In addition to internally available information (e.g., cash flow forecasts), treasury professionals use a range of market information to support instrument selection from both investing and borrowing perspectives. Market information is available both as raw data (e.g., the GBP/USD spot rate at a particular time) and as opinion (e.g., a credit rating from a credit rating agency). Understanding the range of available information and the limits to its accuracy and usefulness will help treasury professionals make good investment and funding decisions.

Treasury professionals rely on market information at each stage of the investing or borrowing process. This information helps treasury professionals perform such activities as evaluating counterparty risk, identifying appropriate investment instruments and borrowing sources, and benchmarking performance.

Most publicly issued debt by firms and municipalities is rated by one or more of the credit rating agencies (CRAs). CRAs assign credit ratings for issuers of short- and long-term debt obligations, as well as for the debt instruments themselves. Ratings can be on either a solicited or unsolicited basis. With a solicited rating, a borrower would ask one or more agencies to rate the borrower and may work with the agency to ensure an appropriate rating in anticipation of a future debt offering. With an unsolicited rating, a CRA would rate an entity based on publicly available information even when the entity has not requested a rating. This may result in a poor rating based on incomplete information. It is important to remember that a credit rating is not an investment recommendation; rather, it is an assessment, in the opinion of the CRA, of the potential for downside loss on the investment. A listing of some of the major credit rating agencies appears in Appendix 13.1.

CRAs generally have access to a borrower’s internal information, and the CRA’s analysis and subsequent rating are widely accepted by market participants and regulators. In most cases, the rating agencies have access to confidential, nonpublic information that the securities issuers provide to the agencies only for the determination of ratings. This information is not released to the general public without the issuer’s permission. Financial institutions use these solicited credit ratings when required by regulators to hold investment-grade bonds.

Part of the US Dodd-Frank Act addresses CRAs and the potential for conflicts of interest arising because the CRAs receive their primary revenues from the entities they rate and not from the investors who use the information. Dodd-Frank requires the CRAs to provide greater disclosure of their rating models and methodologies, and subjects them to greater liability.

1. Rating Classes

There are two primary classes of ratings:

• Issuer credit ratings. This type of credit rating represents the CRA’s opinion on the issuer’s overall capacity to meet its financial obligations. These include counterparty, corporate, and sovereign credit ratings. Counterparty ratings are made for key counterparties in financial transactions (e.g., financial institutions and insurance companies). Corporate credit ratings are on corporate debt issuers, and sovereign ratings are on government debt issuers. Financial institutions may have a number of different issuer credit ratings, reflecting their complex structures.
• Issue-specific credit ratings. These ratings of specific long- and short-term securities consider the attributes of the issuer, as well as the specific terms of the issue, the quality of the collateral, and the creditworthiness of the guarantors.
2. The Ratings Process

For issuers, the ratings process includes the quantitative and qualitative analyses of the issuer being assessed. The quantitative aspects focus mainly on financial analyses derived from the issuer’s financial reports. In most cases, credit rating analysts examine the issuer’s financial statements using proprietary models and may perform additional quantitative reviews if necessary. The qualitative side is concerned with aspects that are distinct from the financial statements. For a corporate issuer, this may include analyzing the quality of the management and the firm’s competitiveness within its industry, as well as the expected growth of the industry and its vulnerability to business cycles, technology changes, regulatory changes, and labor relations.

For government issues, both sovereign and sub-sovereign, the typical analysis is based on the primary factors relating to government finance. These usually include the economy, overall debt levels, tax revenues, expenses, financial statements, and administration/management strategies for the government entity. Other factors would include the collateral for the debt and the primary source for repayment (e.g., general taxes or specific revenues, such as tolls for a bridge). Each factor is evaluated individually and in aggregate with respect to the total effect on the government entity’s ability to repay its debt.

Although each CRA follows the same general approach, there are differences in their methodologies. Each CRA publishes its methodology for each rating process on its website.

3. Reviews of Ratings

Ratings usually are reviewed by the CRAs once a year based on new financial reports, new business information, or review meetings with management. These review meetings are an important part of the ongoing relationship between the organization and the CRA. A credit watch or rating review is issued if there is a reason to believe that the review may lead to an unfavorable credit rating change.

4. Credit Rating Scales

The scales used for bond credit ratings by the primary agencies recognized by the US SEC are shown in Exhibits 13.6 (long-term bonds) and 13.7 (short-term issues). Note that a different rating system is used to evaluate long-term and short-term credit ratings. The main reason for the difference in rating systems is that long-term debt has more possible options and variations that affect the ratings, and the maturity and seniority of the issue often play a major role in the ultimate ratings. Short-term issues, on the other hand, tend to be more standardized in their structure and options, so a narrow range of ratings is appropriate. Rating scales are relative opinions, providing the CRA’s assessment of the rated entity or issue to meet its obligations. Ratings lower down the scale indicate that the entity or issue is more likely to default on its obligations (due to changes in economic conditions or business circumstances) than stronger-rated entities or issues.

In addition to the information provided by CRAs, treasury professionals can use various other market analysis and research tools to help them make financial decisions. These are typically resources that are available to help with (1) portfolio investment decisions (e.g., when purchasing/selling investments or managing the portfolio), (2) acquisition and divestment decisions, (3) evaluation of trading partners for credit and counterparty risk, and (4) comparisons with other firms or industry averages.

Some of the analysis and research tools, such as Bloomberg, FactSet, Thomson Reuters, and Dow Jones Financial Information Services, provide a wide range of services, including real-time news and information on financial markets (e.g., interest rates, FX rates, and market indices), as well as historical data. Some of the services also include platforms that allow for the execution of trades for stocks, bonds, currencies, and derivatives. Financial institution regulators (such as the US Federal Reserve and the European Banking Authority) also publish the results of stress tests and similar regulatory actions, which can inform financial decisions.

Other analysis and research tools focus more on the provision of historical data for research purposes (e.g., Standard & Poor’s and Mergent). Fee-based companies like Dun & Bradstreet (D&B) and CreditRiskMonitor provide information for those wanting to perform a credit analysis on potential customers or borrowers. Financial information on publicly traded companies is available from a wide range of sources as well. While many financial reporting services charge fees, there are also a large number of free sources online. Financial statements of US publicly traded firms are available at no charge through the SEC’s Electronic Data Gathering, Analysis, and Retrieval (EDGAR) system. Financial statements of companies in other countries are also available via locally managed sources; for example, financial statements of all UK-registered companies are available via the UK’s Companies House website. In addition, information on US municipal bonds, including official disclosures, refunding documents, and market information, may be obtained from EMMA (Electronic Municipal Market Access), which is a service of the Municipal Securities Rulemaking Board (MSRB).