What is included with this book?
"At a time of unprecedented public and political scrutiny of the effectiveness and indeed the basic business model of the Credit Rating industry, and heightened concerns regarding the transparency and accountability of the leading agencies, this book provides a commendably comprehensive overview, and should provide invaluable assistance in the ongoing debate."
—Rupert Atkinson, Managing Director, Head of Credit Advisory Group, and member of the SIFMA Rating Agency Task Force
“The Langhors have provided useful information in a field where one frequently finds only opinions or misconceptions. They supply a firm base from which to understand changes now underway. A well-read copy of this monograph should be close to the desk of every investor, issuer and financial regulator, legislator or commentator.”
—John Grout, Policy and Technical Director, The Association of Corporate Treasurers
Foreword | p. ix |
Preface | p. xiii |
Introduction | p. 1 |
Context and Premises | p. 1 |
The Benchmarking of Default Prospects Remains Deeply Rooted in Business Analysis | p. 1 |
Credit Ratings Play a Unique Role in Overcoming Information Asymmetries on the Information Exchanges | p. 9 |
Under the Spotlight as Unique Infomediaries, the CRAs became Strictly Regulated | p. 13 |
Book Chapters | p. 17 |
Supporting Materials | p. 18 |
Credit Rating Foundations | p. 21 |
Credit Ratings | p. 23 |
The World of Corporate Defaults | p. 24 |
What are Corporate Defaults | p. 27 |
The Drivers of Corporate Defaults | p. 35 |
Recovery Rates from Defaults | p. 39 |
Credit Rating Scales | p. 40 |
Fundamental Ordinal Credit Rating Scales | p. 43 |
Rating Scales and Observed Bond Market Credit Spreads | p. 64 |
Market-Implied Cardinal Rating Scales and Default Probabilities | p. 72 |
The Interpretation of Credit Ratings | p. 74 |
Interpreting from the Scale | p. 75 |
Correctly Interpreting versus Misinterpreting Ratings | p. 78 |
Special Issues | p. 85 |
Credit Ratings: Summary and Conclusions | p. 88 |
The Raison d'Etre of Credit Ratings and their Market | p. 89 |
Needs for Credit Ratings - or the Demand Side of Ratings | p. 89 |
Principals: Issuers/Borrowers | p. 91 |
Principals: Fixed Income Investors | p. 99 |
Prescribers | p. 104 |
Credit Ratings as a Solution to Information Asymmetry: Economic Analysis | p. 111 |
Economics of Ratings: Intuition | p. 111 |
Economics of Ratings: Analysis | p. 113 |
The Economic Analysis of Ratings: Summary and Implications | p. 124 |
Credit Rating Segments - or Scale and Scope of the Rated Universe | p. 126 |
Industry Segments or Type of Rated Issuers | p. 126 |
Product Segments or Types of Rated Issues | p. 138 |
Geographical Segments or Location of the Obligor | p. 149 |
Summary | p. 158 |
Technical Appendix | p. 158 |
How to Obtain and Maintain a Credit Rating | p. 161 |
The Rating Preparation | p. 161 |
The Issuer Client | p. 163 |
The Rating Adviser-Intermediary | p. 165 |
The Credit Rating Agency Supplier | p. 168 |
The Rating | p. 170 |
The Rating Action | p. 170 |
Rating Follow-Up | p. 174 |
The Rating Agreement | p. 179 |
Quality of the Rating Process | p. 187 |
Objectivity | p. 188 |
Diligence | p. 189 |
Transparency | p. 191 |
Credit Rating Analysis | p. 195 |
The France Telecom Credit Rating Cycle: 1995-2004 | p. 197 |
From Sovereign Status to Near Speculative Grade (1995-2002) | p. 198 |
How Sovereign Aaa Status of June 1995 Adjusts to Corporate Aa1 in July 1996 | p. 198 |
A Company that went Public on Aa1 Status in October 1997 is Downgraded to Aa2 in December 1999 | p. 200 |
Rapid Extension of FT's Reach and Two Notches Downgrade to A1 in September 2000 | p. 202 |
A Wake-up Call: the Orange IPO and Surprise Two Notches Down-grade to A3 in February 2001 | p. 211 |
The Slide Downward to Baa1 in September 2001 | p. 219 |
Looming Crisis and Two Notches Downgrade to Baa3 in June 2002 | p. 222 |
Turning Point and Rating Recovery (Fall 2002-Winter 2004) | p. 229 |
Improvement in Outlook in September 2002 | p. 229 |
A New Start in October 2002 and Recovery Actions | p. 238 |
Recovery Implementation and the Sequence of Rating Upgrades through February 2005 | p. 244 |
Analysis and Evaluation | p. 247 |
Risk Shifting at France Telecom and its Fundamental and Market-Implied Ratings | p. 248 |
The Restraint of the CRAs during the 2002 Crisis | p. 253 |
The Value of Ratings to Issuers | p. 254 |
Credit Rating Analysis | p. 257 |
Fundamental Corporate Credit Ratings | p. 257 |
Corporate Credit Risk2 | p. 257 |
Credit Risk of Corporate Debt Instruments | p. 260 |
Putting it All Together: the Rating8 | p. 265 |
Corporate Ratings Implied by Market Data | p. 274 |
The Concept | p. 274 |
Mechanics of Extracting Default Probabilities from Market Prices21 | p. 276 |
Market-Implied Ratings | p. 284 |
Special Sector Ratings | p. 286 |
Sovereign Ratings | p. 286 |
Financial Strength Ratings | p. 291 |
Structured Finance Instruments Ratings | p. 296 |
Technical Appendix | p. 304 |
Step 1: Computing the Implied Market Value of Assets and Asset Volatility | p. 305 |
Step 2: Computing the Distance to Default | p. 305 |
Step 3: Calculating the Default Probability Corresponding to the Distance to Default | p. 306 |
Credit Rating Performance | p. 307 |
Relevance: Ratings and Value | p. 307 |
Structural Relevance: Rating and Credit Spreads | p. 310 |
Impact Relevance: Rating Actions and Security Price Changes | p. 325 |
Evaluation: How Relevant are Fundamental Credit Ratings? | p. 331 |
Preventing Surprise in Defaults: Rating Accuracy and Stability | p. 332 |
Metrics of Accuracy and Stability | p. 334 |
Analysis of the Prevention of Surprise in Defaults | p. 353 |
Summary, Evaluation and Conclusion | p. 356 |
Efficiency Enhancement: Stabilization in Times of Crisis? | p. 356 |
The Asian Macroeconomic Financial Crisis | p. 356 |
The Western Microeconomic Equity Crisis | p. 363 |
The Subprime Mortgage Related Crisis | p. 364 |
Criticisms: the Ratings in Crisis? | p. 369 |
The Credit Rating Business | p. 373 |
The Credit Rating Industry | p. 375 |
The Rise of the Credit Rating Agencies | p. 375 |
Origins | p. 375 |
Macroeconomic Forces Shaping the Current Industry | p. 378 |
The Current Structure of the Industry | p. 384 |
Industry Specifics and How They Affect Competition | p. 407 |
Agencies Compete for the Market rather than in the Market | p. 407 |
The Business Model and Profit Drivers | p. 411 |
Some Dynamic Aspects of Competition among CRAs: A Small Number of Players can be Consistent with Intense Rivalry | p. 418 |
Industry Performance | p. 419 |
Performance for CRA Shareholders | p. 419 |
Performance of Ratings as a Public Good | p. 420 |
Performance for Issuers | p. 427 |
Performance for Investors | p. 427 |
Conclusion | p. 428 |
Regulatory Oversight of the Credit Rating Industry | p. 429 |
The Regulatory Uses of Ratings | p. 430 |
Prudence | p. 435 |
Market Access | p. 436 |
Investor Protection | p. 439 |
The Regulation of the Industry | p. 440 |
The Regulatory Options | p. 440 |
Worldwide Regulatory Initiative: the 2004 IOSCO Code of Conduct | p. 443 |
The 2005 European Union Policy on Credit Rating Agencies | p. 444 |
The US 'Credit Rating Agency Reform Act of 2006' | p. 448 |
Analysis and Evaluation | p. 455 |
The EU and the US Approaches Compared | p. 455 |
The Positions of the Main Stakeholders | p. 461 |
Comments and Evaluation on Regulatory Options | p. 466 |
Summary and Conclusions | p. 469 |
The Challenges Facing Rating Agencies Today | p. 469 |
From Regulatory Legitimacy to Market Legitimacy | p. 469 |
Financial Innovation | p. 472 |
Growth and Globalization | p. 473 |
Conclusion | p. 473 |
References | p. 475 |
Index | p. 495 |
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