Rating

The rating is an assessment of the solvency of a debt issuing entity. It is carried out by a specialized and independent agency.

Rating agencies have developed in the context of financial disintermediation to reduce information asymmetry between borrowers and lenders. The best known are 3: Standard & Poor's, Moody's and FitchRatings. Ratings are separated into investment category and speculative category - the riskiest. Often, entities are rated differently over the short and long term. Indeed, a company can have cash flow problems in the short term but not in the long term.

When there are rating differences greater than 2 notches between several agencies, we speak of 'split rating'.

Rating agencies also provide default probabilities and transition matrices (which represent the probability of moving from one rating to another over the course of a year).

When an agency wishes to modify a rating, it can send two signals:

• Placed under surveillance: deterioration is effective 3 months later in 50% of cases.
• Change of perspective: deterioration is effective within the following 12 to 18 months in 25% of cases.

In the context of structured products, it is the ratings of the issuing banks - as well as their guarantors - which are taken into account. The lower the rating, the more profitable the risk taking is for the investor and therefore the higher the coupon will be.