The Rating Agencies and Their Credit Ratings – What They Are, How They Work and Why They are Relevant

Herwig Langohr was Professor of Finance and Banking at Insead, in Fontainebleau, France, which he joined in 1976, specialising in corporate finance, financial services and corporate governance. He visited numerous academic institutions such as The Wharton School, The Darden School and the Universitat Konstanz (Germany). He was holder of the Goldschmidt Chair in Corporate Governance at the Solvay Business School (Brussels). Professor Langohr served on several boards of directors, in particular on the Board of Directors and the Audit Committee of both the financial services group KBC Group N.V. and KBC Insurance N.V. He was Dean MBA and member of the Executive Committee at INSEAD from 1993-1995. He was also a frequent director of Executive Programs and a regular advisor in corporate finance and strategy in the banking sector. He was a contributor to academic journals such as The Journal of Monetary Economics, The Journal of Financial Economics and The Journal of Money, Credit and Banking; to numerous professional journals and newspapers and a regular publisher of case studies. He passed away at the age of 64 on May 28 th 2008. Patricia Langohr is Professor of Economics at the Essec Business School, in Cergy, France, since 2005. Her research specializes in industrial organization, dynamic models of competition and the financial services industry. She teaches microeconomics, industrial organization and business economics. Prior to that, she was a researcher at the Price and Index Number Research division of the Bureau of Labor Statistics in Washington D.C. Professor Langohr obtained her PhD in Managerial Economics and Strategy from the Kellogg School of Management at Northwestern University in December 2003. She has a Diploma in Economics from the Humboldt Universitat in Berlin and a Maitrise in Monetary Economics and Banking from the Universite Paris IX Dauphine.

Foreword Preface 1 Introduction 1.1 Context and Premises 1.2 Book Chapters 1.3 Supporting Materials PART A: CREDIT RATING FOUNDATIONS 2 Credit Ratings 2.1 The World of Corporate Defaults 2.2 Credit Rating Scales 2.3 The Interpretation of Credit Ratings 2.4 Credit Ratings: Summary and Conclusions 3 The Raison d Etre of Credit Ratings and Their M arket 3.1 Needs for Credit Ratings or the Demand Side of Ratings 3.2 Credit Ratings as a Solution to Information Asymmetry: Economic Analysis. 3.3 Credit Rating Segments or Scale and Scope of the Rated Universe. 4 How to Obtain and Maintain a Credit Rating 4.1 The Rating Preparation 4.2 The Rating 4.3 Quality of the Rating Process PART B: CREDIT RATING ANALYSIS 5 The France Telecom Credit Rating Cycle 5.1 From Sovereign Status to Near Speculative Grade 5.2 Turning Point and Rating Recovery (Fall 2002 Winter 2004) 5.3 Analysis and Evaluation 6 Credit Rating Analysis 6.1 Fundamental Corporate Credit Ratings 6.2 Corporate Ratings Implied by Market Data 6.3 Special Sector Ratings 6.4 Technical Appendix 7 Credit Rating Performance 7.1 Relevance: Ratings and Value. 7.2 Preventing Surprise in Defaults: Rating Accuracy and Stability 7.3 Efficiency Enhancement: Stabilization in Times of Crisis PART C: THE CREDIT RATING BUSINESS 8 The Credit Rating Industry 8.1 The Rise of the Credit Rating Agencies 8.2 Industry Specifics and How they Affect Competition 8.3 Industry Performance 9 Regulatory Oversight of the Credit Rating Industry 9.1 The Regulatory Uses of Ratings 9.2 The Regulation of the Industry 9.3 Analysis and Evaluation 10 Summary and Conclusions 10.1 The Rating Agencies Value Added 10.2 The Challenges Rating Agencies Face Today 10.3 Concluding Thoughts References Index