, including financial statements, industry trends, economic conditions, and management quality, to determine a credit rating3. This comprehensive assessment informs their opinion on the issuer's capacity to repay debt.
What is the highest S&P Global Ratings credit rating?
The highest credit rating assigned by S&P Global Ratings is 'AAA', which signifies an extremely strong capacity to meet financial commitments and the lowest level of credit risk.
Are S&P Global Ratings binding?
S&P Global Ratings are independent opinions on creditworthiness and are not legally binding guarantees of an issuer's financial performance or future default. They serve as a tool for investors to evaluate risk2.
How do S&P Global Ratings impact investors?
S&P Global Ratings help investors assess the risk associated with various debt instruments, influencing investment decisions and portfolio construction1. A higher rating generally suggests lower risk and may correlate with lower interest rates for the issuer.