Ratings and rating agency capital

Guoqiang Li

11.1 INTRODUCTION

Corporations usually fund their operations by two forms of capital: equity capital and debt capital. They raise equity capital by issuing equity securities or common stocks to their shareholders. Equity securities are followed by equity analysts from investment banks, who routinely issue “buy”, “hold” or “sell” ratings. Corporations also raise debt capital by issuing various bonds or notes, commonly known as debt securities or fixed-income securities, to debtholders or investors in fixed-income securities.

Credit rating agencies play an important role in the smooth functioning of the debt market as independent third parties that provide useful credit risk information to investors. Rating agencies provide an issuer credit rating (ICR) to the issuer (also known as an obligor) of the debt securities. The ICR of an issuer is often equivalent to the credit rating of its senior unsecured debt securities. If the issuer also issues junior securities, which are subordinate to the senior securities it issues, these will carry a rating that is lower than the ICR. Conversely, if a specific issue is secured by high-quality collateral, then it may carry a rating higher than the