Financial TImes Letter to the Editor
Judge Ratings Agencies on their Record
By Barbara Ridpath
18 October 2007
Financial Times
Sir, Your story “EU plans market reforms to avert crisis” (October 9) includes the suggestion that the Group of Seven is a considering a step that would compel ratings agencies to “split their rating business from their consulting activities”. S&P Ratings Services does not have a consulting business, nor do we advise issuers how to structure securities.
As part of the rating process, we do engage in a dialogue with bond issuers. This helps issuers understand our ratings criteria, which are publicly available and consistently applied, and helps us understand the securities they are structuring, so we can make informed opinions about creditworthiness.
We strive to make issuers and investors fully aware of how we determine creditworthiness and believe all parties are better served when the process is open and transparent. Indeed, many regulators have urged such transparency.
Ultimately, we believe ratings agencies should be judged on their record. Our performance – the correlation between our ratings and defaults – is open for all to see and remains excellent. Since 1978, the average five-year default rate for investment grade structured securities rated by S&P is less than 1 per cent; for speculative grade securities, it is just over 15 per cent. For corporate bonds, the equivalent default rates are just over 1 per cent and about 20 per cent.
We are always looking for ways to enhance our processes and have been actively taking steps to strengthen how we serve the market, including heightening the stress levels at which we rate and monitor transactions, increasing the frequency of our reviews and modifying our analytical models. In this way, we can continue to serve the interests of the capital markets with ratings that are available to all for free.
Barbara Ridpath,
Head of Standard & Poor's Ratings Services, Europe,
London E14 5LH