Rating a Rating Agency. We’ve Rated Moody’s.

Rating_Agencies

Who rates Credit Rating Agencies? Apparently nobody does. Who rates Moody’s? Standard & Poor’s? Probably not. And who rates Fitch? Moody’s? Unlikely. It is not easy to rate them all as only Moody’s is the only publicly listed one of the Big Three (NYSE:MCO). Standard & Poor’s is an LLC subsidiary of S&P Global, Fitch Ratings is a subsidiary of Fitch Group. Nevertheless, it would be amusing to see rating agencies rate each other. It would probably lead to a conflict of interest to the power of three!

Since the Big Three CRAs rate tens of thousands of corporations, financial products as well as national economies, impacting significantly people’s lives, one may be curious to find out just how good they are.

Based on Moody’s Balance Statement we’ve computed its Resistance to Shocks (RtS) Rating as well as its evolution over time. Let us remind the reader that Universal Ratings does not provide Probability of Default (PoD) ratings as we believe that such ratings are irrelevant in a turbulent and complex economy. Resistance to Shocks is a better measure of the state of health of a business, especially in a shock-dominated economy! In effect, when someone is shooting bullets at you, your concern is to protect yourself from bullets and not your theoretical life expectancy. This is how RtS stands to PoD.

As of Q1 2017, the RtS rating of Moody’s is 67.2% (Moderately stable). This corresponds roughly to Baa1 – Baa2 on Moody’s own scale, i.e Lower-Medium Grade (subject to moderate credit risk).

The evolution of Moody’s RtS rating over time is illustrated below.

RtS

In Q4 2010 a peak value of just over 71% was recorded. After a similar peak in Q4 2015, there is an evident downward trend.

In terms of business entropy (i.e. disorder) this has increased from 800 bits, in early 2010, to around 1200 bits, oscillating around that value for the past 6 years.

E

This last plot shows that the Balance Statement was less ‘noisy’ in 2010 while today it is almost 50% more ‘chaotic’.

The Complexity Map, illustrating the interdependencies between the Balance Sheet entries, is shown below. The business is quite intricate, with interdependency (i.e. map density) at 38%.

Moodys_CMap

The size of each node (Balance Sheet entry) on the diagonal is proportional to its impact on the RtS Rating. The same information is provided in a ranked list – known as the Corporate Complexity Profile – illustrated below (values in %).

Moodys_CProfile

The entries at the top of this bar chart are those that impact the RtS Rating the most.

The objective of this study was not perform an in-depth analysis of Moody’s and its Balance Sheet. Our goal was to focus attention on the peculiar fact that some who has the power to assign grades and to judge how well others perform, has a mere  Baa1 – Baa2  Lower-Medium Grade rating. One would probably expect a rating agency to set an example with a high rating, somewhere near the Aa1 – Aa3 range. Would you trust your physician, who insists you should reduce smoking and drinking, if you saw him in a bar smoking and holding a glass of whiskey?

 

www.universal-ratings.com

 

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