Measuring Changes in Corporate Credit Quality

by Lea V. Carty of Moody's Investors Service, and
Jerome S. Fons of Moody's Investors Service

November 1993

Abstract: Moody's credit opinions provide investors with an assessment of an issuer's ability to meet its debt obligations in a timely manner. Ratings are designed to look into the future. However, for many reasons, ranging from the unpredictability of the business cycle to event risk, the future of a rated issuer is not deterministic. As a result, ratings may change.
Changes in credit quality are of obvious interest to investors. In the case of default, investors might lose a substantial portion of their investments. The ability of a structured transaction to meet its contractual payments may be dependent on the credit quality of an underlying pool of corporate issues. Loan indentures may offer a rated entity the opportunity to repay a loan before maturity in the event of an upgrade. In each of the above cases, there is a value to investors in knowing what to expect in terms of the future evolution of issuer credit.
While the credit paths of rated firms are not predetermined, historically they have exhibited patterns. In this study we have compiled a number of statistics that show various aspects of rating changes for some or all of the last 70 years. These statistics should be helpful in analyzing the expected future "credit paths" of rated issuers.

Published in: Journal of Fixed Income, Vol. 4, No. 1, (June 1994), pp. 27-41.

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