Credit rating firm quality comparison
Which major credit rating firm, Fitch, Moody's, or S&P, has the best overall quality credit analysis?
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Based on the most helpful WSO content, there isn't a definitive ranking of Fitch, Moody's, or S&P in terms of overall quality credit analysis. However, each of the "Big 3" credit rating agencies has its strengths and nuances. For example:
Ultimately, the quality of credit analysis can depend on the specific sector or team within each agency. For those looking to gain the most insightful experience, working with non-investment grade issuers or sectors facing complex credit issues is recommended, as it provides exposure to a broader spectrum of credit analysis challenges.
Sources: Global Credit Rating Agency ---> Backdoor to High Finance, Q&A: Credit Analyst (Multi-Strat Credit Fund) >$5bn Fund, Credit Analyst Q&A, L/S Credit HF Analyst - Q&A, Credit Analyst Q&A
LOL, Fitch.
Depends on the practice area for Moody's or S&P. One is better at some things than the others but really there's only so many ways you can quantitatively assess risk. Read the methodologies from each for the same thing (say, GO muni debt) and you'll see they are really assessing the same things. Perhaps slightly different weightings, slightly different calculation of ratios, but fundamentally they are looking at the same factors. The qualitative components and their philosophy for assessing those is where you'll see the biggest difference.
Example: S&P got a lot of flak for downgrading the US rating back in 2011 and Moody's (who counts/counted?) Buffett as a major investor, quickly reaffirmed their Aaa rating in contrast to S&P. Whether that affirmation was related to Buffett's slamming the downgrade as dumb is unknown, of course. I would submit that time has shown S&P's call to be wise.
Also, obligatory statement - credit ratings don't mean anything by themselves. They are only directional tools for assessing portfolio-level decisions.
Thanks Midas! A little more granular, which one has the better Corporate Finance Group?
Again, "better" is a subjective concept. All the agencies have a very solid methodological approach to their ratings that are statistically validated (They are, after all, "Nationally Recognized Statistical Rating Organizations [NRSROs]). The normative decisions they make about what variables to measure and what weight to put on each one in constructing the rating is simply a reflection of their credit philosophy. Read: since their rating methodologies are ultimately back-tested to ensure statistical correlation with default rates... it doesn't really matter "who" is doing it; only that it is being done. The process matters more than the outcome.
As I said above, the biggest differentiator is going to be the subjective, non-financial factors that they consider when evaluating an issuer. Refer again to S&P's downgrade of the USA: according to any methodology you can think of.... the US is literally free of default risk. To wit; it can print its own currency, it has unlimited taxing authority, it has the largest tax base in the history of the human species, and the validity of the public debt is enshrined in the Constitution. Truly, if that is not the definition of AAA rating then WTF is???? But S&P has their reasons and they are well-articulated but it's still a statement of opinion. And those are a lot like assholes; everyone's got one and usually they stink.
Thanks again Midas!
Moody's is known to be the harshest / least charitable in general and Fitch is known to be the most charitable given they're trying to win marketshare. That said, they each have different methodologies that vary by industry. I like the credit KPIs charts Moody's includes in their methodology. The strengths and risks they identify tend to be more or less the same in general though, none really stands out as having a super unique view on the actual core credit quality of the businesses they are evaluating.
This is 1000% accurate. It’s always been my opinion, working with moodys on occasion, that they’re the most critical. I trust their opinion a lot
Thanks Bonkers!
In European LevFin we typically recommend 2 rather than 3 ratings for subIG issuance
Moody's and/or S&P are always a must, with Fitch becoming often a nice to have or being the plan b in case we cannot get that BB+ elsewhere. Because of that I think Fitch ends up leaning in commercially often to try to preserve clients/revenue. But I don't think that Fitch is lower quality - it feels just like market precedent.
But all produce helpful reports that are useful to bring you up to speed on a name. Personally I like the full length reports of Moody's the most as they tend to disclose adjustments better and provide more info or same info in a more structured/digestible way
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