By Greg Zappin | August 17, 2017
Despite criticism for acting too slow or being backward looking, rating agencies and the credit ratings they assign are still relevant in the corporate bond market today. Ratings trends can be a useful, albeit imperfect, tool to access over credit quality in the market and sometimes offer a source of alpha if future ratings direction can be correctly anticipated. Non-financial credit ratings are based on fairly transparent criteria, particularly the leverage and profitability metrics. It’s the qualitative judgments about competitive position, industry dynamics and financial policy that are grey areas. While new issue ratings have proven to be an accurate gauge of default risk over time, the timing of subsequent ratings actions is a big market gripe. Ratings are meant to look through cycles, which can create big gaps between an issuer’s ratings and bond pricing and current fundamentals.