Sunday, August 14, 2011

Standard & Poor's

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Standard & Poor's Financial Services LLC
TypeLimited liability company
IndustryFinancial services
Founded1860, present corporation status in 1941
Founder(s)Daryl Lethbridge
HeadquartersNew York City, United States
Key peopleDeven Sharma (President)
Revenueincrease$2.61 billion US$ (2009)[1]
Employees10,000 (approximate)
ParentThe McGraw-Hill Companies
Websitestandardandpoors.com
Company headquarters at 55 Water Street in New York City (2008)

Standard & Poor's (S&P) is a United States-based financial services company. It is a division of The McGraw-Hill Companies that publishes financial research and analysis on stocks and bonds. It is well known for its stock-market indices, the US-based S&P 500, the Australian S&P/ASX 200, the Canadian S&P/TSX, the Italian S&P/MIB and India's S&P CNX Nifty. The company is one of the Big Three credit-rating agencies, which also include Moody's Investor Service and Fitch Ratings.[2] Its headquarters are in 55 Water Street inLower Manhattan, New York City.[3]

Contents

Corporate history

The company traces its history back to 1860, with the publication by Henry Varnum Poor of History of Railroads and Canals in the United States. This book was an attempt to compile comprehensive information about the financial and operational state of U.S. railroad companies. Henry Varnum went on to establish H.V. and H.W. Poor Co. with his son,Henry William, and published annually updated versions of this book.[citation needed]

In 1906, Luther Lee Blake founded the Standard Statistics Bureau, with the view to providing financial information on non-railroad companies. Instead of an annually published book, Standard Statistics would use 5" x 7" cards, allowing for more frequent updates.[citation needed]

In 1941, Poor and Standard Statistics merged to become Standard & Poor's Corp. In 1966, the company was acquired by The McGraw-Hill Companies, and now encompasses the Financial Services division.[4]

Credit ratings

As a credit-rating agency (CRA), the company issues credit ratings for the debt of public and private corporations. It is one of several CRAs that have been designated a nationally recognized statistical rating organization by the U.S. Securities and Exchange Commission.

It issues both short-term and long-term credit ratings.

Long-term credit ratings

Sovereigns listings by Standard & Poor's as of August 2011.[5][6]
Green - AAA
Turquoise - AA		Lighter blue - A
Darker blue - BBB		Purple - BB
Red - B
Grey - not rated

The company rates borrowers on a scale from AAA to D. Intermediate ratings are offered at each level between AA and CCC (e.g., BBB+, BBB and BBB-). For some borrowers, the company may also offer guidance (termed a "credit watch") as to whether it is likely to be upgraded (positive), downgraded (negative) or uncertain (neutral).

Investment Grade

  • AAA: An obligor rated 'AAA' has extremely strong capacity to meet its financial commitments. 'AAA' is the highest issuer credit rating assigned by Standard & Poor's.
  • AA: An obligor rated 'AA' has very strong capacity to meet its financial commitments. It differs from the highest-rated obligors only to a small degree. Includes:
    • AA+: equivalent to Moody's Aa1 (high quality, with very low credit risk, but susceptibility to long-term risks appears somewhat greater)
    • AA: equivalent to Aa2
    • AA-: equivalent to Aa3
  • A: An obligor rated 'A' has strong capacity to meet its financial commitments but is somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions than obligors in higher-rated categories.
    • A+: equivalent to A1
    • A: equivalent to A2
  • BBB: An obligor rated 'BBB' has adequate capacity to meet its financial commitments. However, adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity of the obligor to meet its financial commitments.

Non-Investment Grade (also known as junk bonds)

  • BB: An obligor rated 'BB' is less vulnerable in the near term than other lower-rated obligors. However, it faces major ongoing uncertainties and exposure to adverse business, financial, or economic conditions, which could lead to the obligor's inadequate capacity to meet its financial commitments.
  • B: An obligor rated 'B' is more vulnerable than the obligors rated 'BB', but the obligor currently has the capacity to meet its financial commitments. Adverse business, financial, or economic conditions will likely impair the obligor's capacity or willingness to meet its financial commitments.
  • CCC: An obligor rated 'CCC' is currently vulnerable, and is dependent upon favorable business, financial, and economic conditions to meet its financial commitments.
  • CC: An obligor rated 'CC' is currently highly vulnerable.
  • C: highly vulnerable, perhaps in bankruptcy or in arrears but still continuing to pay out on obligations
  • CI: past due on interest
  • R: An obligor rated 'R' is under regulatory supervision owing to its financial condition. During the pendency of the regulatory supervision, the regulators may have the power to favor one class of obligations over others or pay some obligations and not others.
  • SD: has selectively defaulted on some obligations
  • D: has defaulted on obligations and S&P believes that it will generally default on most or all obligations
  • NR: not rated

Short-term issue credit ratings

The company rates specific issues on a scale from A-1 to D. Within the A-1 category it can be designated with a plus sign (+). This indicates that the issuer's commitment to meet its obligation is very strong. Country risk and currency of repayment of the obligor to meet the issue obligation are factored into the credit analysis and reflected in the issue rating.

  • A-1: obligor's capacity to meet its financial commitment on the obligation is strong
  • A-2: is susceptible to adverse economic conditions however the obligor's capacity to meet its financial commitment on the obligation is satisfactory
  • A-3: adverse economic conditions are likely to weaken the obligor's capacity to meet its financial commitment on the obligation
  • B: has significant speculative characteristics. The obligor currently has the capacity to meet its financial obligation but faces major ongoing uncertainties that could impact its financial commitment on the obligation
  • C: currently vulnerable to nonpayment and is dependent upon favorable business, financial and economic conditions for the obligor to meet its financial commitment on the obligation
  • D: is in payment default. Obligation not made on due date and grace period may not have expired. The rating is also used upon the filing of a bankruptcy petition.

Stock market indices

It publishes a large number of stock market indices, covering every region of the world, market capitalization level and type of investment (e.g., indices for REITs andpreferred stocks)

These indices include:

Governance Scores (GAMMA)

A GAMMA scorereflects S&P's opinion of the relative strength of a company's corporate-governance practices as an investor protection against potential governance-related losses of value or failure to create value. GAMMA is designed for equity investors in emerging markets and is focused on non-financial-risk assessment, and in particular, assessment of corporate- governance risk.

History of CGS and GAMMA Scores

S&P has developed criteria and methodology for assessing corporate governance since 1998 and has been actively assessing companies' corporate-governance practices since 2000.

In 2007, the methodology of stand-alone governance analysis underwent a major overhaul to strengthen the risk focus of the analysis based on the group's experience assigning governance scores. GAMMA analysis focuses on a number of risks that vary in probability and expected impact on shareholder value. Accordingly, S&P's analysis seeks to determine the most vulnerable areas prompt to potential losses in value attributable to governance deficiencies. Recent developments in the international financial markets emphasize the relevance of enterprise risk management and the strategic process to governance quality. GAMMA methodology incorporates two new elements, addressing these areas of investor concern. It also promotes the culture of risk management and long-term strategic thinking among companies.

GAMMA methodology components

  1. Shareholder influence
  2. Shareholder rights
  3. Transparency, audit, and enterprise risk management
  4. Board effectiveness, strategic process and incentives

GAMMA scale

For the GAMMA score, the S&P uses a numeric scale from one to ten (with ten being the best possible score). At the S&P's discretion, a GAMMA score can be publicly disseminated or used privately.

  • GAMMA-10 and GAMMA-9 – in S&P's opinion, the corporate-governance processes and practices at the company provide a very strong protection against potential governance related losses in value. A company in these scoring categories has, in S&P's opinion, few weaknesses in any of the major areas of governance analysis.
  • GAMMA-8 and GAMMA-7 – in S&P's opinion, the corporate-governance processes and practices at the company provide strong protection against potential governance related losses in value. A company in these scoring categories has, in S&P's opinion, some weaknesses in certain of the major areas of governance analysis.
  • GAMMA-6 and GAMMA-5 – in S&P's opinion, the corporate-governance processes and practices at the company provide moderate protection against potential governance related losses in value. A company in these scoring categories has, in S&P's opinion, weaknesses in several of the major areas of governance analysis.
  • GAMMA-4 and GAMMA-3 – in S&P's opinion, the corporate-governance processes and practices provide weak protection against potential governance related losses in value. A company in these scoring categories has, in S&P's opinion, significant weaknesses in a number of the major areas of governance analysis.
  • GAMMA-2 and GAMMA-1 – in S&P's opinion, the corporate-governance processes and practices provide very weak protection against potential governance related losses in value. A company in these scoring categories has, in S&P's opinion, significant weaknesses in most of the major areas of analysis.

Downgrade of US long-term credit rating

Main article: United States federal government credit rating downgrade, 2011

On August 5, 2011, following enactment of the Budget Control Act of 2011, S&P lowered the US's sovereign long-term credit rating from AAA to AA+.[8] The press release sent with the decision said, in part:

  • "The downgrade reflects our opinion that the fiscal consolidation plan that Congress and the Administration recently agreed to falls short of what, in our view, would be necessary to stabilize the government's medium-term debt dynamics.
  • "More broadly, the downgrade reflects our view that the effectiveness, stability, and predictability of American policymaking and political institutions have weakened at a time of ongoing fiscal and economic challenges to a degree more than we envisioned when we assigned a negative outlook to the rating on April 18, 2011.
  • "Since then, we have changed our view of the difficulties in bridging the gulf between the political parties over fiscal policy, which makes us pessimistic about the capacity of Congress and the Administration to be able to leverage their agreement this week into a broader fiscal consolidation plan that stabilizes the government's debt dynamics any time soon."[8]

The United States Department of the Treasury, which had first called S&P's attention to its $2 trillion error in calculating the ten-year deficit reduction under the Budget Control Act, commented, "The magnitude of this mistake – and the haste with which S&P changed its principal rationale for action when presented with this error – raise fundamental questions about the credibility and integrity of S&P’s ratings action."[9] The following day, S&P acknowledged in writing the USD$2 trillion error in its calculations, saying the error "had no impact on the rating decision" and adding:[10]

In taking a longer term horizon of 10 years, the U.S. net general government debt level with the current assumptions would be $20.1 trillion (85% of 2021 GDP). With the original assumptions, the debt level was projected to be $22.1 trillion (93% of 2021 GDP).[10]

Publications

The company publishes The Outlook, a near-weekly (48 times a year) stock market analysis newsletter, which is issued both in print and online to subscribers.

Standard & Poor's Governance Services analysts issue a monthly GAMMA Newslettercontaining comments and views on corporate governance-related matters in emerging markets (BRIC and beyond).

Criticism

See also: Credit rating agency#Criticism

CRAs such as S&P have been subject to criticism in the wake of large losses beginning in 2007 in the collateralized debt obligation (CDO) market that occurred despite being assigned top ratings by the CRAs.

Credit ratings of AAA (the highest rating available) were given to large portions of even the riskiest pools of loans. Investors trusting the low-risk profile that AAA implies, purchased large amounts of CDOs that later became unsalable. Those that could be sold often took staggering losses. For instance, losses on $340.7 million worth of CDOs issued by Credit Suisse Group added up to about $125 million, despite being rated AAA by S&P.[11]

Companies pay S&P to rate their debt issues. As a result, some critics have contended that S&P is beholden to these issuers and that its ratings are not as objective as they ought to be.

In April 2009, the company called for "new faces" in the Irish government, which was seen as interfering in the democratic process. In a subsequent statement they said they were "misunderstood".[12]

See also: United States public debt

Some critics have pointed out that the company and other rating agencies were part of the cause of the global financial crisis of 2008–2009, for example when Moody'sdowngraded Freddie Mac[13] or, to quote Time, when "both agencies granted AAA rating to Collateralized Debt Obligations (CDOs) that were chock-full-of crap mortgages, thereby helping to precipitate the 2008 financial collapse"[14]). Ezra Klein wrote for The Washington Post that "Standard Poor's didn't just miss the bubble. They helped cause it," but he said S&P took the right action to downgrade the U.S.[15]. On the other hand, Paul Krugman wrote, "it’s hard to think of anyone less qualified to pass judgment on America than the rating agencies," and, "S&P’s demands suggest that it’s talking nonsense about the US fiscal situation".[16]

With the US downgrade some have accused S&P of causing further damage for its own agenda. S&P acknowledged making a USD$2 trillion error in its justification for downgrading the US credit rating,[17], but stated that it "had no impact on the rating decision".[18] "A judgment flawed by a $2 trillion error speaks for itself,"[19] said a spokesman for the United States Department of the Treasury.

Another issue that has concerned commentators is that an S&P rating — for example, of the US government or any other national government — can have, and has had, a distinct effect on a truly global scale, but the decision on these ratings are made by the company's employees who are not elected by the public, and are not accountable for their decision making process. There is no appeals process against a credit-rating decision.

The United States Department of the Treasury, which had first called S&P's attention to its $2 trillion error in calculating the ten-year deficit reduction under the Budget Control Act commented, "The magnitude of this mistake – and the haste with which S&P changed its principal rationale for action when presented with this error – raises fundamental questions about the credibility and integrity of S&P’s ratings action."[9]

In August 2011, S&P filed a letter with the SEC in an attempt to water down a proposal requiring credit rating agencies to publicly disclose "significant errors" in how they calculate their ratings. The SEC proposal, issued in May 2011, would require credit raters to disclose more about their methods and strengthen internal controls to protect against conflicts of interest.[20][21]

Antitrust Review

In November 2009, ten months after launching an investigation, the European Commission (EC) formally charged S&P with abusing its position as the sole provider of international securities identification codes for U.S. securities by requiring European financial firms and data vendors to pay licensing fees for their use. "This behavior amounts to unfair pricing," the EC said in its statement of objections which lays the groundwork for an adverse finding against S&P. "The (numbers) are indispensable for a number of operations that financial institutions carry out – for instance, reporting to authorities or clearing and settlement – and cannot be substituted.”[22]

S&P has run the CUSIP Service Bureau, the only International Securities Identification Number (ISIN) issuer in the US, on behalf of the American Bankers Association. In its formal statement of objections, the EC alleged "that S&P is abusing this monopoly position by enforcing the payment of licence fees for the use of US ISINs by (a) banks and other financial services providers in the EEA and (b) information service providers in the EEA." It claims that comparable agencies elsewhere in the world either do not charge fees at all, or do so on the basis of distribution cost, rather than usage.[23]

See also

References

  1. ^ "S&P | About S&P | Americas - Key Statistics". Standard & Poor's. Retrieved August 7, 2011.
  2. ^ Blumenthal, Richard (May 5, 2009). "Three Credit Rating Agencies Hold Too Much of the Power". Juneau Empire - Alaska's Capital City Online Newspaper. Retrieved August 7, 2011.
  3. ^ "Office Locations." Standard & Poor's. Retrieved on August 12, 2011. "Corporate 55 Water Street New York New York "
  4. ^ "A History of Standard & Poor's". Retrieved May 9, 2007.
  5. ^ "S&P | Ratings Sovereigns Ratings List | Americas". Standard & Poor's. Retrieved August 7, 2011.
  6. ^ Reference for the United States: "United States of America Long-Term Rating Lowered To 'AA+' On Political Risks And Rising Debt Burden; Outlook Negative". Standard & Poor's. Retrieved August 5, 2011.
  7. ^ "S&P SmallCap 600 –Overview". Standard and Poors. Retrieved June 29, 2009.
  8. ^ a b McGraw-Hill Companies: Standard & Poor's (August 5, 2011). "United States of America Long-Term Rating Lowered To 'AA+' Due To Political Risks, Rising Debt Burden; Outlook Negative". Press release. Retrieved August 5, 2011.
  9. ^ a b Bellows, John (August 6, 2011). "Just the Facts: S&P's $2 Trillion Mistake". United States Department of the Treasury. Retrieved August 7, 2011.
  10. ^ a b McGraw-Hill Companies: Standard & Poor's (August 6, 2011). "Standard & Poor's Clarifies Assumption Used on Discretionary Spending Growth". Press release. Retrieved August 6, 2011.
  11. ^ Tomlinson, Richard; Evans, David (May 31, 2007). "CDO Boom Masks Huge Subprime Losses, Abetted by S&P, Moody's Fitch". Bloomberg. Retrieved August 6, 2011.
  12. ^ GAA Video:. "Cowen Attacks Call for 'New Faces' in Cabinet". Irish Independent. Retrieved August 7, 2011.
  13. ^ Associated Press (August 22, 2008). "Freddie Mac Courts Investors, Buffett Passes". International Herald Tribune (via Internet Archive). Archived from the originalon 2008-09-15. Retrieved August 6, 2011.
  14. ^ Klein, Joe (August 6, 2011). "Standard & Poor's Downgrades Itself".Time. Retrieved August 6, 2011.
  15. ^ Klein, Ezra (August 6, 2011). "Standard & Poor's Has Been Wrong Before, But They're Right Now". The Washington Post. Retrieved August 6, 2011.
  16. ^ Paul Krugman (August 5, 2011). "S&P and the USA". The New York Times. Retrieved August 8, 2011.
  17. ^ Paletta, Damian (August 5, 2011). "U.S. Debt Rating in Limbo as Treasury Finds Math Mistake by S&P in Downgrade Warning". The Wall Street Journal. Retrieved August 5, 2011.
  18. ^ Adams, Richard. "US Stripped of AAA Credit Rating by S&P over Political Weakness". The Guardian. Retrieved August 7, 2011.
  19. ^ Goldfarb, Zachary A. (August 5, 2011). "S&P Downgrades U.S. Credit Rating for First Time". The Washington Post. Retrieved August 5, 2011.
  20. ^ Lynch, Sarah (August 10, 2011). "S&P balks at SEC proposal to reveal rating errors". Reuters. Retrieved August 10, 2011.
  21. ^ Wang, Marian (August 10, 2011). "What’s a ‘Significant Error’? Standard & Poor’s Says Leave It To Us". ProPublica. Retrieved August 10, 2011.
  22. ^ Securities Technology Monitor, ed (2009). "EC Charges S&P With Monopoly Abuse".
  23. ^ Finextra, ed (2009). "European Commission Accuses S&P of Monopoly Abuse over Isin Fees".

External links

Retrieved from "http://en.wikipedia.org/wiki/Standard_%26_Poor%27s"
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