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68-641: In 1953, the first in a series of general obligation bonds was approved by city voters for the construction of a civic center in the downtown area of Charleston, West Virginia between Lee Street and Quarrier Street on the banks of the Elk River just before the Elk River empties into the Kanawha River . When the original Civic Center opened in November 1958 at the cost of $ 2.5 million, it consisted of

136-592: A profit center for rating agencies. By 2006, Moody's earned $ 881 million in revenue from structured finance. By December 2008, there were over $ 11 trillion structured finance debt securities outstanding in the US bond market. The Big Three issued 97%–98% of all credit ratings in the United States and roughly 95% worldwide, giving them considerable pricing power. This and credit market expansion brought them profit margins of around 50% from 2004 through 2009. As

204-450: A "5-year time horizon", bonds that were given its highest rating (Aaa) had a "cumulative default rate" of just 0.18%, the next highest (Aa2) 0.28%, the next (Baa2) 2.11%, 8.82% for the next (Ba2), and 31.24% for the lowest it studied (B2). (See "Default rate" in "Estimated spreads and default rates by rating grade" table to right.) Over a longer time horizon, it stated, "the order is by and large, but not exactly, preserved". Another study in

272-418: A $ 10 million general obligation bond sale in 1976 to erect a 13,000-seat coliseum, a two-story lobby that connected the new coliseum with the original arena and theater, and remodel the original arena into a convention center. The project also received an additional $ 10 million in federal matching grants and was completed in 1980. Two parking garages were added in 1983, accommodating up to 1,300 cars. In 1994,

340-401: A 6,000-seat arena and the 750-seat "Little Theater." The complex underwent its first renovation and expansion in 1964 when 2,400 additional seats were added to the arena and a paved parking lot and an ice rink were added to the facilities. The $ 1.5 million project was financed through the sale of revenue bonds . The most significant renovation and expansion began when city voters approved

408-430: A company or sovereign nation pays its debt on time, the market barely takes momentary notice ... but let a country or corporation unexpectedly miss a payment or threaten default, and bondholders, lawyers and even regulators are quick to rush the field to protest the credit analyst's lapse." Others say that bonds assigned a low credit rating by rating agencies have been shown to default more frequently than bonds that receive

476-408: A credit score by a CRA can create a vicious cycle and a self-fulfilling prophecy : not only do interest rates on securities rise, but other contracts with financial institutions may also be affected adversely, causing an increase in financing costs and an ensuing decrease in creditworthiness. Large loans to companies often contain a clause that makes the loan due in full if the company's credit rating

544-407: A growing free rider problem related to the increasing availability of inexpensive photocopy machines and the increased complexity of the financial markets. The rating agencies added levels of gradation to their rating systems. In 1973, Fitch added plus and minus symbols to its existing letter-rating system. The following year, Standard and Poor's did the same, and Moody's began using numbers for

612-473: A hard number of probability of default to each grade, preferring descriptive definitions, such as "the obligor's capacity to meet its financial commitment on the obligation is extremely strong", (from a Standard and Poor's definition of a AAA-rated bond) or "less vulnerable to non-payment than other speculative issues" (for a BB-rated bond). However, some studies have estimated the average risk and reward of bonds by rating. One study by Moody's claimed that over

680-425: A high credit rating, suggesting that ratings still serve as a useful indicator of credit risk. A number of explanations of the rating agencies' inaccurate ratings and forecasts have been offered, especially in the wake of the subprime crisis: Conversely, the complaint has been made that agencies have too much power over issuers and that downgrades can even force troubled companies into bankruptcy. The lowering of

748-547: A key role in structured financial transactions such as asset-backed securities (ABS), residential mortgage-backed securities (RMBS), commercial mortgage-backed securities (CMBS), collateralized debt obligations (CDOs), " synthetic CDOs ", or derivatives . Credit ratings for structured finance instruments may be distinguished from ratings for other debt securities in several important ways. Aside from investors mentioned above—who are subject to ratings-based constraints in buying securities—some investors simply prefer that

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816-407: A public vote . Credit rating agency A credit rating agency ( CRA , also called a ratings service ) is a company that assigns credit ratings , which rate a debtor's ability to pay back debt by making timely principal and interest payments and the likelihood of default . An agency may rate the creditworthiness of issuers of debt obligations, of debt instruments, and in some cases, of

884-439: A ratings guide in 1857. Credit rating agencies originated in the United States in the early 1900s, when ratings began to be applied to securities, specifically those related to the railroad bond market. In the United States, the construction of extensive railroad systems had led to the development of corporate bond issues to finance them, and therefore a bond market several times larger than in other countries. The bond markets in

952-554: A result of missing the Enron fraud" and "management stayed the same". During the subprime crisis, when hundreds of billion of dollars' worth of triple-A-rated mortgage-backed securities were abruptly downgraded from triple-A to "junk" status within two years of issue, the CRAs' ratings were characterized by critics as "catastrophically misleading" and "provided little or no value". Ratings of preferred stocks also fared poorly. Despite over

1020-399: A single page in length, with scant discussion of methodology. In another case, a chief executive officer of a company had signed off on a report as though a board member. Also, overseas staff of ratings agencies had assigned credit ratings despite lacking the necessary accreditation. Defenders of credit rating agencies complain of the market's lack of appreciation. Argues Robert Clow, "When

1088-465: A structured finance product be rated by a credit rating agency. And not all structured finance products receive a credit rating agency rating. Ratings for complicated or risky CDOs are unusual and some issuers create structured products relying solely on internal analytics to assess credit risk. The Financial Crisis Inquiry Commission has described the Big Three rating agencies as "key players in

1156-496: A year of rising mortgage delinquencies, Moody's continued to rate Freddie Mac 's preferred stock triple-A until mid-2008, when it was downgraded to one tick above the junk bond level. Some empirical studies have also found that rather than a downgrade lowering the market price and raising the interest rates of corporate bonds, the cause and effect are reversed. Expanding yield spreads (i.e., declining value and quality) of corporate bonds precedes downgrades by agencies, suggesting it

1224-426: Is lowered beyond a certain point (usually from investment grade to "speculative"). The purpose of these "ratings triggers" is to ensure that the loan-making bank is able to lay claim to a weak company's assets before the company declares bankruptcy and a receiver is appointed to divide up the claims against the company. The effect of such ratings triggers, however, can be devastating: under a worst-case scenario, once

1292-462: Is required to increase its property tax rate by as much as is legally allowable in a following year to make up for any delinquencies. Between the taxpayer delinquency and the higher property tax rate in the following year, the general obligation pledge requires the local government to pay debt service coming due with its available resources. State law generally sets the conditions under which a local government can issue general obligation debt, including

1360-399: Is secured by a state or local government 's pledge to use legally-available resources, including tax revenues, to repay bondholders. Most general obligation pledges at the local government level include a pledge to levy a property tax to meet debt service requirements, and holders of general obligation bonds then have a right to compel the borrowing government to levy that tax to satisfy

1428-693: Is the market that alerts the CRAs of trouble and not vice versa. In February 2018, an investigation by the Australian Securities and Investments Commission found a serious lack of detail and rigour in many of the ratings issued by agencies. ASIC examined six agencies, including the Australian arms of Fitch, Moody's and S&P Global Ratings (the other agencies were Best Asia-Pacific, Australia Ratings and Equifax Australia). It said agencies had often paid lip service to compliance. In one case, an agency had issued an annual compliance report only

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1496-409: The 1907 financial crisis , demand rose for such independent market information, in particular for independent analyses of bond creditworthiness. In 1909, financial analyst John Moody issued a publication focused solely on railroad bonds. His ratings became the first to be published widely in an accessible format, and his company was the first to charge subscription fees to investors. In 1913,

1564-487: The Journal of Finance calculated the additional interest rate or "spread" that corporate bonds pay over that of "riskless" US Treasury bonds, according to the bonds rating. (See "Basis point spread" in the table to right.) Looking at rated bonds from 1973 through 1989, the authors found a AAA-rated bond paid only 43 " basis points " (or 43/100ths of a percentage point) more than a Treasury bond (so that it would yield 3.43% if

1632-399: The 2007–8 subprime mortgage crisis . In the 2001 Enron accounting scandal , the company's ratings remained at investment grade until four days before bankruptcy—though Enron's stock had been in sharp decline for several months —when "the outlines of its fraudulent practices" were first revealed. Critics complained that "not a single analyst at either Moody's or S&P lost his job as

1700-517: The 36,000-square-foot (3,300 m) Grand Hall of the convention center received a new ceiling, paint and lighting and the ice rink was also converted into an exhibit hall in the 2001. The last renovations took place between 2004 and 2006 when about $ 250,000 was spent to renovate the Little Theater. After Pride Youth Programs' annual anti-drug convention in early 2007, Jay DeWispelaere, CEO of Pride Youth Programs, commented on what he felt were

1768-529: The Coliseum until 2013. Recently the Coliseum started hosting more concerts in the area bringing icons such as Judas Priest, Jelly Roll, Motionless In White and Heart to the city. The Charleston Light Opera Guild conducts performances in the Little Theater throughout the year. General obligation bond A general obligation bond is a common type of municipal bond in the United States that

1836-579: The Fitch Publishing Company in 1924. In the United States, the rating industry grew and consolidated rapidly following the passage of the Glass-Steagall act of 1933 and the separation of the securities business from banking. As the market grew beyond that of traditional investment banking institutions, new investors again called for increased transparency, leading to the passage of new, mandatory disclosure laws for issuers, and

1904-485: The Netherlands and Britain had been established longer but tended to be small, and revolved around sovereign governments that were trusted to honor their debts. Companies were founded to provide investors with financial information on the growing railroad industry, including Henry Varnum Poor 's publishing company, which produced a publication compiling financial data about the railroad and canal industries. Following

1972-496: The SEC and decisions by courts. To determine a bond's rating , a credit rating agency analyzes the accounts of the issuer and the legal agreements attached to the bond to produce what is effectively a forecast of the bond's chance of default , expected loss, or a similar metric. The metrics vary somewhat between the agencies. S&P's ratings reflect default probability, while ratings by Moody's reflect expected investor losses in

2040-822: The Taste of Charleston, and the Capital City Art & Craft Show. Several local high schools hold proms and graduation ceremonies at the Civic Center. The Civic Center has also hosted local show choir festivals, including the state competition. It hosts the quarterfinals, semifinals, and finals of the annual, West Virginia State High School Boys and Girls Basketball Tournaments, music concerts, professional wrestling , and hosted basketball games between in-state rivals West Virginia University and Marshall University until that series ended in 2016. West Virginia State University held its commencement ceremonies in

2108-486: The Treasury bond yielded 3.00%). A CCC-rated "junk" (or speculative) bond, on the other hand, paid over 4% more than a Treasury bond on average (7.04% if the Treasury bond yielded 3.00%) over that period. The market also follows the benefits from ratings that result from government regulations (see below ), which often prohibit financial institutions from purchasing securities rated below a certain level. For example, in

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2176-595: The US subprime mortgage crisis and subsequent financial crisis of 2007–2008 . During that debacle, 73%—over $ 800 billion worth —of all mortgage-backed securities that one credit rating agency (Moody's) had rated triple-A in 2006 were downgraded to junk status two years later. In July 2008, SIFMA formed a global task force with members drawn from a cross-section of the financial services industry, including asset managers, underwriters, and issuers, and provided industry input to lawmakers and regulators in Europe and Asia, and

2244-484: The United States disclose their existence. The 2010 Dodd–Frank Wall Street Reform and Consumer Protection Act mandated improvements to the regulation of credit rating agencies and addressed several issues relating to the accuracy of credit ratings specifically. Under Dodd-Frank rules, agencies must publicly disclose how their ratings have performed over time and must provide additional information in their analyses so investors can make better decisions. An amendment to

2312-561: The United States, in accordance with two 1989 regulations, pension funds are prohibited from investing in asset-backed securities rated below A, and savings and loan associations from investing in securities rated below BBB. CRAs provide "surveillance" (ongoing review of securities after their initial rating) and may change a security's rating if they feel its creditworthiness has changed. CRAs typically signal in advance their intention to consider rating changes. Fitch, Moody's, and S&P all use negative "outlook" notifications to indicate

2380-492: The act also specifies that ratings are not protected by the First Amendment as free speech but are "fundamentally commercial in character and should be subject to the same standards of liability and oversight as apply to auditors, securities analysts and investment bankers." Implementation of this amendment has proven difficult due to conflict between the SEC and the rating agencies. The Economist magazine credits

2448-527: The agencies' highest ratings were downgraded to junk during the financial crisis of 2007–08 . Rating downgrades during the European sovereign debt crisis of 2010–12 were blamed by EU officials for accelerating the crisis. Credit rating is a highly concentrated industry, with the "Big Three" credit rating agencies controlling approximately 95% of the ratings business. Moody's Investors Service and Standard & Poor's (S&P) together control 80% of

2516-460: The agencies' informed opinions, protected as "free speech" under the First Amendment . As one rating agency disclaimer read: The ratings ... are and must be construed solely as, statements of opinion and not statements of fact or recommendations to purchase, sell, or hold any securities. Under an amendment to the 2010 Dodd-Frank Act , this protection has been removed, but how the law will be implemented remains to be determined by rules made by

2584-748: The case of default. For corporate obligations, Fitch's ratings incorporate a measure of investor loss in the event of default, but its ratings on structured, project, and public finance obligations narrowly measure default risk. The process and criteria for rating a convertible bond are similar, although different enough that bonds and convertible bonds issued by the same entity may still receive different ratings. Some bank loans may receive ratings to assist in wider syndication and attract institutional investors. The relative risks—the rating grades—are usually expressed through some variation of an alphabetical combination of lower- and uppercase letters, with either plus or minus signs or numbers added to further fine-tune

2652-490: The company's debt is downgraded by a CRA, the company's loans become due in full; if the company is incapable of paying all of these loans in full at once, it is forced into bankruptcy (a so-called death spiral ). These ratings triggers were instrumental in the collapse of Enron . Since that time, major agencies have put extra effort into detecting them and discouraging their use, and the US SEC requires that public companies in

2720-600: The creation of the Securities and Exchange Commission (SEC). In 1936, regulation was introduced to prohibit banks from investing in bonds determined by "recognized rating manuals" (the forerunners of credit rating agencies) to be "speculative investment securities" ("junk bonds", in modern terminology). US banks were permitted to hold only "investment grade" bonds, and it was the ratings of Fitch, Moody's, Poor's, and Standard that legally determined which bonds were which. State insurance regulators approved similar requirements in

2788-590: The credit reporting industry. Mercantile credit agencies—the precursors of today's rating agencies—were established in the wake of the financial crisis of 1837 . These agencies rated the ability of merchants to pay their debts and consolidated these ratings in published guides. The first such agency was established in 1841 by Lewis Tappan in New York City. It was subsequently acquired by Robert Dun, who published its first ratings guide in 1859. Another early agency, John Bradstreet, formed in 1849 and published

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2856-399: The fact that merchants knew their customers personally and knew whether or not they would be able to pay them back. As trading distances increased, merchants no longer personally knew their customers and became wary of extending credit to people who they did not know in fear of them not being able to pay them back. Business owners' hesitation to extend credit to new customers led to the birth of

2924-700: The following decades. From 1930 to 1980, the bonds and ratings of them were primarily relegated to American municipalities and American blue chip industrial firms. International "sovereign bond" rating shrivelled during the Great Depression to a handful of the most creditworthy countries, after a number of defaults of bonds issued by governments such as Germany's. In the late 1960s and 1970s, ratings were extended to commercial paper and bank deposits . Also during that time, major agencies changed their business model by beginning to charge bond issuers as well as investors. The reasons for this change included

2992-580: The free speech defence at least in part for the fact that "41 legal actions targeting S&P have been dropped or dismissed" since the crisis. In the European Union , there is no specific legislation governing contracts between issuers and credit rating agencies. General rules of contract law apply in full, although it is difficult to hold agencies liable for breach of contract. In 2012, an Australian federal court held Standard & Poor's liable for inaccurate ratings. Credit rating agencies play

3060-438: The global market, and Fitch Ratings controls a further 15%. They are externalized sell-side functions for the marketing of securities. When the United States began to expand to the west and other parts of the country, so did the distance of businesses to their customers. When businesses were close to those who purchased goods or services from them, it was easy for the merchants to extend credit to them, due to their proximity and

3128-621: The inadequacies of the Charleston Civic Center. In May 2015, the Charleston's Municipal Planning Commission approved the permit need to move forward with a planned comprehensive expansion and renovation, expected to cost around $ 72 million. Construction began in September 2015, with an expected completion date in early 2018. The Civic Center will remain open during construction. As part of a 10-year sponsorship deal with

3196-496: The influence and profitability of CRAs expanded, so did scrutiny and concern about their performance and alleged illegal practices. In 1996 the US Department of Justice launched an investigation into possible improper pressuring of issuers by Moody's in order to win business. Agencies were subjected to dozens of lawsuits by investors complaining of inaccurate ratings following the collapse of Enron , and especially after

3264-403: The local government's obligation. Because property owners are usually reluctant to risk losing their holding from unpaid property tax bills, credit rating agencies often consider a general obligation pledge to have very strong credit quality and frequently assign them investment grade ratings. If local property owners do not pay their property taxes on time in any given year, a government entity

3332-457: The long-held triple-A rating of US securities. Since the spring of 2010, one or more of the Big Three relegated Greece, Portugal, and Ireland to " junk " status—a move that many EU officials say has accelerated a burgeoning European sovereign-debt crisis . In January 2012, amid continued eurozone instability, S&P downgraded nine eurozone countries, stripping France and Austria of their triple-A ratings . Credit rating agencies assess

3400-677: The obligations or securities may be companies, special purpose entities , state or local governments, non-profit organizations , or sovereign nations. A credit rating facilitates the trading of securities on international markets. It affects the interest rate that a security pays out, with higher ratings leading to lower interest rates. Individual consumers are rated for creditworthiness not by credit rating agencies but by credit bureaus (also called consumer reporting agencies or credit reference agencies), which issue credit scores . The value of credit ratings for securities has been widely questioned. Hundreds of billions of securities that were given

3468-563: The organization, the Charleston Civic Center's new basketball court (which debuted in the 2011-12 season) is branded with a large logo for Friends of Coal , a locally based political advocacy group. A number of annual events and fairs throughout the year at the complex. Among the events includes the Annual West Virginia Hunting and Fishing Show, West Virginia Association of Fairs & Festivals Conference, West Virginia International Auto Show, West Virginia Sports Show,

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3536-435: The paying customers of CRAs have primarily not been buyers of securities but their issuers, raising the issue of conflict of interest (see below). In addition, rating agencies have been liable—at least in US courts—for any losses incurred by the inaccuracy of their ratings only if it is proven that they knew the ratings were false or exhibited "reckless disregard for the truth". Otherwise, ratings are simply an expression of

3604-424: The potential for a downgrade within the next two years (one year in the case of speculative-grade credits). Negative "watch" notifications are used to indicate that a downgrade is likely within the next 90 days. Critics maintain that this rating, outlooking, and watching of securities has not worked nearly as smoothly as agencies suggest. They point to near-defaults, defaults, and financial disasters not detected by

3672-462: The price volatility of mutual funds and mortgage-backed securities. Ratings were increasingly used in most developed countries' financial markets and in the " emerging markets " of the developing world . Moody's and S&P opened offices Europe, Japan, and particularly emerging markets. Non-American agencies also developed outside of the United States. Along with the largest US raters, one British, two Canadian and three Japanese firms were listed among

3740-468: The process" of mortgage securitization , providing reassurance of the soundness of the securities to money manager investors with "no history in the mortgage business". Credit rating agencies began issuing ratings for mortgage-backed securities (MBS) in the mid-1970s. In subsequent years, the ratings were applied to securities backed by other types of assets. During the first years of the twenty-first century, demand for highly rated fixed income securities

3808-581: The rating agencies' post-issuance surveillance, or ratings of troubled debt securities not downgraded until just before (or even after) bankruptcy. These include the 1970 Penn Central bankruptcy , the 1975 New York City fiscal crisis , the 1994 Orange County default , the Asian and Russian financial crises, the 1998 collapse of the Long-Term Capital Management hedge fund, the 2001 Enron and WorldCom bankruptcies, and especially

3876-445: The rating agencies; they allowed pension funds and money market funds to purchase only securities rated above certain levels. A market for low-rated, high-yield "junk" bonds blossomed in the late 1970s, expanding securities financing to firms other than a few large, established blue chip corporations. Rating agencies also began to apply their ratings beyond bonds to counterparty risks, the performance risk of mortgage servicers, and

3944-402: The rating would be done by "nationally recognized statistical ratings organizations" (NRSROs). This referred to the "Big Three", but in time ten agencies (later six, due to consolidation) were identified by the SEC as NRSROs. Rating agencies also grew in size and profitability as the number of issuers accessing the debt markets grew exponentially, both in the United States and abroad. By 2009

4012-496: The rating. Fitch and S&P use (from the most creditworthy to the least) AAA, AA, A, and BBB for investment-grade long-term credit risk and BB, CCC, CC, C, and D for "speculative" long-term credit risk. Moody's long-term designators are Aaa, Aa, A, and Baa for investment grade and Ba, B, Caa, Ca, and C for speculative grade. Fitch and S&P use pluses and minuses (e.g., AA+ and AA−), and Moody's uses numbers (e.g., Aa1 and Aa3) to add further gradations. Agencies do not attach

4080-542: The ratings publication by Moody's underwent two significant changes: it expanded its focus to include industrial firms and utilities, and it began to use a letter-rating system. For the first time, public securities were rated using a system borrowed from the mercantile credit rating agencies, using letters to indicate their creditworthiness. In the next few years, antecedents of the " Big Three " credit rating agencies were established. Poor's Publishing Company began issuing ratings in 1916, Standard Statistics Company in 1922, and

4148-412: The relative credit risk of specific debt securities or structured finance instruments and borrowing entities ( issuers of debt), and in some cases the creditworthiness of governments and their securities . By serving as information intermediaries , CRAs theoretically reduce information costs, increase the pool of potential borrowers, and promote liquid markets . These functions may increase

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4216-462: The same purpose in 1982. The end of the Bretton Woods system in 1971 led to the liberalization of financial regulations and the global expansion of capital markets in the 1970s and 1980s. In 1975, SEC rules began explicitly referencing credit ratings. For example, the commission changed its minimum capital requirements for broker-dealers , allowing smaller reserves for higher-rated bonds;

4284-562: The servicers of the underlying debt, but not of individual consumers. Other forms of a rating agency include environmental, social and corporate governance (ESG) rating agencies and the Chinese Social Credit System . The debt instruments rated by CRAs include government bonds , corporate bonds , CDs , municipal bonds , preferred stock , and collateralized securities, such as mortgage-backed securities and collateralized debt obligations . The issuers of

4352-521: The supply of available risk capital in the market and promote economic growth. Credit rating agencies provide assessments about the creditworthiness of bonds issued by corporations , governments , and packagers of asset-backed securities . In market practice, a significant bond issuance generally has a rating from one or two of the Big Three agencies. CRAs theoretically provide investors with an independent evaluation and assessment of debt securities ' creditworthiness. However, in recent decades

4420-528: The type of security that is available: All things being equal, credit rating agencies and investors can consider an unlimited property tax pledge to be materially stronger than a limited-tax pledge. That perception could thus potentially allow a local government to borrow at a lower interest rate , saving its taxpayers' money over the life of the bonds. Despite that advantage, many states, such as California under Proposition 13 , do not allow local governments to issue unlimited-tax general obligation debt without

4488-530: The world's "most influential" rating agencies in the early 1990s by the Financial Times publication Credit Ratings International . Structured finance was another growth area of growth. The "financial engineering" of the new "private-label" asset-backed securities —such as subprime mortgage-backed securities (MBS), collateralized debt obligations (CDO), " CDO-Squared ", and " synthetic CDOs "—made them "harder to understand and to price" and became

4556-415: The worldwide bond market (total debt outstanding) reached an estimated $ 82.2 trillion, in 2009 dollars. Two economic trends of the 1980s and 90s that brought significant expansion for the global capital market were More debt securities meant more business for the Big Three agencies, which many investors depended on to judge the securities of the capital market. US government regulators also depended on

4624-616: Was designated by the U.S. President's Working Group on Financial Markets as the private-sector group to provide the PWG with industry recommendations on credit rating matters. It published the "Recommendations of the Securities Industry and Financial Markets Association Credit Rating Agency Task Force", which included a dozen recommendations to change the credit rating agency process. Downgrades of European and US sovereign debt were also criticized. In August 2011, S&P downgraded

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