During the last 20 years, the capital markets have seen three recessions, the largest equity bull market in history, the continuation of a 30-year trend of declining interest rates on fixed-income investments, and numerous other types of tumultuous periods. Such evolving market dynamics have implications on creditworthiness, too.
Credit ratings are sometimes criticized for being “pro-cyclical.” It is implied that credit rating agencies assign overly positive ratings during times of economic stability which they then have to lower during times of instability, and that this behavior exacerbates the economic situation during volatile markets.
At S&P Global Ratings, we don’t look at our ratings this way: We believe that to effectively serve their purpose as independent forward-looking opinions on credit risk, our credit ratings should reflect the most current information and evolve if and when circumstances change.
Transparency and consistency with our published methodologies are top priorities of ours when assigning ratings. So, we cannot choose to ignore changes that affect creditworthiness because of the potential effects a downgrade or upgrade may have. We are required to change our credit ratings when our assessment of credit risk changes, in line with our published methodologies.
Credit ratings are typically not point-in-time assessments, but rather forward-looking evaluations that are subject to – and require – surveillance over time in order to reflect changes in creditworthiness. Our ratings are based on quantitative and qualitative analyses of available information by experienced professionals. Of course, that analysis includes relevant changes in credit cycles, as well as other events that could have an impact on credit risk.
Credit ratings express an opinion about the ability and willingness of an issuer to meet its financial obligations in full and on time. They also speak to the credit quality of an individual debt issue and the relative likelihood of default of that debt instrument. It is precisely because credit ratings evolve over time, to reflect changes to market- or issuer-specific credit drivers, that they have value to market participants when assessing credit risk.
Ratings changes reflect the views of our analysts on how external events or circumstances affect individual issuers. Different issuers may be affected differently by the same events or circumstances.