Credit rating
The use of the ratings makes it possible to select counter parties quickly and efficiently in transactions where there is a probability of non-fulfillment by the other party of its obligations, otherwise - transactions involving the presence of the counterpart's credit risk. Credit rating, in our case, of the issuer's bank is an opinion of an independent agency on the readiness and ability of the bank to fulfill its current and future obligations in a timely manner and in full in the long term.
Rating agencies are commercial organizations whose activities are aimed at conducting credit analysis of companies according to the following indicators:
- Position of a credit institution in the market;
- quality of credit organization management and composition of shareholders;
- asset structure and dynamics;
- quality of the loan portfolio;
- liabilities of the organization (structure and dynamics of liabilities);
- structure and adequacy of equity capital;
- liquidity of the organization;
- profitability of a credit organization, its income.
Today, in the global financial markets, the tone in this business is set by rating companies from the U.S., they are also called the "Big Three" - Moody's, S & P, and Fitch. Agencies themselves estimate their share in this business at 95% of the global market: Moody's accounts for 39%, S&P for 40% and Fitch for 16%. The top management of each of these agencies asserts that it is their companies that have fundamental analytical knowledge and enormous experience (both successful and negative), which together makes their assessments of creditworthiness the most objective. But many investors still remember what role these agencies played during the mortgage crisis.
The main instrument for rating is the rating model, which includes a number of risk factors from the company's financial indicators. Among such, for example, Standart & Poor's singles out the following indicators:
- EBIT/EBITDA to interest paid ratio;
- EBIT to capital ratio;
- Long-term debt to long-term debt and equity ratio.
Each of the factors has its own weight and significance. At the final stage, the model value is converted to a point scale value.
Dependence of the yield spread on the issuer's credit rating at the stage of placement, assigned by one of the rating agencies, is often a common factor in the existing empirical models, as it provides information on the financial condition of the issuer, the probability of default, and the level of losses as a result of its possible occurrence. An indicator such as a credit rating from one of the international rating agencies has become possible to use as an exogenous variable in regression models for finding corporate bond yield spreads relatively recently. The reason for this is that very few issuers had a credit rating at all: only about 20% of the securities placed by real sector companies in 2006-2007 were rated at all. However, with the advent of the next economic crisis, only reliable, proven borrowers managed to issue bonds: in 2008-2009, the share of bonds issued by real sector companies with ratings of international agencies amounted to 69%, and nowadays, at least banks have a rating, if not from one of the Big Three participants, then at least from one of the domestic rating agencies. At the same time, investors' appetite for risk remained rather low even after the end of the mortgage crisis. Until now, third tier bonds are rarely placed, and market participants are similar in their opinion that the situation should not change.
The higher the rating, the higher the confidence of market participants in the bank's securities, and, conversely, the lower the rating, the higher the probability of default. In this case, the investor has the right to demand a higher yield for such securities.
The volatility of the issuer's shares.
Some foreign studies note the need to take into account the volatility of the share yield when creating a model of the corporate bond yield spread. An issuer with a more volatile equity capital is more likely to default, so the investor, aware of this risk, may demand an additional premium in the form of a higher yield spread when making a decision to buy bonds. As an exogenous variable, it is customary to use the standard deviation of the company's daily share returns 100-150 days before the placement. According to the authors of all known works on this topic, the volatility of shares turned out to be a significant factor, and a positive correlation with the yield spread was revealed. However, due to the peculiarities of the Russian share market, this regressor will not be considered in this study, as the number of corporate bond issuers is not traded on the stock exchange.