Abstract

Credit Rating Agencies (CRAs) play a crucial role in reducing the asymmetry in the information available to the issuer and the investor. This role gains even more significance when rating is for sovereign entities and their securities. The CRAs like S&P, Moody’s, and Fitch, which rate sovereign entities, consider a number of variables both qualitative and quantitative to assess the creditworthiness and rating of these entities and their securities. The case study gives a view of the sovereign credit rating industry, its major players, the industry issues and controversies. The case also discusses the variables and parameters used by these big 3 agencies to rate sovereign entities. Most importantly, the case study helps the students to develop a basic model taking generally accepted variables to arrive at a credit score for two of the largest economies in the world – the US and the UK. This will help the student appreciate the various variables that go into sovereign credit rating apart from helping them to develop a basic model and analyze the creditworthiness of the two sovereign entities. The case also comes with Excel supplements.

Learning Objectives

The case is structured to achieve the following Learning Objectives:

• Understand the important role of credit rating agencies.
• Get to know the variables and parameters considered in rating sovereign entities.
• Understand the variables/parameters used by major sovereign rating agencies like Fitch, S&P, and Moody’s.
• Develop a basic model to arrive at the rating scores for the US and the UK.
• Analyze and interpret the scores based on a simple model.

Keywords

Credit Rating; Sovereign Credit Rating; Credit Rating Agencies (CRAs); Moody; S&P; Fitch; Selective Default; US; UK; Brexit; Rating Scales; Rating Indicators; Probability of Default (PD); Credit Rating Agency Duopoly Relief Act (2006); Office of Credit Ratings (OCR)