Standard and Poors, Moodys and Fitchs Rating Processes - Term Paper Example

Standard and Poor’s (S&P’s), Moody’s and Fitch’s Rating Processes: A Comparison Introduction This term paper compares and contrasts the three United States Nationally Recognized Statistical Rating Organizations (NRSROs)’, S&P, Moody’s and Fitch, rating processes to establish any similarities and differences the three rating agencies may have. The paper does this in two parts. Part one discusses crediting rating, the credit rating agencies, their historical foundations and provides a summarized comparison table of S&P, Moody’s and Fitch rating processes. Part two discusses the concept of Islamic bonds (Sukuk) as viewed through the lens of the three NRSROs and the rating agencies rating processes in place or intended to cover this sub sector. Credit Rating Beaver, Shakespeare and Soliman describes credit rating as the letter and number based risk assessment measure predicting default probability or expected loss with regard to a debt obligation for both issuers and investors in a securities market by a rating agency (Richard and Packer 15). White (213) defines credit rating as the creditworthiness of bonds issued by corporations and governments in both local and international markets which determines the credit risk taken by a bond issuer by conveying important information to the market that enables investors to make decision on whether or not to invest in the issuer (Jewell and Jewell and Livingstone 1). This means that both the security and the entity issuing the security, referred to as the issuer, can be rated for creditworthiness. Simply put, credit rating is an evaluation of an entity’s willingness and ability to pay its debts when they become due. Beaver et.al (6) observe that ratings provide information to investors and increase the efficiency of the securities market by creation of standards that assure investors as well as issuers during the issue and post investment as they track the progress of their investment up to the bond maturity. A credit rating will give information on likelihood of loss should the issuer default on its promises, and other rating agencies go further to give opinions on whether debtors can recover funds lost to a defaulter. History White (213) traces the history of the development of the credit rating to the pre Securities and Exchange Commission (SEC) period when Moody’s, S&P’s as well as Fitch earned revenue through selling creditworthiness assessment to investors. Regulation changes in the 1930s were spurred by the need to ensure that banks only invested in secure bonds that were not speculative investment as defined by preexisting raters. These rating judgments were made by published rating manuals such as those produced and sold by the three agencies. Over the years since then, these firms’ credit rating judgments have become pivotal in the securities world. The investor pays model was also changed to bond issuer pays model by the rating agencies in a bid to avoid free riding on disseminated opinions (White 214), in response to the need by bond issuers to prove that they were creditworthy given by good rating from independent and objective third parties such as the rating agencies (215) and the two sided nature of the credit rating business mechanisms. The conflict of interest implications for this shift in payment mode were kept in check by the three rating agencies’ dominance in the market in the market and the fact that the three could not risk losing their reputation as credible and reliable raters (White 216) by giving inaccurate ratings or acting under the influence of securities’ issuers since the authenticity of such ratings could be easily established. This status quo was maintained until the new century’s bankruptcies exposed the inherent weaknesses in the regime that fueled the 2007 global meltdown (White 218) that necessitated regulatory change and a scrutiny into the operations of this exclusive club of three. The financial problems also saw a flurry of changes in ratings; specifically downgrades as rating agencies reviewed their methodology. The Credit Rating Agencies Jewell et.al (3) state that the SEC classifies credit rating service providers in the NRSROs and other Credit Rating Agencies (CRAs). Beaver et.al (2) classifies CRAs into certified agencies, in reference to the NRSROs, and non-certified agencies. Certified agencies are according to Beaver et.al more conservative as they set higher standards for achieving investment grade ratings which are respected by all stakeholders in the securities markets. Moody’s, S&P’s along with Fitch are mostly high quality multinational firms that have capacity to deliver credible, accurate and reliable ratings in all areas of the market and in other markets, as well as follow the issuer over time (Richard and Packer 30). The CRAs use rating scales ranging from ‘AAA’ or Aaa to C or D denoting least to most risky investment respectively and constantly review the ratings to ensure that issuers maintain these standards. These symbols are described as opinions by both Moody’s and S&P (Jewell and Livingston et.al 30) and not guarantees of default or loss expectations, but only expected trends or predictions of the future risk in investment in bonds. Long-term credit ratings for Fitch range from ‘AAA’ to ‘D’ on an alphabetic scale. The methods and analytical tools used by the three firms to arrive at the ratings are self-defined and constructed by each firm, and as is the case in the United States rating industry, there are no standards with regard to uniformity regulations. The highest four ratings are referred to as investment grade while the other rankings below them are known as non-investment grade or speculative bonds. The highest four ratings (Long-term credit ratings) are “AAA”, “AA”, “A” and “BBB” and are similar for S&P, Moodys and Fitch. Non-certified agencies basically rate credit for clientele in the investor category, are more specific and change their ratings frequently as they are short-term based. In addition to this function, NRSROs on the other hand play a largely regulatory role, are mostly paid by the issuers of credit facilities to rate them, set industry standards in the long term and as a consequence, are sluggish in adjusting ratings to reflect market changes (White 218). White also observes that the payment by issuers of securities rather than investors has conflict of interest implications for NRSROs as noted in the SEC’s NRSRO Report of 2014 and the previous reports preceding it as well as the recent legislative interest. According to the US SEC’s 2014 Summary Report of Commission Staff’s Examinations of Each NRSRs (4), the credit rating agencies (NRSROs) at the forefront of this business are the S&P, Moody’s and Fitch in order of the market share each holds. The three agencies have had a long history preceding the SEC formation; have established a comfortable oligopoly (Beaver et.al 32) and their ratings still have the force of law (White 213). They still do not have uniform standards as each NRSRO has self-defined credit rating benchmarks and methodology for arriving at the assigned rates. Fitch, holding the least market share of the three, is the swing agency when there is a tie in ratings. Moody’s and S & P rate most bonds registered by the SEC and allow paying firms to participate in the rating process while Fitch only rates an issuer or issue on request for such rating and after payment to conduct the exercise (Jewell et.al 8). An issuer can stop public release of ratings by Fitch (Jewell et.al 4) before publication or release in to the public domain. Most issues pay for ratings by Moody’s and S&P despite not being obligated to do so. When Moody’s and S&P reach different conclusions about creditworthiness in a state referred to as split rating, most issuers seek Fitch’s rating for a third rating. Several arguments have been advanced to explain this. Jewell et.al opine that this may be because the Moody’s and S & P misjudge some bond issues hence creating the need for more useful information from a third party and disvalue an issue by overlooking or misinterpretation of some aspects of the issue. On the firms’ part, Jewell et.al believe that seeking a third rating is almost always an exercise in rate shopping for higher or favorable investment grade ratings (2) given Fitch’s history of higher ratings. Fitch’s credit ratings are generally higher than Moody’s and S & P’s ratings. It has been suggested that this trends is as a result of lax standards employed by Fitch in credit rating (Jewell et.al 5). With regard to frequency of change in ratings, Fitch records the least frequency of changes to their assigned ratings, but when the NRSRO makes changes, these changes have more magnitude in substance than the other two CRAs (Jewell et.al 6) as well as provide more additional information in their ratings releases. Beaver et.al (2) asserts that credits ratings are useful for contracting and valuation purposes via provision of investment advice certified agencies and regulation by certified agencies respectively. The Rating Process Jewell et.al (8) find that to assign ratings, the three dominant NRSROs assign rating teams to repeat clients, while new clients may request the agency to give them a preliminary opinion drawn from public information about the company that helps in deciding whether to go for the rating team to be assigned to the issuer for the rating process. The rating team scrutinizes financial statements, forecasts, capital spending, incomes, outstanding debt and future plans as well as relevant insider information such as strategies before holding in depth discussions on the firm’s and issue position with senior management. The CRA them holds an internal rating committee meeting to discuss the rating teams conclusions and vote on these findings. At this rating committee meeting, the issuer’s management is invited to be present. Apart from Fitch, the other two NRSROs have almost the same ratings for the same issues (Jewell et.al 10; Richard and Packer 11) which have been interpreted to mean that Fitch has lenient rating scales. Fitch’s third rating is most likely to be sought when split ratings are closer to investment grade rates implying a rate shopping trend in firms. Jewell et.al (12) avers that a favorable second rating would lower cost of borrowing while a contrary one would raise the costs of borrowing. The reason why split ratings create a need for market for swing rating agencies such as Fitch could be the fact that the prior raters’ rating process might have had nonsystematic variations in judgements that could be rectified by the third rating to give a higher and truer rating. Jewell et.al concluded that the market tended to adopt the lower of the two ratings (13) and that as a rule Fitch gave higher ratings as a tie breaker, (22) and with split ratings (25) while providing incremental information with its ratings especially when it gave the lowest of the ratings (41). Li (15) describes inaccuracy of ratings with regard to neglect or bad faith as opposed to unexpected and unforeseen change in market conditions from initial conditions as caused by failure of credit rating agencies to adhere to their own procedures and methodologies (SEC 8), the use of same methods for grossly different risks (25), the inherent conflicts of interests sound in the NRSROs (SEC 11) by dint of the issuer pays approach and ratings shopping, the failure of rating agencies in due diligence (26; SEC 15) when sourcing for information that informs ratings largely comparable to the Garbage In, Garbage Out (GIGO) scenario and lastly improper business practices to cut corners (27; SEC 17 – 22) such as hiring inadequate staff to cut costs. Moody, S& P’s and Fitch: NRSRO Comparison and Contrast Alp (37) states that the various NRSRO’s adopt varied methodologies of assigning ratings to companies that are based on the rated methods such as default probability, and loss expectation, scales denoting whether the rating is investment grade or speculative (non-investment grade), and the short term versus the long term scope of the ratings which encompasses the change frequency as well as rating withdrawals (Crouchy, Galai and Mark 70). Li (20) agrees that the credit rating process involves both the creditworthiness of companies and their debt instruments and while Moody’s and S&P’s methodology have a high degree of congruence as opposed to other NRSROs, there exists various important procedural differences such as the subject of the rating and recovery protection in bankruptcy (12). Jewell and Livingston et.al (10) finds that NRSROs rate issuers’ bonds, loans as well as shorter term debt issuances as specific issues and generally, also rate the firm’s creditworthiness as an entity. In doing this, S&P’s generally assigns higher ratings or credit qualities than Moody’s (Jewell and Livingston et.al 7). Moody’s and Fitch’s credit ratings give opinions on the probability of default on a debt by an issuer and recovery of the debt likelihood in event of default while S&P’s only give credits ratings that give opinions on the likelihood of default or overall capacity and willingness to meet debts due date (Alp 3). Table 1: Credit Rating Process Table: Moody’s, S & P and Fitch. RATINGS; MOODY’S S&P FITCH Similarities and Differences 1. Process Preliminary opinion Similar processes for all NRSROs 2. Rating team 3. Participation Voluntary for issuers, payment must be made for rating participation. 4. Results release All released Can be halted 5. Payment Not required Mandatory 6. Ratings Default Probability Opinion None Opinion 7. Loss Expectation Opinion given 8. Grading Investment All bonds are graded and tracked 9. Speculative 10. Scales Own scales Similar scales used 11. Time Dimension Short Term Less prominent aspect of operations Long Term Cycle methodology approach favoured 12. Withdrawals/Reversals Small percentages, tracking even after. 13. Subject Firm based SEC registered bonds and issuer On issuer request 14. Issue based 15. Recovery Protection Opinion None Opinion 16. Split ratings Lowest Higher Highest 17. Tie breaking N/A Higher 18. Changes Stability Fairly stable Most stable 19. Upgrades High frequency Higher frequency Highest frequency 20. Downgrades 21. Margins Lower change Highest change Table 1 illustrates that S&P and Moody’s are highly congruent in their rating process mechanisms, tend to arrive at the same rating level on identical issues or entity rating and have only one major difference in the symbols they use for rating. Fitch differs from the two in that it is more dynamic and does not conform to the same parameters making the other two NRSROs congruent. All the three NRSROs have been criticized for sluggish response to market changes (1) which can be attributed to their adoption of the cycle methodology long term mode of rating. Cycle methodology means that NRSROs only change ratings when a permanent change is perceived in the credit quality of a firm to maintain stability of ratings and reduce reversals creating uncertainty (Alp 3). Illustrations of this criticism include the fact that all the credit rating agencies have in the recent past maintained investment grade ratings for firms such as Enron Corporation, World Com and California Utilities until they file for bankruptcy. The credit rating agencies, especially NRSROs, ratings’ accuracy and reliability was questioned (Alp 5), and the aftermath of this high profile collapses resulted in tightened standards in the investment grade, a relaxation of the non-investment grade standards, tighter regulation and a diminishing regulatory powers of the NRSROs (Alp 16). Concluding, Alp (17) finds that these trends have implications in the securities market such as raising the cost of debt. The table below shows the comparison of how Moody’s, S&P and Fitch rate debt. The rating shows the summery of the creditworthiness of the issue. The AAA rating forecasts virtually no default risk for the foreseeable future while the B rating forecasts a greater default risk (James and Patel 635). Table 2: A comparison of Bond ratings from Moody’s, S&P and Fitch IBCA Code Moody’s Fitch and S&P Interpretation 1 Aaa AAA 2 Aa1 AA+ 3 Aa2 AA High quality 4 Aa3 AA- 5 A1 A+ Strong capacity 6 A2 A Capacity 7 A3 A- 8 Baa1 BBB+ Adequate payment 9 Baa2 BBB Capacity 10 Baa3 BBB- 11 Ba1 BB+ Likely to fulfill 12 Ba2 BB Obligations; ongoing 13 Ba3 BB- uncertainity 14 B1 B+ 15 B2 B High Risk Obligations 16 B3 B- 17 CCC+ Current Vulnerability 18 Caa CCC To default 19 CCC- 20 Ca CC In bankruptcy or 21 C C Default or other 22 D D Marked shortcomings The table below shows the comparison of Moody’s, S&P and Fitch debt rating. The first row is the highest grade credit, the second row is the very high grade credit, row three is the high grade credit and row four shows the good credit grade. The weakest part of the CRA’s debt rating is categorized into three from the weakest and they include substantial risks in default, very speculative credit and speculative grade credit. Table 3: Comparison of CRA’s debt rating Strongest Moody’s S&P Fitch Aaa AAA AAA Aa AA AA A A A Baa BBB BBB Weakest B BB BB Caa B B Ca CCC CCC C CC CC C D D Source: Ang and Kirit 632 Table 4: Comparison in rating and default probabilities S&P Moodys Fitch Rating Category 5-year default probability Rating Category 5-year default probability Rating Category 5-year default probability Investment Grade 0.88% Investment Grade 0.90% Investment Grade 0.44% AAA 0.10% Aaa 0.14% AAA 0.00% AA 0.26% Aa 0.31% AA 0.15% A 0.57% A 0.51% A 0.15% BBB 2.16% Baa 1.95% BBB 1.58% Speculative grade 19.48% Speculative grade 20.98% High Yield 7.34% BB 10.59% Ba 11.42% BB 4.55% B 25.06% B 31.00% B 2.37% CCC, CC OR C 46.87% Caa, Ca or C 56.82% CCC, CC OR C 45.65% Source: Crouhy, Galai and Mark 110 The table above shows a comparison of rating among the CRA’s as well as a 5 year default probability for the investment grade and speculative grade. From the above table, it is evident that the corporate default probabilities of Fitch correlate less with those of S&P and Moody’s and there are higher default probabilities for those issues in the BB category than those in the B category. How CRA’s rate debt, calculate default probability, and recovery rate CRA’s use long-term and short term to rate debts as shown in the table below: Moody’s Long-term Moody’s Short-term Fitch Long-term Fitch Short-term S&P Long term S&P Short term Aaa P-1 AAA F1+ AAA A-1+ Aa1 AA+ AA+ Aa2 AA AA Aa3 AA- AA- A1 A+ A+ A2 A A A3 A- A- Baa1 BBB+ BBB+ Baa2 P-3 BBB F-3 BBB A-3 Baa3 BBB- BBB- Source: Crouhy, Galai and Mark 87: Ammann 70 S&P and Fitch use probability models to calculate probability of default while Moody’s models the ‘expected loss’ which means that they do model the future value of the US bonds by modelling the probability of default combined with ‘recovery rate’ once the default occurs (Ang and Kirit 632). Recovery rate is the percent of the face value of a bond that its bond holders expect to receive after the bond goes through a default (Crouhy, Galai and Mark 110). Therefore, the CRA’s use the probability of default in calculating recovery rate. Comparison of Models used by Fitch, Moody’s and S&P Fitch uses the Leland and Toft (1996) model to calculate default probability (Leland and Toft 900), S&P use Altman Z-score while Moody’s use KMV-Merton model (Kealhofer Merton Vasicek model. Using this model, Fitch and has to constantly roll over its maturing debt and this is by issuing new debt with the same maturity as well as the face value at market price (Ang and Kirit 632). Equity holders normally bear rollover gains or losses and endogenously default whenever the equity value goes down to zero. The model assumes infinite maturity of debt while still keeping similar assumptions for the interest rate term structure and the fraction of loss upon default. In this model, the recovery rate is assumed to be either industry specific or constant and the performance of the model is reported correspondingly (Crouhy, Galai and Mark 87). To predict default probabilities, Fitch use this model to determine the mean error to be negative for investment-grade bonds as well as the positive for speculative grade bonds, which the provides an evidence that this model under predicts the default probabilities for the investment grade bonds while over predicting the default probabilities of non-investment grade bonds correspondingly (Crouhy, Galai and Mark 87). S&P uses the Z-score as logit model of determining relevant coefficients that are then used to predict default probabilities (Crouhy, Galai and Mark 87). Moody’s use Merton (1974) model to measure the distance to default hence it is useful in the prediction of defaults. Moody’s also apply this model to rate debt (Ammann 70). The equity of the firm is a call option on the underlying value of the firm with a strike price that is equal to the face value of the firm’s debt correspondingly (Crouhy, Galai and Mark 113). The model used by Moody’s consists of the following procedures: the estimation of the market value as well as the volatility of the assets of the company, calculation of the distance to default and the scaling of the distance to default to actual probability default by using a proprietary default data set. Moody’s normally use Merton model in predicting default probabilities of individual firms (Ang and Kirit 632). The use of KMV-Merton model affects credit rating as it is not a sufficient statistic to use in forecasting default. The Leland and Toft (1996) model under predicts the default probabilities for the investment grade bonds while over predicting the default probabilities of non-investment grade bonds. Therefore, the default probabilities that are predicted by investment grade firms normally tend to cluster close to zero while those from speculative grade firms tend to spread out to the higher end of a distribution (Crouhy, Galai and Mark 87). This shows that the Leland and Toft (1996) model predicts higher default probabilities as compared to Merton model. The use of industry specific recovery rate by Leland and Toft (1996) model normally results in the production of higher model errors than if a constant recovery rate is assumed across industries. The use of different models in credit rating and in the calculation of default probabilities and recovery rate by Moody’s, S&P and Fitch results to differences in credit rating. The differences between KMV Merton, Z-score, and Leland & Toft is that Merton Model is purely based on the testing of statistical significance with the specifications of the Moody’s, Leland & Toft assumed that debt normally has a finite life while Z-score results in financial distress Islamic Bonds (Sukuk): Definition According to Galai and Mark (60), Islamic bonds or Sukuk are a form of security investment certificates that should not be viewed as substituting or imitating conventional interest based securities, but should be viewed as innovative bonds based on sharia law which forbids charging of interest, requirements of security and financing of haram projects. The Islamic bond avoids infringing the sharia law as it is framed in such a manner that the issuing entity gives the bond owner a tangible interests such as ownership from which the owner can generate returns on investment. The bond is based on participation in both profits and losses and documentation in accordance with dictates of the Koran. Richard and Packer (15) assert that Islamic bonds are specifically designed to achieve compliance with the sharia law provisions that specify that which is in accordance with it (halal) or prohibited under Islamic law (haram). White (4) states that the Islamic bond is one of the fastest growing sectors of the Islamic capital market that provides an alternative funding, and specifies that the funds must be used for sharia compliant specific purposes (8). This makes Sukuk a cultural and religious adaptation or variant of the conventional securities. Most of these bonds are sovereign bonds such as the Qatar global Sukuk bond of 2003 redeemable in 2010 which spawned corporate Islamic bonds like the 2004 three year Caravan Sukuk, and future trends project a spread in to diversifies and globalized financial market such as the United states (26). Alkhunaizi state that the Islamic bond market is characterized by dominant sovereign issuers, which mean governments issue this bond and few corporate issues (4). In fact many corporates are owned wholly or substantially backed by the government in the specialized markets where the bond has been floated. Rating Sukuk The three NRSROs approach rating of the Islamic Sukuk in fairly congruent ways that conforms to their conventional practice. The NRSROs have established strategic offices (Li 4) in regions where the Islamic bonds are prevalent; maintain ratings of significant international and national entities as well as sovereigns in these regions. It is also a common practice to conduct studies and reviews of the Islamic finance markets in an attempt to track entities and securities just as they do in the western world and at home in the united stated securities market. The ratings agencies are aware of the trends in this specialized bond, and are poised to exploit rating opportunities that promise to arise in the developing markets of both Muslim and non-Muslim countries and in global finance. The Moody’s Global Credit Research (2013) on Malaysian corporate Sukuk found that the credit worthiness of the Sukuk is largely based on the corporate entity issuing the Islamic bond. The reason given for this was the lack of security which is a primary characteristic of Sukuk as unsecured obligations can only rely on the ratings of the corporate issuing entity. Quoting a research firm Dealogic, Moody’s (2013) observes that Malaysia is a dominant player in the international Sukuk market, a situation encouraged strongly by entrance of new Islamic and non-Islamic governments in to the market for sharia complaint financial assets (Richard and Packer 20). Moody’s (2013) predicts growing interest in Islamic financial instruments, and increased need in Muslim countries driven by faster growing gulf economies collaboration with other international global market hubs. Moody’s describes itself very active in Islamic finance markets assessment of risk, particularly for the Sukuk, and looks forward to providing rating services to this subsector as it has always done in the conventional bonds market. Likewise, S&P’s Islamic Finance Outlook (6) concurs with assertions about Malaysia’s dominance and the Gulf Corporation Council economic block factor effect in driving the Islamic finance sector. Equally, the prevalence of sovereign and sovereign backed Sukuk (7). The NRSRO uses its existing credit rating mechanisms to assess risks in the subsector (14). The outlook is a comprehensive policy prepared by S&P’s Dubai office and analysts, which is illustrative of the NRSRO’s interest and foothold in the Islamic banking and particularly securities rating concept. The rating process methods and analytical approaches as delineated in the outlook’s review of the Arabic and Muslim world finance look to the Islamic bond issuer creditworthiness as the basis for giving a Sukuk credit rating. Fitch has published Islamic finance reports (Fitch Publishes) on rating approaches to the sector in the belief that conventional methodologies and scales can be applied to the Islamic bond. The NRSRO has along with Moody’s and S&P established strategic offices to service demand for credit ratings coverage. Unlike Adam and Thomas, Fitch believes that Islamic Sukuk can fit into then conventional model and be rated accordingly and the CRA anticipates growing issuances of Islamic bonds. On assessment of credit risk, Fitch used the same methodology for coming up with risk assessment ratings. Concurring with Moody’s, Fitch believes that the Islamic bond rating also depends on the issuing banks creditworthiness and hence, an analysis of the banks and corporates issuing these bonds should determine the ratings to be assigned to a Sukuk issue. Basically, Moody’s, S&P’s as well as Fitch handle the Islamic bond or Sukuk as a projection, derivative or alternative to the conventional interest based bonds and securities, with only slight variations of methodology, and administration. The three NRSRO are comfortable in their capability to accurately and reliably assessing risks associated with Sukuk issue. For the NRSROs, the Islamic bond is just a variant of the securities they rate in the diversified United States financial market, and sine they already have a footing in the global financial markets, the Islamic bond is expected to respond to the same variables as any other debt instrument. Alkhunaizi observes that these NRSROs have only rated few organizations in the GCC country network (5) and in Saudi Arabia; most of the rated organizations are mostly owned by the government or are in the public sector. The NRSRO approach is characterized by the common thread that the Sukuk is dependent on the issuer’s credit rating, that the Sukuk is just a variant of the conventional bond and to some, just an alternative for the Muslims. Consequently, the creditworthiness of the regimes governing the regions where the financial entities float their Sukuk is very important, and since most Islamic bonds are floated in conjunction with the oil revenue backed GCC countries, the creditworthiness of Islamic Sukuk can only be affected by political upheavals, religious fundamentalism, militancy and terrorism associated with the Muslim Arab world. The 2011 lowering of the United States credit rating from AAA to AA by S&P’s citing political risks and debt burden has dire implications for the Islamic bond concept, since their credit rating wholly relies on their issuer, who is in most cases the government (Li 4). In stable political systems such as Malaysia, it can be argued that the Islamic bond would get investment grade ratings if backed by such sovereign entity or a highly rated issuing corporate entity. Conclusion This term paper set out to compare and contrast the three NRSROs rating processes. A scrutiny of the three rating agencies process and methodology indicates that the agencies are fairly congruent in risk assessment and rating, use fairly similar analytical tools. While the differences identified might not seem significant on paper, they have huge impacts in the securities market since each rating agency employs its own means to ascertain credit worthiness that regulators and its competitors are not privy to as indicated by split ratings and the need for a tie breaker. The role of the NRSROs has also diminished significantly in the recent past after the 2007 financial crisis cause by the subprime sector bubble burst, a phenomenon which resulted in the rating agencies losing their long existing and legendary reputation as credible and reliable evaluators of risk. With regard to Islamic bonds, the study has established a projection trend that the rating agencies have used to deal with the fairly new concept. The rating agencies apply the conventional bond rating mechanism to the issuer of the Islamic bond, and interpret the issuer creditworthiness as being directly in relationship with the Islamic bond good credit rating. Given the downgrading of the United States rating in 2009, the Islamic bond may face a tough rating crisis due to its dependence on the issue since it cannot be rated on its own. Having thus handled the Sukuk, S&P’s, Moody’s and Fitch have exploited the new markets presented by the concept and look forward to its spread to other financial markets and global finance. Works Cited Alp, Aysun. "Structural Shifts in Credit Rating Standards." The Journal of Finance: 2435-470. Print. Ammann, Manuel. Credit Risk Valuation: Methods, Models, and Applications. Springer Science & Business Media, 2001:65-70 Ang, James and Kirit, Patel. Bond Rating methods: Comparison and validation. Journal of Finance 30 (1975): 631-640 Beaver, William, Shakespeare, Catherine, and Soliman, Mark. 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