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Name the major rating agencies, and list some factors that affect bond ratings. Additionally, make sure...

Name the major rating agencies, and list some factors that affect bond ratings. Additionally, make sure to discuss who pays for the ratings and how this can influence ratings.

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Answer #1

The major ratings agencies are Moody's, S&P and Fitch.

Some factors that affect bond ratings are :

  • Leverage ratios such as debt-equity ratio and debt-to-total assets
  • Coverage ratios such as times-interest-earned
  • Cash flows available for debt servicing
  • History of defaults on debt
  • Restrictive covenants in bond indenture
  • Collateral
  • Seniority of bonds

The practice is for the firm whose bonds are being rated to pay for the ratings. This could influence the ratings agencies to give a better rating, since they do not want to lose the client's business in a highly concentrated and competitive industry. Thus, the ratings could be overstated (ratings are better than they should be).

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