Moody's Rating Symbols and Definitions
Moody's Rating Symbols and Definitions
Moody's Rating Symbols and Definitions
9 November 2023
MOOD
Preface
In the spirit of promoting transparency and clarity, Moody’s Standing Committee on Rating Symbols
and Definitions offers this updated reference guide which defines Moody’s various ratings symbols,
rating scales and other ratings-related definitions. In addition to credit ratings, this document
contains symbols and definitions for Other Permissible Services, Inputs to Ratings, and Research
Transparency Assessments, which are symbols and scores that are not credit ratings.
Since John Moody devised the first bond ratings more than a century ago, Moody’s rating systems
have evolved in response to the increasing depth and breadth of the global capital markets. Much of
the innovation in Moody’s rating system has been in response to market needs for increased clarity
around the components of credit risk or for finer distinctions in rating classifications.
Kenneth Emery
Chair, Standing Committee on Rating Symbols and Definitions
+1.212.553.4415
kenneth.emery@moodys.com
Contents
MIG Ratings.............................................. 10
VMIG Ratings ........................................... 10
Standard Linkages Between the Long-
Term and MIG and VMIG Short-Term
Preface .................................................. 2 Rating Scales ............................................. 11
Credit Rating Services .......................... 5 National Scale Long-Term Ratings ........12
Moody’s Global Rating Scales ...................5 National Scale Short-Term Ratings .......12
Standard Linkage Between the Probability of Default Ratings ................ 14
Global Long-Term and Short-Term
Rating Scales.................................................. 7 Other Permissible Services .................15
Moody’s differentiates structured finance ratings from fundamental ratings (i.e., ratings on nonfinancial corporate, financial
institution, and public sector entities) on the global long-term scale by adding (sf) to all structured finance ratings. 7 The addition of
(sf) to structured finance ratings should eliminate any presumption that such ratings and fundamental ratings at the same letter
grade level will behave the same. The (sf) indicator for structured finance security ratings indicates that otherwise similarly rated
structured finance and fundamental securities may have different risk characteristics. Through its current methodologies, however,
Moody’s aspires to achieve broad expected equivalence in structured finance and fundamental rating performance when measured
over a long period of time.
1
In the case of impairments, there can be a financial loss even when contractual obligations are met. See the definition of Impairment in this publication.
2
For issuer level ratings, see the definition of Issuer Ratings in this publication. In some cases the relevant credit risk relates to a third party, in addition to, or instead of the
issuer. Examples include credit-linked notes and guaranteed obligations.
3
Because the number of possible features or structures is limited only by the creativity of issuers, Moody’s cannot comprehensively catalogue all the types of non-standard
variation affecting financial obligations, but examples include equity indexed principal values and cash flows, prepayment penalties, and an obligation to pay an amount
that is not ascertainable at the inception of the transaction.
4
For certain preferred stock and hybrid securities in which payment default events are either not defined or do not match investors’ expectations for timely payment, long-
term and short-term ratings reflect the likelihood of impairment (as defined below in this publication) and financial loss in the event of impairment.
5
Debts held on the balance sheets of official sector institutions – which include supranational institutions, central banks and certain government-owned or controlled banks
– may not always be treated the same as debts held by private investors and lenders. When it is known that an obligation is held by official sector institutions as well as
other investors, a rating (short-term or long-term) assigned to that obligation reflects only the credit risks faced by non-official sector investors.
6
For information on how to obtain a Moody’s credit rating, including private and unpublished credit ratings, please see Moody’s Investors Service Products. Please note that
Moody’s always reserves the right to choose not to assign or maintain a credit rating for its own business reasons.
7
Like other global scale ratings, (sf) ratings reflect both the likelihood of a default and the expected loss suffered in the event of default. Ratings are assigned based on a
rating committee’s assessment of a security’s expected loss rate (default probability multiplied by expected loss severity), and may be subject to the constraint that the
final expected loss rating assigned would not be more than a certain number of notches, typically three to five notches, above the rating that would be assigned based on
an assessment of default probability alone. The magnitude of this constraint may vary with the level of the rating, the seasoning of the transaction, and the uncertainty
around the assessments of expected loss and probability of default.
Aaa Obligations rated Aaa are judged to be of the highest quality, subject to the lowest level of credit risk.
Aa Obligations rated Aa are judged to be of high quality and are subject to very low credit risk.
A Obligations rated A are judged to be upper-medium grade and are subject to low credit risk.
Baa Obligations rated Baa are judged to be medium-grade and subject to moderate credit risk and as such may possess certain speculative
characteristics.
Ba Obligations rated Ba are judged to be speculative and are subject to substantial credit risk.
B Obligations rated B are considered speculative and are subject to high credit risk.
Caa Obligations rated Caa are judged to be speculative of poor standing and are subject to very high credit risk.
Ca Obligations rated Ca are highly speculative and are likely in, or very near, default, with some prospect of recovery of principal and
interest.
C Obligations rated C are the lowest rated and are typically in default, with little prospect for recovery of principal or interest.
Note: Moody’s appends numerical modifiers 1, 2, and 3 to each generic rating classification from Aa through Caa. The modifier 1 indicates that the obligation ranks in
the higher end of its generic rating category; the modifier 2 indicates a mid-range ranking; and the modifier 3 indicates a ranking in the lower end of that generic rating
category. Additionally, a “(hyb)” indicator is appended to all ratings of hybrid securities issued by banks, insurers, finance companies, and securities firms.*
Note: For more information on long-term ratings assigned to obligations in default, please see the definition “Long-Term Credit Ratings for Defaulted or Impaired
Securities” in the Other Definitions section of this publication.
* By their terms, hybrid securities allow for the omission of scheduled dividends, interest, or principal payments, which can potentially result in impairment if such an omission
occurs. Hybrid securities may also be subject to contractually allowable write-downs of principal that could result in impairment. Together with the hybrid indicator, the
long-term obligation rating assigned to a hybrid security is an expression of the relative credit risk associated with that security.
NP Issuers (or supporting institutions) rated Not Prime do not fall within any of the Prime rating categories.
LONG-TERM SHORT-TERM
RATING RATING
Aaa
Aa1
Aa2
Aa3 Prime-1
A1
A2
A3
Prime-2
Baa1
Baa2 Prime-3
Baa3
Obligations and Issuers Rated on the Global Long-Term and Short-Term Rating Scales
Deposit Ratings
Deposit Ratings are opinions of a deposit-taking institution’s ability to repay punctually its foreign and/or domestic currency deposit
obligations and also reflect the expected financial loss of the default. Deposit Ratings do not apply to deposits that are subject to a
public or private insurance scheme; rather, the ratings apply to the most junior class of uninsured deposits, but they may in some
cases incorporate the possibility that official support might in certain cases extend to the most junior class of uninsured as well as
preferred and insured deposits. Foreign currency deposit ratings are subject to Moody’s foreign currency country ceilings which may
result in the assignment of a different (and typically lower) rating for the foreign currency deposits relative to the deposit-taking
institution’s rating for domestic currency deposits.
8
Structured finance short-term ratings are usually based either on the short-term rating of a support provider or on an assessment of cash flows available to retire the
financial obligation.
Enhanced Ratings
Enhanced Ratings only pertain to US municipal securities. Enhanced ratings are assigned to obligations that benefit from third-party
credit or liquidity support, including state aid intercept programs. They primarily reflect the credit quality of the support provider,
and, in some cases, also reflect the credit quality of the underlying obligation. Enhanced ratings do not incorporate support based on
insurance provided by financial guarantors.
Insured Ratings
An insured or wrapped rating is Moody’s assessment of a particular obligation’s credit quality given the credit enhancement provided
by a financial guarantor. Moody’s insured ratings apply a credit substitution methodology, whereby the debt rating matches the
higher of (i) the guarantor’s financial strength rating and (ii) any published underlying or enhanced rating on the security.
Issuer Ratings
Issuer Ratings are opinions of the ability of entities to honor senior unsecured debt and debt like obligations. 9,10 As such, Issuer
Ratings incorporate any external support that is expected to apply to all current and future issuance of senior unsecured financial
obligations and contracts, such as explicit support stemming from a guarantee of all senior unsecured financial obligations and
contracts, and/or implicit support for issuers subject to joint default analysis (e.g. banks and government-related issuers). Issuer
Ratings do not incorporate support arrangements, such as guarantees, that apply only to specific (but not to all) senior unsecured
financial obligations and contracts.
While Issuer Ratings reflect the risk that debt and debt-like claims are not serviced on a timely basis, they do not reflect the risk that
a contract or other non-debt obligation will be subjected to commercial disputes. Additionally, while an issuer may have senior
unsecured obligations held by both supranational institutions and central banks (e.g., IMF, European Central Bank), as well as other
investors, Issuer Ratings reflect only the risks faced by other investors.
9
Issuer Ratings as applied to US local government special purpose districts typically reflect an unlimited general obligation pledge which may have security and structural
features in some states that improve credit quality for general obligation bondholders but not necessarily for other counterparties holding obligations that may lack such
features. An Issuer Rating as applied to a US state, territory, K-12 public school district, city or county reflects its ability to repay debt and debt-like obligations without
consideration of any pledge, security or structural features.
10
These opinions exclude debt known to be held by official sector investors because in practice such debt could effectively be treated as either senior or junior to senior
unsecured debt held by private sector investors.
MTN program ratings are intended to reflect the ratings likely to be assigned to drawdowns issued from the program with the
specified priority of claim (e.g. senior or subordinated). To capture the contingent nature of a program rating, Moody’s assigns
provisional ratings to MTN programs. A provisional rating is denoted by a (P) in front of the rating and is defined elsewhere in this
document.
The rating assigned to a drawdown from a rated MTN or bank/deposit note program is definitive in nature, and may differ from the
program rating if the drawdown is exposed to additional credit risks besides the issuer’s default, such as links to the defaults of other
issuers, or has other structural features that warrant a different rating. In some circumstances, no rating may be assigned to a
drawdown.
Moody’s encourages market participants to contact Moody’s Ratings Desks or visit moodys.com directly if they have questions
regarding ratings for specific notes issued under a medium-term note program. Unrated notes issued under an MTN program may be
assigned an NR (not rated) symbol.
Pledge-Specific Ratings
Pledge-specific ratings are opinions of the ability of a US state, local government, related entity, or nonprofit issuer to honor debt and
debt-like obligations based upon specific security payment pledges or structural features.
Underlying Ratings
An underlying rating is Moody’s assessment of a particular obligation’s credit quality absent any insurance or wrap from a financial
guarantor or other credit enhancement.
For US municipal securities, the underlying rating will reflect the underlying issue’s standalone credit quality absent any credit
support provided by a state credit enhancement program.
For other short-term municipal obligations, we use one of two other short-term rating scales, the Municipal Investment Grade (MIG)
and Variable Municipal Investment Grade (VMIG) scales discussed below.
MIG Ratings
We use the MIG scale for US municipal cash flow notes, bond anticipation notes and certain other short-term obligations, which
typically mature in three years or less.
MIG Scale
MIG 1 This designation denotes superior credit quality. Excellent protection is afforded by established cash flows, highly reliable liquidity
support, or demonstrated broad-based access to the market for refinancing.
MIG 2 This designation denotes strong credit quality. Margins of protection are ample, although not as large as in the preceding group.
MIG 3 This designation denotes acceptable credit quality. Liquidity and cash-flow protection may be narrow, and market access for
refinancing is likely to be less well-established.
SG This designation denotes speculative-grade credit quality. Debt instruments in this category may lack sufficient margins of protection.
VMIG Ratings
For variable rate demand obligations (VRDOs), Moody’s assigns both a long-term rating and a short-term payment obligation rating.
The long-term rating addresses the issuer’s ability to meet scheduled principal and interest payments. The short-term payment
obligation rating addresses the ability of the issuer or the liquidity provider to meet any purchase price payment obligation resulting
from optional tenders (“on demand”) and/or mandatory tenders of the VRDO. The short-term payment obligation rating uses the
VMIG scale. Transitions of VMIG ratings with conditional liquidity support differ from transitions of Prime ratings reflecting the risk
that external liquidity support will terminate if the issuer’s long-term rating drops below investment grade. Please see our
methodology that discusses obligations with conditional liquidity support.
For VRDOs, we typically assign a VMIG rating if the frequency of the payment obligation is less than every three years. If the
frequency of the payment obligation is less than three years, but the obligation is payable only with remarketing proceeds, the VMIG
short-term rating is not assigned and it is denoted as “NR”.
VMIG Scale
VMIG 1 This designation denotes superior credit quality. Excellent protection is afforded by the superior short-term credit strength of the
liquidity provider and structural and legal protections.
VMIG 2 This designation denotes strong credit quality. Good protection is afforded by the strong short-term credit strength of the liquidity
provider and structural and legal protections.
VMIG 3 This designation denotes acceptable credit quality. Adequate protection is afforded by the satisfactory short-term credit strength of
the liquidity provider and structural and legal protections.
SG This designation denotes speculative-grade credit quality. Demand features rated in this category may be supported by a liquidity
provider that does not have a sufficiently strong short-term rating or may lack the structural or legal protections.
Standard Linkages Between the Long-Term and MIG and VMIG Short-Term Rating Scales
The following table indicates the municipal long-term ratings consistent with the highest potential MIG and VMIG short-term
ratings. The rating may be lower than indicated by this table when there are higher risks for investors.
Aaa
Aa1
Aa2
Aa3 MIG 1 / VMIG 1
A1
A2
A3
In each specific country, the last two characters of the rating indicate the country in which the issuer is located or the financial
obligation was issued (e.g., Aaa.ke for Kenya).
Aaa.n Issuers or issues rated Aaa.n demonstrate the strongest creditworthiness relative to other domestic issuers and issuances.
Aa.n Issuers or issues rated Aa.n demonstrate very strong creditworthiness relative to other domestic issuers and issuances.
A.n Issuers or issues rated A.n present above-average creditworthiness relative to other domestic issuers and issuances.
Baa.n Issuers or issues rated Baa.n represent average creditworthiness relative to other domestic issuers and issuances.
Ba.n Issuers or issues rated Ba.n demonstrate below-average creditworthiness relative to other domestic issuers and issuances.
B.n Issuers or issues rated B.n demonstrate weak creditworthiness relative to other domestic issuers and issuances.
Caa.n Issuers or issues rated Caa.n demonstrate very weak creditworthiness relative to other domestic issuers and issuances.
Ca.n Issuers or issues rated Ca.n demonstrate extremely weak creditworthiness relative to other domestic issuers and issuances.
C.n Issuers or issues rated C.n demonstrate the weakest creditworthiness relative to other domestic issuers and issuances.
Note: Moody’s appends numerical modifiers 1, 2, and 3 to each generic rating classification from Aa through Caa. The modifier 1 indicates that the obligation ranks in
the higher end of its generic rating category; the modifier 2 indicates a mid-range ranking; and the modifier 3 indicates a ranking in the lower end of that generic
rating category.
There are four categories of short-term national scale ratings, generically denoted N-1 through N-4 as defined below.
N-1 N-1 issuers or issuances represent the strongest likelihood of repayment of short-term debt obligations relative to other domestic
issuers or issuances.
N-2 N-2 issuers or issuances represent an above average likelihood of repayment of short-term debt obligations relative to other domestic
issuers or issuances.
N-3 N-3 issuers or issuances represent an average likelihood of repayment of short-term debt obligations relative to other domestic
issuers or issuances.
N-4 N-4 issuers or issuances represent a below average likelihood of repayment of short-term debt obligations relative to other domestic
issuers or issuances.
Note: The short-term rating symbols P-1.za, P-2.za, P-3.za and NP.za are used in South Africa.
A D-PD probability of default rating is not assigned (or /LD indicator appended) until a failure to pay interest or principal extends
beyond any grace period specified by the terms of the debt obligation.
A D-PD probability of default rating is not assigned (or /LD indicator appended) for distressed exchanges until they have been
completed, as opposed to simply announced.
Adding or removing the “/LD” indicator to an existing PDR is not a credit rating action.
PDR Scale
Aaa-PD Corporate families rated Aaa-PD are judged to be of the highest quality, subject to the lowest level of default risk.
Aa-PD Corporate families rated Aa-PD are judged to be of high quality and are subject to very low default risk.
A-PD Corporate families rated A-PD are judged to be upper-medium grade and are subject to low default risk.
Baa-PD Corporate families rated Baa-PD are judged to be medium-grade and subject to moderate default risk and as such may possess certain
speculative characteristics.
Ba-PD Corporate families rated Ba-PD are judged to be speculative and are subject to substantial default risk.
B-PD Corporate families rated B-PD are considered speculative and are subject to high default risk.
Caa-PD Corporate families rated Caa-PD are judged to be speculative of poor standing, subject to very high default risk, and may be in default
on some but not all of their long-term debt obligations.
Ca-PD Corporate families rated Ca-PD are highly speculative and are likely in, or very near, default on some but not all of their long-term
debt obligations.
C-PD Corporate families rated C-PD are the lowest rated and are typically in default on some but not all of their long-term debt obligations.
D-PD Corporate families rated D are in default on all of their long-term debt obligations.
Note: Moody’s appends numerical modifiers 1, 2, and 3 to each generic rating classification from Aa-PD through Caa-PD (e.g., Aa1-PD). The modifier 1 indicates that
the obligation ranks in the higher end of its generic rating category; the modifier 2 indicates a mid-range ranking; and the modifier 3 indicates a ranking in the lower
end of that generic rating category.
Aaa-bf Bond Funds rated Aaa-bf generally hold assets judged to be of the highest credit quality.
Aa-bf Bond Funds rated Aa-bf generally hold assets judged to be of high credit quality.
A-bf Bond Funds rated A-bf generally hold assets considered upper-medium credit quality.
Baa-bf Bond Funds rated Baa-bf generally hold assets considered medium credit quality.
Ba-bf Bond Funds rated Ba-bf generally hold assets judged to have speculative elements.
B-bf Bond Funds rated B-bf generally hold assets considered to be speculative.
Caa-bf Bond Funds rated Caa-bf generally hold assets judged to be of poor standing.
Ca-bf Bond Funds rated Ca-bf generally hold assets that are highly speculative and that are likely in, or very near, default, with some
prospect of recovery of principal and interest.
C-bf Bond Funds rated C-bf generally hold assets that are in default, with little prospect for recovery of principal or interest.
EF-1 Equity funds assessed at EF-1 have the highest investment quality relative to funds with a similar investment strategy.
EF-2 Equity funds assessed at EF-2 have high investment quality relative to funds with a similar investment strategy.
EF-3 Equity funds assessed at EF-3 have moderate investment quality relative to funds with a similar investment strategy.
EF-4 Equity funds assessed at EF-4 have low investment quality relative to funds with a similar investment strategy.
EF-5 Equity funds assessed at EF-5 have the lowest investment quality relative to funds with a similar investment strategy.
Indicative Ratings
An Indicative Rating is a confidential, unpublished, unmonitored, point-in-time opinion of the potential Credit Rating(s) of an issuer
or a proposed debt issuance by an issuer contemplating such a debt issuance at some future date. Indicative Ratings are not
equivalent to and do not represent traditional MIS Credit Ratings. However, Indicative Ratings are expressed on MIS’s traditional
rating scale.
MQ assessments do not indicate an asset manager’s ability to repay a fixed financial obligation or satisfy contractual financial
obligations, neither those entered by the firm nor any that may have been entered into through actively managed portfolios.
The assessments are also not intended to evaluate the performance of a portfolio, mutual fund, or other investment vehicle with
respect to appreciation, volatility of net asset value, or yield. Instead, MQ assessments are opinions about the quality of an asset
manager’s management and client service characteristics as expressed through the symbols below.
MQ2 Investment managers assessed at MQ2 exhibit very good management characteristics.
Aaa-mf Money market funds rated Aaa-mf have very strong ability to meet the dual objectives of providing liquidity and preserving capital.
Aa-mf Money market funds rated Aa-mf have strong ability to meet the dual objectives of providing liquidity and preserving capital.
A-mf Money market funds rated Aa-mf have moderate ability to meet the dual objectives of providing liquidity and preserving capital.
Baa-mf Money market funds rated Baa-mf have marginal ability to meet the dual objectives of providing liquidity and preserving capital.
B-mf Money market funds rated B-mf are unable to meet the objective of providing liquidity and have marginal ability to meet the
objective of preserving capital.
C-mf Money market funds rated C-mf are unable to meet either objective of providing liquidity or preserving capital.
[1] We do not provide Net Zero Assessments to entities whose carbon transition profiles do not imply a meaningful contribution towards climate goals, which we define as an implied
temperature rise of 2.5 degrees Celsius or below relative to pre-industrial levels.
Source: Moody’s Investors Service
Originator Assessments
Moody’s Originator Assessments (OAs) provide general insights into the operational quality of originators’ loan origination practices,
relative to other originators of the same type of loans within a given country.
Moody’s assigns originators one of the following five assessment levels: Strong, Above Average, Average, Below Average, Weak.
A Scenario is (1) a proposed credit transforming transaction, project and/or debt issuance which materially alters the issuer’s current
state (including acquisitions, disposals, share buybacks, listings, initial public offerings and material restructurings) or (2) a proposed
initial transaction, project and/or debt issuance; or materially different variation on any such transaction, project and/or debt
issuance, including a material change in the overall size of the debt being contemplated.
SQS1 The financial instrument or financing framework is overall considered to be of excellent sustainability quality. Documentation and
information are aligned with relevant principles and exhibit a high level of transparency and issuer accountability consistent with best
practices, and the instrument or framework is expected to make a high contribution to the issuer’s advancement of long-term
sustainable development.
SQS2 The financial instrument or financing framework is overall considered to be of very good sustainability quality. Documentation and
information are at least aligned with relevant principles and the instrument or framework is expected to make at least a significant
contribution to the issuer’s advancement of long-term sustainable development.
SQS3 The financial instrument or financing framework is overall considered to be of good sustainability quality. Documentation and
information are typically at least aligned with relevant principles and the instrument or framework is expected to make at least a
moderate contribution to the issuer’s advancement of long-term sustainable development, or the documentation or information is
partially aligned with relevant principles and is balanced by an expected high contribution.
SQS4 The financial instrument or financing framework is overall considered to be of intermediate sustainability quality. There are some
weaknesses identified in the alignment of the documentation and information with relevant principles or in the contribution the
financial instrument or financing framework is expected to make to the issuer’s advancement of long-term sustainable development,
with limited offsetting strengths.
SQS5 The financial instrument or financing framework is overall considered to be of weak sustainability quality. There are material
weaknesses identified in the alignment of the documentation and information or in the contribution the financial instrument or
financing framework is expected to make to the issuer’s advancement of long-term sustainable development, with no or very limited
offsetting strengths.
SQ1 Strong.
SQ3 Average.
SQ5 Weak.
Note: Where appropriate, a “+” or “-” modifier will be appended to the SQ2, SQ3, and SQ4 rating categories, a “-” modifier will be appended to the SQ1 assessment
category and a “+” modifier will be appended to the SQ5 assessment category. A “+” modifier indicates the servicer ranks in the higher end of the designated
assessment category. A “-” modifier indicates the servicer ranks in the lower end of the designated assessment category.
For provisional ratings assigned to an issuer or instrument, the (P) notation is removed when the applicable contingencies have been
fulfilled. A Credit Rating Action to remove the (P) notation indicates that the rating is no longer subject to contingencies, and
changes the provisional rating to a definitive rating. 11 Program ratings for shelf registrations and other issuance programs remain
provisional, while the subsequent ratings of issuances under these programs are assigned as definitive ratings.
Refundeds - #
Issues that are secured by escrowed funds held in trust, reinvested in direct, non-callable US government obligations or non-callable
obligations unconditionally guaranteed by the US Government or Resolution Funding Corporation are identified with a # (hash mark)
symbol, e.g., #Aaa.
Withdrawn - WR
When Moody’s no longer rates an obligation on which it previously maintained a rating, the symbol WR is employed. Please see
Moody’s Guidelines for the Withdrawal of Ratings, available on www.moodys.com.
Not Rated - NR
NR is assigned to an unrated issuer, obligation and/or program.
11
Provisional ratings may also be assigned to unexecuted credit default swap contracts or other debt-like obligations that define specific credit risk exposures facing
individual financial institutions. In such cases, the drafter of the swap or other debt-like obligation may have no intention of executing the agreement, and, therefore, the
provisional notation is unlikely to ever be removed.
BCA Scale
aaa Issuers assessed aaa are judged to have the highest intrinsic, or standalone, financial strength, and thus subject to the lowest level of credit
risk absent any possibility of extraordinary support from an affiliate or a government.
aa Issuers assessed aa are judged to have high intrinsic, or standalone, financial strength, and thus subject to very low credit risk absent any
possibility of extraordinary support from an affiliate or a government.
a Issuers assessed a are judged to have upper-medium-grade intrinsic, or standalone, financial strength, and thus subject to low credit risk
absent any possibility of extraordinary support from an affiliate or a government.
baa Issuers assessed baa are judged to have medium-grade intrinsic, or standalone, financial strength, and thus subject to moderate credit risk
and, as such, may possess certain speculative credit elements absent any possibility of extraordinary support from an affiliate or a
government.
ba Issuers assessed ba are judged to have speculative intrinsic, or standalone, financial strength, and are subject to substantial credit risk absent
any possibility of extraordinary support from an affiliate or a government.
b Issuers assessed b are judged to have speculative intrinsic, or standalone, financial strength, and are subject to high credit risk absent any
possibility of extraordinary support from an affiliate or a government.
caa Issuers assessed caa are judged to have speculative intrinsic, or standalone, financial strength, and are subject to very high credit risk absent
any possibility of extraordinary support from an affiliate or a government.
ca Issuers assessed ca have highly speculative intrinsic, or standalone, financial strength, and are likely to be either in, or very near, default,
with some prospect for recovery of principal and interest; or, these issuers have avoided default or are expected to avoid default through
the provision of extraordinary support from an affiliate or a government.
c Issuers assessed c are typically in default, with little prospect for recovery of principal or interest; or, these issuers are benefiting from a
government or affiliate support but are likely to be liquidated over time; without support there would be little prospect for recovery of
principal or interest.
Note: Moody’s appends numerical modifiers 1, 2, and 3 to each generic assessment classification from aa through caa. The modifier 1 indicates that the obligation
ranks in the higher end of its generic assessment category; the modifier 2 indicates a mid-range ranking; and the modifier 3 indicates a ranking in the lower end of that
generic assessment category.
12
Affiliate includes a parent, cooperative groups and significant investors (typically with a greater than 20 percent voting interest). Government includes local, regional and
national governments.
CT-1 Advanced Issuers typically have a business model that benefits from the transition to a low-carbon economy.
CT-2-3 Strong Issuers typically have a business model that is not expected to be materially affected by the carbon
transition, or they have strategies and plans in place that substantially mitigate their carbon transition
exposure.
CT-4-5 Moderate Issuers typically have a business model that is subject to some exposure to carbon transition risks and their
relative positioning within this category is determined by variations in the extent of their exposure to carbon
risks, medium-term management actions and long-term resilience.
CT-6-7-8 Challenged Issuers typically have a business model that is challenged, over the longer term, by the transition to a low-
carbon economy.
CT-9-10 Highly Challenged Issuers typically have a business model that is fundamentally inconsistent, over the longer term, with the
transition to a low-carbon economy.
Obligations and commitments typically covered by CR assessments include payment obligations associated with covered bonds (and
certain other secured transactions), derivatives, letters of credit, third party guarantees, servicing and trustee obligations and other
similar operational obligations that arise from a bank in performing its essential client-facing operating functions.
Long-term CR assessments reference obligations with an original maturity of eleven months or more. Short-term CR assessments
reference obligations with an original maturity of thirteen months or less. CR assessments are expressed on alpha-numeric scales that
correspond to the alpha-numeric ratings of the global long-term and short-term rating scales, with a “(cr)” modifier appended to the
CR assessment symbols to differentiate them from our credit ratings.
Aaa(cr) Issuers assessed Aaa(cr) are judged to be of the highest quality, subject to the lowest level of risk of defaulting on certain senior
operating obligations and other contractual commitments.
Aa(cr) Issuers assessed Aa(cr) are judged to be of high quality and are subject to very low risk of defaulting on certain senior operating
obligations and other contractual commitments.
A(cr) Issuers assessed A(cr) are judged to be upper-medium grade and are subject to low risk of defaulting on certain senior operating
obligations and other contractual commitments.
Baa(cr) Issuers assessed Baa(cr) are judged to be medium-grade and subject to moderate risk of defaulting on certain senior operating
obligations and other contractual commitments and as such may possess certain speculative characteristics.
Ba(cr) Issuers assessed Ba(cr) are judged to be speculative and are subject to substantial risk of defaulting on certain senior operating
obligations and other contractual commitments.
B(cr) Issuers assessed B(cr) are considered speculative and are subject to high risk of defaulting on certain senior operating obligations and
other contractual commitments.
Caa(cr) Issuers assessed Caa(cr) are judged to be speculative of poor standing and are subject to very high risk of defaulting on certain senior
operating obligations and other contractual commitments.
Ca(cr) Issuers assessed Ca(cr) are highly speculative and are likely in, or very near, default on certain senior operating obligations and other
contractual commitments.
C(cr) Issuers assessed C(cr) are the lowest rated and are typically in default on certain senior operating obligations and other contractual
commitments.
Note: Moody’s appends numerical modifiers 1, 2, and 3 to each generic assessment classification from Aa(cr) through Caa(cr). The modifier 1 indicates that the issuer
ranks in the higher end of its generic assessment category; the modifier 2 indicates a mid-range ranking; and the modifier 3 indicates a ranking in the lower end of
that generic assessment category.
P-1(cr) Issuers assessed Prime-1(cr) have a superior ability to honor short-term operating obligations.
P-2(cr) Issuers assessed Prime-2(cr) have a strong ability to honor short-term operating obligations.
P-3(cr) Issuers assessed Prime-3(cr) have an acceptable ability to honor short-term operating obligations.
NP(cr) Issuers assessed Not Prime(cr) do not fall within any of the Prime rating categories.
Country Ceilings
Moody’s assigns long-term foreign and local currency ceilings to countries, expressed on the alphanumeric global long-term rating
scale. Ceilings apply to the ratings of non-sovereign issuers, debt obligations, transactions and deposits in a country and facilitate the
assignment of local and foreign currency ratings for bonds, other debt and debt-like obligations and deposits of locally domiciled
issuers and obligors, including locally originated structured finance transactions.
Country ceilings indicate the highest rating level that Moody’s generally assigns to the financially strongest issuers domiciled in a
country, including the strongest structured finance transactions whose cash flows are generated predominantly from domestic assets
or residents. In other words, ceilings generally act as a cap on ratings for locally domiciled issuers and locally originated structured
finance transactions. Notwithstanding the foregoing, obligations benefiting from meaningful support mechanisms, assets or cash
flows based outside the country may on occasion be rated higher than the country ceiling. Applied to deposits, local and foreign
ceilings indicate the highest rating level that Moody’s generally assigns to deposit obligations of domestic and foreign branches of
banks headquartered in that domicile (including local subsidiaries of foreign banks), while foreign currency ceilings also apply to the
branches of foreign banks operating in that domicile.
Ceilings apply to long-term and short-term obligations. The short-term ceiling equivalent can be inferred from the alphanumeric
level of the country ceiling. The mapping of short-term ceiling equivalents is the same as the mapping of short-term ratings from
long-term ratings. 13 While the mapping includes some overlap in the short-term equivalent that can be inferred from a given country
ceiling, countries with ceilings between A3 and Baa2 typically map to a short-term equivalent of P-2.
Credit Estimates
A Credit Estimate (CE) is an unpublished point-in-time opinion of the approximate credit quality of individual securities, financial
contracts, issuers, corporate families or loans. CEs are not Moody’s Credit Ratings and are not assigned by rating committees. Had
Moody’s conducted an analysis commensurate with a full Moody’s Credit Rating, the result may have been significantly different.
Additionally, CEs are not monitored but are often updated from time to time.
CEs are widely used in the process of assessing elements of credit risk in transactions for which a traditional Moody’s Credit Rating is
to be determined. CEs are provided in the context of granular pools (where no one obligor represents an exposure of more than 3%
of the total pool), chunky pools (where individual exposures represent 3% or more of the total pool) or single-name exposures.
CEs are typically assigned based on an analysis that uses public information (which at times may be limited) or information supplied
by various third parties and usually does not involve any participation from the underlying obligor.
CEs are not expressed through the use of Moody’s traditional 21-point, Aaa-C alphanumeric long-term rating scale; rather, they are
expressed on a simple numerical 1-21 scale. They are calibrated, however, to be broadly comparable to Moody’s alphanumeric rating
scale and Moody’s Rating Factors, which are used in CDO analysis.
13
Please see the table showing standard linkage between the global long-term and short-term rating scales in this document.
E-1 S-1 G-1 Issuers or transactions with an issuer profile score of 1 typically have exposures to E or S issues that carry material credit
benefits. For G, issuers or transactions typically have exposure to G considerations that, in the context of their sector,
positions them strongly, with material credit benefits.
E-2 S-2 G-2 Issuers or transactions with an issuer profile score of 2 typically have exposures to E or S issues that are not material in
differentiating credit quality. In other words, they could be overall slightly credit-positive, credit neutral, or slightly credit-
negative. An issuer or transaction may have a IPS score of 2 because the exposure is not material or because there are
mitigants specifically related to any E or S risks that are sufficient to offset those risks. Issuers or transactions with an issuer
profile score of 2 typically have exposure to G considerations that, in the context of their sector, positions them as average,
and the exposure is overall neither credit-positive nor negative.
E-3 S-3 G-3 Issuers or transactions with an issuer profile score of 3 typically have moderate credit exposures to E or S risks. These
issuers may demonstrate some mitigants specifically related to the identified E or S risks, but they are not sufficiently
material to fully offset the risks. Issuers or transactions with an issuer profile score of 3 typically have moderate credit
exposure to G risks that, in the context of the sector, positions them below average.
E-4 S-4 G-4 Issuers or transactions with an issuer profile score of 4 typically have high credit exposures to E or S risks. These issuers may
demonstrate some mitigants specifically tied to the E or S risks identified, but they generally have limited effect on the
risks. Issuers or transactions with an issuer profile score of 4 typically have high credit exposure to G risks that, in the
context of their sector, positions them more weakly than issuers with an issuer profile score of 3.
E-5 S-5 G-5 Issuers or transactions with an issuer profile score of 5 typically have very high credit exposures to E or S risks. While these
issuers or transactions may demonstrate some mitigants specifically related to the identified E or S risks, they are not
meaningful relative to the magnitude of the risks. Issuers or transactions with an issuer profile score of 5 typically have
very high credit exposure to G risks that in the context of their sector, positions them more weakly than issuers with an
issuer profile score of 4.
Q-scores
Q-scores are assessments that are scorecard generated, unpublished, point-in-time estimates of the approximate credit quality of
sub-sovereign entities globally (such as states, regions, provinces, territories, counties, cities and closely related entities). Depending
on circumstances, these can be for an individual sub-sovereign entity or sector-wide assessments. Q-scores assist in the analysis of
mean portfolio credit risk and represent the distribution of credit risk from the underlying exposures in a large pool. 15 Q-scores are
not equivalent to and do not represent traditional Moody’s Credit Ratings and are not assigned by a rating committee. Q-scores are
not expressed through the use of Moody’s traditional 21-point, Aaa-C alphanumeric long-term rating scale; rather, they are expressed
on a numerical 1.q-21.q scale.
14
The expected LGD rate is 100% minus the expected value that will be received at default resolution, discounted by the coupon rate back to the date the last debt service
payment was made, and divided by the principal outstanding at the date of the last debt service payment.
15
There may be instances in which the pool is not large but the Q-score represents a small portion of the transaction.
SGL-1 Issuers rated SGL-1 possess very good liquidity. They are most likely to have the capacity to meet their obligations over the coming 12
months through internal resources without relying on external sources of committed financing.
SGL-2 Issuers rated SGL-2 possess good liquidity. They are likely to meet their obligations over the coming 12 months through internal
resources but may rely on external sources of committed financing. The issuer’s ability to access committed sources of financing is
highly likely based on Moody’s evaluation of near-term covenant compliance.
SGL-3 Issuers rated SGL-3 possess adequate liquidity. They are expected to rely on external sources of committed financing. Based on its
evaluation of near-term covenant compliance, Moody’s believes there is only a modest cushion, and the issuer may require covenant
relief in order to maintain orderly access to funding lines.
SGL-4 Issuers rated SGL-4 possess weak liquidity. They rely on external sources of financing and the availability of that financing is, in
Moody’s opinion, highly uncertain.
Structured Credit Assessments are opinions of the expected loss associated with the financial obligation in the context of the
corresponding securitization transaction and are expressed, with the sca indicator, on a lower-case alpha-numeric scale that
corresponds to the alpha-numeric ratings of the global long- term rating scale.
SCA Scale
aaa (sca) Financial obligations assessed aaa (sca) are judged to have the highest credit quality and thus subject to the lowest credit risk, when
used as inputs in determining a structured finance transaction’s rating.
aa (sca) Financial obligations assessed aa (sca) are judged to have high credit quality and thus subject to very low credit risk, when used as
inputs in determining a structured finance transaction’s rating.
a (sca) Financial obligations assessed a (sca) are judged to have upper-medium credit quality and thus subject to low credit risk, when used as
inputs in determining a structured finance transaction’s rating.
baa (sca) Financial obligations assessed baa (sca) are judged to have medium-grade credit quality and thus subject to moderate credit risk, and
as such, may possess certain speculative credit elements, when used as inputs in determining a structured finance transaction’s rating.
ba (sca) Financial obligations assessed ba (sca) are judged to have speculative credit quality and subject to substantial credit risk, when used as
inputs in determining a structured finance transaction’s rating.
b (sca) Financial obligations assessed b (sca) are judged to have speculative credit quality and subject to high credit risk, when used as inputs
in determining a structured finance transaction’s rating.
caa (sca) Financial obligations assessed caa (sca) are judged to have speculative credit quality and subject to very high credit risk, when used as
inputs in determining a structured finance transaction’s rating.
ca (sca) Financial obligations assessed ca (sca) are judged to be highly speculative and are likely to be either in, or very near, default, with some
prospect for recovery of principal or interest, when used as inputs in determining a structured finance transaction’s rating.
c (sca) Financial obligations assessed c (sca) are typically in default with little prospect for recovery of principal or interest, when used as
inputs in determining a structured finance transaction’s rating.
Notes:
1. Moody’s appends numerical modifiers 1, 2, and 3 to each generic assessment classification from aa (sca) through caa (sca). The modifier 1 indicates that the
obligation ranks in the higher end of its generic assessment category; the modifier 2 indicates a mid-range ranking; and the modifier 3 indicates a ranking in the
lower end of that generic assessment category.
2. The modifier pd indicates a probability of default structured credit assessment (for example aaa (sca.pd)). A probability of default structured credit assessment is
an opinion of the relative likelihood that the financial instrument will default.
16
Structural features of securitisations often include: servicing of the loans by third party experts, liquidity arrangements to mitigate specific risks or the risk of short term
cash flow interruptions, and tail periods between the loan maturity date and the loss calculation date to allow for an orderly sale of the assets upon default.
Other Definitions
ESG Credit Impact Scores
ESG credit impact scores (CISs) communicate the impact of ESG considerations on the rating of an issuer or transaction. The CIS is
based on Moody’s qualitative assessment of the impact of ESG considerations in the context of the issuer’s or transaction’s other
credit drivers that are material to a given rating.
CIS-1 ESG considerations have a positive impact on the current rating which is higher than it would have been in the absence of ESG
considerations.
CIS-2 ESG considerations do not have a material impact on the current rating.
CIS-3 ESG considerations have a limited impact on the current rating, with potential for greater negative impact over time.
CIS-4 ESG considerations have a discernible impact on the current rating, which is lower than it would have been if ESG risks did not
exist. The negative impact of ESG considerations on the rating is higher than for an issuer scored CIS-3.
CIS-5 ESG considerations have a pronounced impact on the current rating, which is lower than it would have been if ESG risks did not
exist. The negative impact of ESG considerations on the rating is higher than for an issuer scored CIS-4.
Rating Outlooks
A Moody’s rating outlook is an opinion regarding the likely rating direction over the medium term. Rating outlooks fall into four
categories: Positive (POS), Negative (NEG), Stable (STA), and Developing (DEV). Outlooks may be assigned at the issuer level or at
the rating level. Where there is an outlook at the issuer level and the issuer has multiple ratings with differing outlooks, an “(m)”
modifier to indicate multiple will be displayed and Moody’s press releases will describe and provide the rationale for these
differences. A designation of RUR (Rating(s) Under Review) is typically used when an issuer has one or more ratings under review,
which overrides the outlook designation. A designation of RWR (Rating(s) Withdrawn) indicates that an issuer has no active ratings to
which an outlook is applicable. Rating outlooks are not assigned to all rated entities. In some cases, this will be indicated by the
display NOO (No Outlook).
A stable outlook indicates a low likelihood of a rating change over the medium term. A negative, positive or developing outlook
indicates a higher likelihood of a rating change over the medium term. A rating committee that assigns an outlook of stable,
negative, positive, or developing to an issuer’s rating is also indicating its belief that the issuer’s credit profile is consistent with the
relevant rating level at that point in time.
Rating Reviews
A review indicates that a rating is under consideration for a change in the near term. 17 A rating can be placed on review for upgrade
(UPG), downgrade (DNG), or more rarely with direction uncertain (UNC). A review may end with a rating being upgraded,
downgraded, or confirmed without a change to the rating. Ratings on review are said to be on Moody’s “Watchlist” or “On Watch”.
Ratings are placed on review when a rating action may be warranted in the near term but further information or analysis is needed to
reach a decision on the need for a rating change or the magnitude of the potential change.
The time between the origination of a rating review and its conclusion varies widely depending on the reason for the review and the
amount of time needed to obtain and analyze the information relevant to make a rating determination. In some cases, the ability to
conclude a review is dependent on whether a specific event occurs, such as the completion of a corporate merger or the execution of
an amendment to a structured finance security. In these event-dependent cases and other unique situations, reviews can sometimes
last 90 to 180 days or even longer. For the majority of reviews, however, where the conclusion of the review is not dependent on an
event whose timing Moody’s cannot control, reviews are typically concluded within 30 to 90 days.
Ratings on review for possible downgrade (upgrade) have historically concluded with a downgrade (upgrade) over half of the time.
Confirmation of a Rating
A Confirmation is a public statement that a previously announced review of a rating has been completed without a change to
the rating.
Affirmation of a Rating
An Affirmation is a public statement that the current Credit Rating assigned to an issuer or debt obligation, which is not currently
under review, continues to be appropriately positioned. An Affirmation is generally issued to communicate Moody’s opinion that a
publicly visible credit development does not have a direct impact on an outstanding rating.
» Assignment of a Credit Rating to issuance of debt within or under an existing rated program where the transaction structure and
terms have not changed in a manner that would affect the Credit Rating indicated by the program rating (examples include
covered bond programs, shelf registrations, and medium term note programs);
» Credit Ratings assigned based on the pass-through of a primary Rated Entity’s Credit Rating, including monoline or guarantee
linked ratings;
17
Baseline Credit Assessments and Counterparty Risk Assessments may also be placed on review.
Definition of Default
Moody’s definition of default is applicable only to debt or debt- like obligations (e.g., swap agreements). Four events constitute a
debt default under Moody’s definition:
a. a missed or delayed disbursement of a contractually-obligated interest or principal payment (excluding missed payments cured
within a contractually allowed grace period 18), as defined in credit agreements and indentures;
b. a bankruptcy filing or legal receivership by the debt issuer or obligor that will likely cause a miss or delay in future contractually-
obligated debt service payments;
c. a distressed exchange whereby 1) an issuer offers creditors a new or restructured debt, or a new package of securities, cash or
assets, that amount to a diminished value relative to the debt obligation’s original promise and 2) the exchange has the effect of
allowing the issuer to avoid a likely eventual default;
d. a change in the payment terms of a credit agreement or indenture imposed by the sovereign that results in a diminished
financial obligation, such as a forced currency re-denomination (imposed by the debtor, or the debtor’s sovereign) or a forced
change in some other aspect of the original promise, such as indexation or maturity. 19
We include distressed exchanges in our definition of default in order to capture credit events whereby issuers effectively fail to meet
their debt service obligations but do not actually file for bankruptcy or miss an interest or principal payment. Moody’s employs
fundamental analysis in assessing the likelihood of future default and considers various indicators in assessing loss relative to the
original promise, which may include the yield to maturity of the debt being exchanged.
Moody’s definition of default does not include so-called “technical defaults,” such as maximum leverage or minimum debt coverage
violations, unless the obligor fails to cure the violation and fails to honor the resulting debt acceleration which may be required. For
structured finance securities, technical defaults (such as breach of an overcollateralization test or certain other events of default as
per the legal documentation of the issuer), or a temporary (i.e., less than twelve months) missed interest payment on a security
18
Among some structured finance asset classes, missed scheduled payments impose meaningful investor losses even though such payments are not contractually obligated.
Therefore, for structured finance securities, Moody’s practice is to recognize that a default has occurred if a material interest payment has been missed (this excludes
allowable deferrals not driven by credit stress) for 12 months or longer or if there has been a material principal loss (or writedown) to the security. If such an interest or
principal shortfall is subsequently reduced below the materiality threshold of 50 basis points of the original balance of the security, then the default is cured. Note that
when a structured finance default is completely cured, we consider retrospectively that no default has taken place for the purposes of our studies on ratings performance.
19
Moreover, unlike a general tax on financial wealth, the imposition of a tax by a sovereign on the coupon or principal payment on a specific class of government debt
instruments (even if retroactive) would represent a default. Targeted taxation on government securities would represent a default even if the government’s action were
motivated by fairness or other considerations, rather than inability or unwillingness to pay.
Also excluded are payments owed on long-term debt obligations which are missed due to purely technical or administrative reasons
which are 1) not related to the ability or willingness to make the payments and 2) are cured in very short order (typically, 1-2 business
days after the technical/administrative issue is recognized). 20 Finally, in select instances based on the facts and circumstances, missed
payments on financial contracts or claims may be excluded if they are the result of legal disputes regarding the validity of those
claims.
Definition of Impairment
A security is impaired when investors receive — or expect to receive with near certainty — less value than would be expected if the
obligor were not experiencing financial distress or otherwise prevented from making payments by a third party, even if the indenture
or contractual agreement does not provide the investor with a natural remedy for such events, such as the right to press for
bankruptcy.
Moody’s definition of impairment is applicable to debt or debt-like obligations (e.g., swap agreements), as well as preferred stock and
other hybrid securities. A security is deemed to be impaired upon the occurrence of:
a. any event that meets the definition of default (above);
b. contractually-allowable payment omissions of scheduled dividends, interest or principal payments on preferred stock or other
hybrid instruments; 21
c. write-downs or "impairment distressed exchanges" 22 of preferred stock or other hybrid instruments due to financial distress
whereby (1) the principal promise to an investor is reduced according to the terms of the indenture or other governing
agreement, 23 or (2) an obligor offers investors a new or restructured security, or a new package of securities, cash or assets and
the exchange has the effect of allowing the obligor to avoid a contractually-allowable payment omission as described in b)
above; or 24
d. rating actions leading to an assignment of a rating of Ca or C, signaling the near certain expectation of a significant level of
future losses.
The impairment status of a security may change over time as it migrates from impaired to cured (e.g., if initially deferred cumulative
preferred dividends are ultimately paid in full) and possibly back again to impaired. If a security is upgraded above a Ca rating then
the impairment based on clause d above will be cured. Also, if a security having a Ca or C rating has its rating withdrawn and the
security has been paid in full without a loss, its impairment is cured. Note that when a structured finance impairment is completely
cured, we consider retrospectively that no impairment has taken place for the purposes of our studies on ratings performance.
Definition of Loss-Given-Default
The loss-given-default rate for a security is 100% minus the value that is received at default resolution (which may occur at a single
point in time or accrue over an interval of time), discounted by the coupon rate back to the date the last debt service payment was
made, divided by the principal outstanding at the date of the last debt service payment.
20
See “Assessing the Rating Impact of Debt Payments That Are Missed for Operational or Technical Reasons”, Moody’s Special Comment, April 2013. For the avoidance of
doubt, payments missed due to reasons that are not purely technical or administrative, such as payments missed due to potential failures of distributed ledger technology
or as the result of sovereign political sanctions, for example, do constitute defaults.
21
In this context, the exercise of a payment-in-kind option embedded in a fundamental debt security is an impairment event. Similar to default events, excluded from
impairment events are 1) missed payments due to purely technical or administrative reasons which are not related to the ability or willingness to make the payments and
2) are remedied in very short order (typically, 1-2 business days after the technical/administrative issue is recognized).
22
Impairment distressed exchanges are similar to default distressed exchanges except that they have the effect of avoiding an impairment event, rather than a default event.
23
Once written down, complete cures, in which securities are written back up to their original balances are extraordinarily rare; moreover, in most cases, a write-down of
principal leads to an immediate and permanent loss of interest for investors, since the balance against which interest is calculated has been reduced.
24
Examples of such impairments include mandatory conversions of contingent capital securities to common equity and mandatory write-downs of other hybrid securities
that are the direct result of obligor distress.
Approximate Expected Recoveries Associated with Ratings for Defaulted or Impaired Securities
35 to 65% Ca Ca (sf)
* For instruments rated B1, B2, or B3, the uncertainty around expected recovery rates should also be low. For example, if a defaulted security has a higher than a 10%
chance of recovering less than 90%, it would generally be rated lower than B3.
Additionally, the table may not apply directly in a variety of unusual circumstances. For example, a security in default where the
default is likely to be fully cured over the short-term but remain very risky over a longer horizon might be rated much lower than
suggested by this table. At the other end of the rating scale, very strong credits that experience temporary default events that have
no impact on expected credit losses might be rated much higher than B1 but no higher than Baa1. Under very rare circumstances a
structured finance debt security may incur a one-time principal write-down that is very small (considerably less than 1% of par) and
is not expected to recur. 26 In such cases, Moody’s will add this small loss amount to its calculations of the expected loss associated
with the security and may rate it higher than B1.
Securities in default where recovery rates are expected to be greater than 95% can be rated in the B category as outlined in the table
above. In order to be assigned a rating in the B category, the confidence level regarding the expected recovery rates should also be
high. Or in other words, uncertainty should be low. As stated in the footnote to the table, if a security has a higher than a 10%
chance of recovering less than 90%, then it would generally be rated lower than B3.
25
The approach to impairment is consistent with the approach to default. When an instrument is impaired or very likely to become impaired, the rating will reflect the
expected loss relative to the value that was originally expected absent financial distress.
26
For example, some master servicers of US RMBS implemented a new loan modification program and divided the cost of its administration across all their transactions,
resulting in a loss of a few hundred dollars per security. In other examples some rated synthetic transactions have seen a very small loss attributable to the non payment of
a very small CDS premium.
Most of our credit rating methodologies focus on a particular industry sector or class of issuer or transaction. These primary
methodologies may incorporate similar industries, sectors or classes that are not specifically cited. Primary methodologies have
sufficient analytical flexibility that collectively provide an analytical framework that can be used to assign ratings to almost any debt
instrument or debt issuer. Other methodologies describe our approach to analytical considerations that aren’t specific to any single
sector or class of issuer. These methodologies are referred to as cross-sector methodologies, and they cover general credit-related
topics and are typically used in conjunction with primary methodologies to assign credit ratings.
Methodologies governing fundamental credits (e.g., non- financial corporates, financial institutions and governments) generally
(though not always) incorporate a scorecard. A scorecard is a reference tool explaining the factors that are generally most important
in assigning ratings. It is a summary, and does not contain every rating consideration. The weights shown for each factor and sub-
factor in the scorecard represent an approximation of their typical importance for rating decisions, but the actual importance of each
factor may vary significantly depending on the circumstances of the issuer and the environment in which it is operating. In addition,
quantitative factor and sub-factor variables generally use historical data, but our rating analyses are based on forward- looking
expectations. Each rating committee will apply its own judgment in determining whether and how to emphasize rating factors which
it considers to be of particular significance given, for example, the prevailing operating environment. As a consequence, assigned
ratings may fall outside the range or level indicated by the scorecard.
Methodologies governing structured finance credits often mention one or more rating models. A structured finance ratings model is a
reference tool that explains how certain rating factors are considered in estimating a loss distribution for the collateral assets, or how
the interplay between collateral cash flows, capital structure and credit enhancement jointly influence the credit risk of different
tranches of securities. While methodologies may contain fixed values for key model parameters to be applied to transactions across
an entire sector, individual rating committees are expected to employ judgment in determining model inputs, and rating committee
deliberations may fall outside model-indicated outputs.
While most methodologies relate to a particular industry, sector or class of issuers or transactions, a small number — cross-sector
methodologies, many originally issued as ‘Rating Implementation Guidance’ — have implications for a number of (and in some cases
all) sectors. Examples include the methodologies which govern:
» the assignment of short-term ratings across the Fundamental Group;
» the use of credit estimates in the analysis of structured finance transactions;
» the linkage between sovereign ratings and related ratings in other Fundamental Groups;
» the ‘notching’ guidelines used to assign ratings to different classes of corporate debt;
» and the determination of country ceilings.
Typically, these are broad commentaries, the output of which may be general guidance to committees on ranges or caps on ratings
rather than a specific rating assignment and which, to a greater extent than sector-specific methodologies, set out broad principles
and relationships rather than detailed risk factors which can be summarized in a scorecard. However, in other respects cross-sector
methodologies are no different from any sector-specific methodology, in providing an analytical framework to promote consistency
rather than a set of rules which must be applied rigidly in all circumstances.
KRAs are, by their nature, relatively stable inputs to the analytical process, and because they seek to bring a degree of stability,
consistency and transparency to something that may in practice be uncertain, they are intended to be reasonably resilient to change.
They may change over time in response to long-term structural changes or as more is learned about long- run relationships between
risk factors, but they would be very unlikely to change as a result of a short-run change in economic or financial market conditions.
By contrast, credit judgments reached in rating committees regarding the impact of prevailing credit conditions on ratings within a
particular sector, country or region are not KRAs, even where those judgments affect a large number of Credit Ratings (for example
because they alter a country ceiling, systemic support indicator or a Timely Payment Indicator). Moreover, rating committees will,
from time to time, reach credit judgments in relation to the application of KRAs in the assignment of credit ratings for a particular
deal or set of deals which are the subject of that rating committee, to reflect prevailing credit conditions in the relevant region or
sub-sector (for example to apply higher or lower correlation assumptions while a given set of credit conditions persist). Such
judgments would not be deemed to have amended a KRA, since they were not intended to be applied consistently and systematically
across most if not all debt instruments covered by the relevant methodology, and in a manner which was largely insensitive to
further changes in credit conditions. Macro-economic or financial market projections which are by definition specific to a particular
point in time are not KRAs.
For Structured Finance Credit Rating Methodologies, KRAs are generally assumptions that underlie the overall methodological
construct — values assigned to parameters which influence the analysis of a prototypical transaction broadly across the relevant
sector. Examples would include:
» sector correlation assumptions;
» loss severity assumptions for particular sectors;
» and idealized default rates when used as a proxy for collateral performance.
Inputs to the rating of structured finance transactions that result from credit judgments reached by rating committees or which
reflect analytic deliberations and that are not KRAs include, for example:
» the credit risk considerations (as reflected in credit ratings or other credit assessments) introduced by third parties, such as
guarantors and other support providers, servicers, trust banks, swap providers, etc.;
» the credit risk introduced by the issuer’s operating environment, as reflected, for example, by country ceilings;
» changes in collateral asset risk expectations brought on by changes in the economic environment; and
» the maximum extent to which a bank’s legal and operating environment would enable overcollateralization to provide lift for a
covered bond’s rating over the bank’s own rating, as expressed in the Timely Payment Indicator.
For Fundamental Credit Rating Methodologies, KRAs are intrinsically less common (in part reflecting the less quantitative nature of
Fundamental credit analysis), and where they do exist they may be embedded within the underlying Credit Rating Methodology.
Generally, they are so deeply embedded in the overlying analytical structure that it would be meaningless and misleading to identify
them as distinct from the Credit Rating Methodology itself: a KRA change would almost inevitably involve a corresponding change to
the Credit Rating Methodology itself. Examples of deeply embedded KRAs in Fundamental that cannot be viewed distinctly from a
Credit Rating Methodology include:
» the assumption that leverage and access to liquidity are strong drivers of credit risk and appropriate factors to include in Credit
Rating Methodologies;
» the assumptions that there is very strong interdependence between bank and sovereign credit strength (from which MIS concludes
that a lower-rated sovereign cannot generally provide ratings lift through support to a higher rated bank);
Examples of assumptions in Fundamental Credit Rating Methodologies that would be considered KRAs distinct from (though perhaps
stated in) the Credit Rating Methodology to which each relates would include:
» loss severity assumptions for different sectors;
» and idealized loss rates when used as a proxy for the ability of a sovereign to support its banking system;
Inputs to the fundamental ratings process that result from credit judgments reached by rating committees or which reflect analytic
deliberations which are not KRAs include:
» the credit risk considerations (as reflected in credit ratings or other credit assessments) introduced by third parties, such as
guarantors and other support providers or affiliates;
» the credit risk introduced by the issuer’s operating environment, as reflected, for example, by country ceilings; and
» the ability a sovereign to provide support to, for example, banks, as expressed in a systemic support indicator.
» Such inputs may incorporate underlying assumptions which may be KRAs.
To rate some obligations in some asset classes, however, Moody’s uses models and tools that require ratings to be associated with
cardinal default rates, expected loss rates, and internal rates of return in order for those models and tools to generate outputs that
can be considered in the rating process. For these purposes, Moody’s has established a fixed common set of default rates, expected
loss rates, and internal rates of return that vary by rating category and/or investment horizon (Moody’s Idealized Default and
Expected Loss Rates; 27 hereafter called “Moody’s Idealized Rates”). By using a common fixed set of benchmark parameters, rating
models are more likely to provide consistency with respect to the estimation of relative risk across rating levels and investment
horizons and can be more easily compared to one another. Moody’s Idealized Rates are used with other tools and assumptions that
have a combined effect on model outcomes. While cardinal measures are used as inputs to models, the performance of ratings is
benchmarked against other metrics. 28 Although Moody’s Idealized Rates bore some degree of relationship to corporate default and
loss experience at the time they were created, that relationship has varied over time, and Moody’s continuing use of the Idealized
Rates for modeling purposes does not depend on the strength of that relationship over any particular time horizon. When we
perceive changes in risk that necessitate changes in our credit analysis, we make revisions to key assumptions and other aspects of
models and tools rather than changing this fixed common set of benchmark parameters. This approach enables us to make
adjustments that only affect the particular sectors and asset classes we expect will experience significant changes in risk at a given
time.
27
These tables are highly stylized and are not intended to match historical or future ratings performance. The tables were constructed in 1989 with reference to corporate
default and loss experience over four historical data points. In particular, the 10-year idealized default rates for A2, Baa2, Ba2, and B2 were set equal to the 10-year
historical default rates for corporate issuers with single A, Baa, Ba, and single B ratings, as observed between 1970 and 1989. In contrast, the 10-year idealized default rates
for Aaa and Aa2 were set lower than their historical default rates. All the other idealized default rates – for different alphanumeric ratings and at different rating horizons –
were derived through interpolation rather than being matched to historical data. The idealized expected loss table was then derived by multiplying each element of the
idealized default table by an average loss severity assumption, set equal to the approximate historical recovery rate of senior unsecured debt observed between 1970 and
1989. Moody’s has not published a revised version of these tables since the 1989 version, and has no plans to revise them at the time of this writing.
28
Moody’s approach to measuring ratings performance is discussed in “Measuring The Performance Of Credit Ratings” (Moody’s Special Comment, November 2011).
The tables can be used into two ways: (1) to suggest benchmark expected default and loss rates for modelling the credit risk of a
securitization’s collateral assets or the risk that a rated- counterparty will fail to perform a role, and (2) to associate different
modelled expected loss rates with different benchmark ratings. Please consult Moody’s published credit rating methodologies for
details.
The table of these benchmarks can be found here: Moody’s IRR Reduction Rates. This table was derived from Moody’s Idealized
Rates, which can be found here: Moody’s Idealized Cumulative Expected Default and Loss Rates.
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