Standard & Poor's

Standard & Poor's Financial Services LLC (S&P) is an American financial services company. It is a division of McGraw Hill Financial that publishes financial research and analysis on stocks and bonds. S&P is known for its stock market indices such as the U.S.-based S&P 500, the Canadian S&P/TSX, and the Australian S&P/ASX 200. S&P is considered one of the Big Three credit-rating agencies, which also include Moody's Investor Service and Fitch Ratings. It has 26 offices around the world, and the head office is located on 55 Water Street in Lower Manhattan, New York City. Standard & Poor's Ratings Services publishes more than a million credit ratings on debt issued by sovereign, municipal, corporate and financial sector entities. In 2013, it rated $6.6 trillion in new debt.

History

The company traces its history back to 1860, with the publication by Henry Varnum Poor of History of Railroads and Canals in the United States. This book compiled comprehensive information about the financial and operational state of U.S. railroad companies. In 1868, Henry Varnum Poor established H.V. and H.W. Poor Co. with his son, Henry William Poor, and published two annually updated hardback guidebooks, Poor's Manual of the Railroads of the United States and Poor's Directory of Railway Officials.

In 1906, Luther Lee Blake founded the Standard Statistics Bureau, with the view to providing financial information on non-railroad companies. Instead of an annually published book, Standard Statistics would use 5" x 7" cards, allowing for more frequent updates.

In 1941, Poor's Publishing and Standard Statistics merged to become Standard & Poor's Corp. In 1966, the company was acquired by The McGraw-Hill Companies, extending McGraw-Hill into the field of financial information services.

Credit ratings

As a credit-rating agency (CRA), the company issues credit ratings for the debt of public and private companies, and other public borrowers such as governments and governmental entities. It is one of several CRAs that have been designated a nationally recognized statistical rating organization by the U.S. Securities and Exchange Commission.

S&P issues both short-term and long-term credit ratings. Below is a partial list; see S&P's website for more information.

Long-term credit ratings

The company rates borrowers on a scale from AAA to D. Intermediate ratings are offered at each level between AA and CCC (e.g., BBB+, BBB and BBB-). For some borrowers, the company may also offer guidance (termed a "credit watch") as to whether it is likely to be upgraded (positive), downgraded (negative) or uncertain (neutral).

Investment Grade

• AAA: An obligor rated 'AAA' has extremely strong capacity to meet its financial commitments. 'AAA' is the highest issuer credit rating assigned by Standard & Poor's.
• AA: An obligor rated 'AA' has very strong capacity to meet its financial commitments. It differs from the highest-rated obligors only to a small degree. Includes:
  • AA+: equivalent to Moody's Aa1 (high quality, with very low credit risk, but susceptibility to long-term risks appears somewhat greater)
  • AA: equivalent to Aa2
  • AA-: equivalent to Aa3
• A: An obligor rated 'A' has strong capacity to meet its financial commitments but is somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions than obligors in higher-rated categories.
  • A+: equivalent to A1
  • A: equivalent to A2
• BBB: An obligor rated 'BBB' has adequate capacity to meet its financial commitments. However, adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity of the obligor to meet its financial commitments.

Non-Investment Grade (also known as speculative-grade)

• BB: An obligor rated 'BB' is less vulnerable in the near term than other lower-rated obligors. However, it faces major ongoing uncertainties and exposure to adverse business, financial, or economic conditions, which could lead to the obligor's inadequate capacity to meet its financial commitments.
• B: An obligor rated 'B' is more vulnerable than the obligors rated 'BB', but the obligor currently has the capacity to meet its financial commitments. Adverse business, financial, or economic conditions will likely impair the obligor's capacity or willingness to meet its financial commitments.
• CCC: An obligor rated 'CCC' is currently vulnerable, and is dependent upon favorable business, financial, and economic conditions to meet its financial commitments.
• CC: An obligor rated 'CC' is currently highly vulnerable.
• C: highly vulnerable, perhaps in bankruptcy or in arrears but still continuing to pay out on obligations
• R: An obligor rated 'R' is under regulatory supervision owing to its financial condition. During the pendency of the regulatory supervision, the regulators may have the power to favor one class of obligations over others or pay some obligations and not others.
• SD: has selectively defaulted on some obligations
• D: has defaulted on obligations and S&P believes that it will generally default on most or all obligations
• NR: not rated

Short-term issue credit ratings

The company rates specific issues on a scale from A-1 to D. Within the A-1 category it can be designated with a plus sign (+). This indicates that the issuer's commitment to meet its obligation is very strong. Country risk and currency of repayment of the obligor to meet the issue obligation are factored into the credit analysis and reflected in the issue rating.

• A-1: obligor's capacity to meet its financial commitment on the obligation is strong
• A-2: is susceptible to adverse economic conditions however the obligor's capacity to meet its financial commitment on the obligation is satisfactory
• A-3: adverse economic conditions are likely to weaken the obligor's capacity to meet its financial commitment on the obligation
• B: has significant speculative characteristics. The obligor currently has the capacity to meet its financial obligation but faces major ongoing uncertainties that could impact its financial commitment on the obligation
• C: currently vulnerable to nonpayment and is dependent upon favorable business, financial and economic conditions for the obligor to meet its financial commitment on the obligation
• D: is in payment default. Obligation not made on due date and grace period may not have expired. The rating is also used upon the filing of a bankruptcy petition.

Stock market indices

It publishes a large number of stock market indices, covering every region of the world, market capitalization level and type of investment (e.g., indices for REITs and preferred stocks)

These indices include:

• S&P 500 â€" free-float capitalization-weighted index of the prices of 500 large-capitalization common stocks actively traded in the US.
• S&P 400 MidCap Index
• S&P 600 SmallCap Index

Governance scores (GAMMA)

A GAMMA score reflects S&P's opinion of the relative strength of a company's corporate-governance practices as an investor protection against potential governance-related losses of value or failure to create value. GAMMA is designed for equity investors in emerging markets and is focused on non-financial-risk assessment, and in particular, assessment of corporate- governance risk.

History of CGS and GAMMA scores

S&P has developed criteria and methodology for assessing corporate governance since 1998 and has been actively assessing companies' corporate-governance practices since 2000.

In 2007, the methodology of stand-alone governance analysis underwent a major overhaul to strengthen the risk focus of the analysis based on the group's experience assigning governance scores. GAMMA analysis focuses on a number of risks that vary in probability and expected impact on shareholder value. Accordingly, S&P's analysis seeks to determine the most vulnerable areas prompt to potential losses in value attributable to governance deficiencies. Recent developments in the international financial markets emphasize the relevance of enterprise risk management and the strategic process to governance quality. GAMMA methodology incorporates two new elements, addressing these areas of investor concern. It also promotes the culture of risk management and long-term strategic thinking among companies.

GAMMA methodology components

1. Shareholder influence
2. Shareholder rights
3. Transparency, audit, and enterprise risk management
4. Board effectiveness, strategic process and incentives

GAMMA scale

For the GAMMA score, the S&P uses a numeric scale from one to ten (with ten being the best possible score). At the S&P's discretion, a GAMMA score can be publicly disseminated or used privately.

• GAMMA-10 and GAMMA-9 â€" in S&P's opinion, the corporate-governance processes and practices at the company provide a very strong protection against potential governance related losses in value. A company in these scoring categories has, in S&P's opinion, few weaknesses in any of the major areas of governance analysis.

• GAMMA-8 and GAMMA-7 â€" in S&P's opinion, the corporate-governance processes and practices at the company provide strong protection against potential governance related losses in value. A company in these scoring categories has, in S&P's opinion, some weaknesses in certain of the major areas of governance analysis.

• GAMMA-6 and GAMMA-5 â€" in S&P's opinion, the corporate-governance processes and practices at the company provide moderate protection against potential governance related losses in value. A company in these scoring categories has, in S&P's opinion, weaknesses in several of the major areas of governance analysis.

• GAMMA-4 and GAMMA-3 â€" in S&P's opinion, the corporate-governance processes and practices provide weak protection against potential governance related losses in value. A company in these scoring categories has, in S&P's opinion, significant weaknesses in a number of the major areas of governance analysis.

• GAMMA-2 and GAMMA-1 â€" in S&P's opinion, the corporate-governance processes and practices provide very weak protection against potential governance related losses in value. A company in these scoring categories has, in S&P's opinion, significant weaknesses in most of the major areas of analysis.

Downgrade of U.S. long-term credit rating

On August 5, 2011, following enactment of the Budget Control Act of 2011, S&P lowered the US's sovereign long-term credit rating from AAA to AA+. The press release sent with the decision said, in part:

• " The downgrade reflects our opinion that the fiscal consolidation plan that Congress and the Administration recently agreed to falls short of what, in our view, would be necessary to stabilize the government's medium-term debt dynamics.
• " More broadly, the downgrade reflects our view that the effectiveness, stability, and predictability of American policymaking and political institutions have weakened at a time of ongoing fiscal and economic challenges to a degree more than we envisioned when we assigned a negative outlook to the rating on April 18, 2011.
• " Since then, we have changed our view of the difficulties in bridging the gulf between the political parties over fiscal policy, which makes us pessimistic about the capacity of Congress and the Administration to be able to leverage their agreement this week into a broader fiscal consolidation plan that stabilizes the government's debt dynamics any time soon."

The United States Department of the Treasury, which had first called S&P's attention to its $2 trillion error in calculating the ten-year deficit reduction under the Budget Control Act, commented, "The magnitude of this mistake â€" and the haste with which S&P changed its principal rationale for action when presented with this error â€" raise fundamental questions about the credibility and integrity of S&P’s ratings action." The following day, S&P acknowledged in writing the US$2 trillion error in its calculations, saying the error "had no impact on the rating decision" and adding:

In taking a longer term horizon of 10 years, the U.S. net general government debt level with the current assumptions would be $20.1 trillion (85% of 2021 GDP). With the original assumptions, the debt level was projected to be $22.1 trillion (93% of 2021 GDP).

In 2013 the Justice Department charged Standard & Poor's with fraud in a $5 billion lawsuit: U.S. v. McGraw-Hill Cos et al., U.S. District Court, Central District of California, No. 13-00779. Since it did not charge Fitch and Moody's and because the Department did not give access to evidence, there has been speculation whether the lawsuit may have been in retaliation to S&P's decision to downgrade. On 4-15 the Department of Justice was ordered to allow access to evidence. A federal judge ordered S&P, to get access to evidence.

Downgrade of France's long-term credit rating

On November 11, 2011 S&P erroneously announced the cut of France's triple-A rating (AAA). French leaders said that the error was inexcusable and called for even more regulation of private credit rating agencies (CRA's). On January 13, 2012 S&P truly cut France's AAA rating, lowering it to AA+. This was the first time since 1975 that Europe's second-biggest economy, France, had been downgraded to AA+. The same day S&P downgraded the rating of eight other European countries: Austria, Spain, Italy, Portugal, Malta, Slovenia, Slovakia and Cyprus.

Downgrade of Brazil's sovereign debt rating

On March 11, 2014 S&P downgraded the long-term sovereign debt rating of Latin America’s largest economy, Brazil, by one notch to BBB-, the agency’s lowest investment-grade rating, from BBB. The agency added that the Brazil’s fiscal credibility was "systematically weakened" by reductions in the government's budget target, while loans issued by state-controlled banks to stimulate spending and increase growth "undermined policy credibility and transparency" instead. This came as a blow to President Dilma Rousseff, whose efforts to stir the economy from a years-long slump have eroded the country's finances. "The downgrade reflects the combination of fiscal slippage, the prospect that fiscal execution will remain weak amid subdued growth in the coming years, a constrained ability to adjust policy ahead of the October presidential elections, and some weakening in Brazil's external accounts," S&P said.

Publications

The company publishes The Outlook, a near-weekly (48 times a year) stock market analysis newsletter, which is issued both in print and online to subscribers.

Standard & Poor's Governance Services analysts issue a monthly GAMMA Newsletter containing comments and views on corporate governance-related matters in emerging markets (BRIC and beyond).

Criticism

CRAs such as S&P have been subject to criticism in the wake of large losses beginning in 2007 in the collateralized debt obligation (CDO) market that occurred despite being assigned top ratings by the CRAs.

Credit ratings of AAA (the highest rating available) were given to large portions of even the riskiest pools of loans. Investors trusting the low-risk profile that AAA implies, purchased large amounts of CDOs that later became unsaleable. Those that could be sold often took staggering losses. For instance, losses on $340.7 million worth of CDOs issued by Credit Suisse Group added up to about $125 million, despite being rated AAA by S&P.

Companies pay S&P to rate their debt issues. As a result, some critics have contended that S&P is beholden to these issuers and that its ratings are not as objective as they ought to be and that, in fact, this "pay to play" model makes their ratings meaningless at best and perhaps would more accurately be compared to the role of the "shill" in a game of three card monte. In a 2012 news story, The Guardian reported:

"In the run-up to 2008, a staggering proportion of mortgage-based debts were rated AAA, when in fact they were junk. The same goes for groups such as Enron, Lehman Brothers and AIG. Days before they went bust, Moody's, S&P, and Fitch all still rated these failing companies as safe investments. Shockingly, more than half of all corporate debt ever rated AAA by S&P has been downgraded within seven years, according to research by economist Sukhdev Johal."

In April 2009, the company called for "new faces" in the Irish government, which was seen as interfering in the democratic process. In a subsequent statement they said they were "misunderstood".

Some critics have pointed out that the company and other rating agencies were part of the cause of the global financial crisis of 2008â€"2009, for example when Moody's downgraded Freddie Mac or, to quote Time, when "both agencies granted AAA rating to Collateralized Debt Obligations (CDOs) that were chock-full-of crap mortgages, thereby helping to precipitate the 2008 financial collapse"). Ezra Klein wrote for The Washington Post that "Standard Poor's didn't just miss the bubble. They helped cause it," but he said S&P took the right action to downgrade the U.S. On the other hand, Paul Krugman wrote, "it’s hard to think of anyone less qualified to pass judgment on America than the rating agencies," and, "S&P’s demands suggest that it’s talking nonsense about the US fiscal situation". Perhaps more revealing and supportive of Paul Krugman's comment, David Wyss, who was chief economist at S&P till July 2011 noted to a reporter on August 17, 2011: "The credit agencies don't know any more about government budgets than the guy in the street who is reading the newspaper." Such insider comments lay fresh doubts about the key ratings decisions by S&P. And, in a recent Wall Street Journal article, Mark Adelson, S&P's chief credit officer since June 2008, openly decried the quality of S&P analysis and analysts; yet the majority of them (including Clifford Griep, the former chief credit risk officer) remain employed by S&P. While Mark Adelson reviewed and edited the U.S. downgrade notice, he did not really question the reasoning, nor spot the $2 trillion error in the computations. Furthermore, on August 6, 2011, the CEO Deven Sharma publicly stated that he had no prior knowledge that such a rating change was even in the works for the prior day, but quickly went on to defend the move; in a surprise development, Deven Sharma left S&P in early September amid mounting criticism of the firm's ratings and research.

With the US downgrade some have accused S&P of causing further damage for its own agenda. S&P acknowledged making a US$2 trillion error in its justification for downgrading the US credit rating, but stated that it "had no impact on the rating decision". "A judgment flawed by a $2 trillion error speaks for itself," said a spokesman for the United States Department of the Treasury. Jonathan Portes, director of NIESR, Britain's longest established independent economic research institute, has observed that "S&P's record . . . is remarkable. The agency downgraded Japan's credit rating in 2002, since when it has had the lowest long-term interest rates in recorded economic history. That did not, however, stop S&P rating numerous sub-prime mortgage-backed securities as AAA, or maintaining its rating on Lehman Brothers until the bitter end." U.S. Treasury Secretary Timothy Geithner said that "S&P has shown really terrible judgment and they've handled themselves very poorly."

The SEC is investigating whether the intent to downgrade the U.S. was leaked prior to the public announcement, since the stock market fell sharply for no apparent reasona day earlier, fed by rumors of an impending downgrade. Another issue that has concerned commentators is that an S&P rating â€" for example, of the US government or any other national government â€" can have, and has had, a distinct effect on a truly global scale, but the decision on these ratings are made by the company's employees who are not elected by the public, and are not accountable for their decision making process. There is no appeals process against a credit-rating decision.

In August 2011, S&P filed a letter with the SEC in an attempt to water down a proposal requiring credit rating agencies to publicly disclose "significant errors" in how they calculate their ratings. The SEC proposal, issued in May 2011, would require credit raters to disclose more about their methods and strengthen internal controls to protect against conflicts of interest.

In late 2013, S&P downgraded France's credit rating, a move viewed by one commentator as based on politics, rather than sound financial analysis.

Australian Federal Court decision

In November 2012, Jagot J of the Federal Court of Australia found that: "A reasonably competent ratings agency could not have rated the Rembrandt 2006-3 CPDO AAA in these circumstances"; and "S&P’s rating of AAA of the Rembrandt 2006-2 and 2006-3 CPDO notes was misleading and deceptive and involved the publication of information or statements false in material particulars and otherwise involved negligent misrepresentations to the class of potential investors in Australia, which included LGFS and the councils, because by the AAA rating there was conveyed a representation that in S&P’s opinion the capacity of the notes to meet all financial obligations was “extremely strong” and a representation that S&P had reached this opinion based on reasonable grounds and as the result of an exercise of reasonable care when neither was true and S&P also knew not to be true at the time made." In conclusion Jagot J found S&P to be jointly liable along with ABN Amro and LGFS.

Antitrust review

In November 2009, ten months after launching an investigation, the European Commission (EC) formally charged S&P with abusing its position as the sole provider of international securities identification codes for United States of America securities by requiring European financial firms and data vendors to pay licensing fees for their use. "This behavior amounts to unfair pricing," the EC said in its statement of objections which lays the groundwork for an adverse finding against S&P. "The (numbers) are indispensable for a number of operations that financial institutions carry out â€" for instance, reporting to authorities or clearing and settlement â€" and cannot be substituted.”

S&P has run the CUSIP Service Bureau, the only International Securities Identification Number (ISIN) issuer in the US, on behalf of the American Bankers Association. In its formal statement of objections, the EC alleged "that S&P is abusing this monopoly position by enforcing the payment of licence fees for the use of US ISINs by (a) banks and other financial services providers in the EEA and (b) information service providers in the EEA." It claims that comparable agencies elsewhere in the world either do not charge fees at all, or do so on the basis of distribution cost, rather than usage.

2015 settlement

In early 2015, the McGraw Hill Financial subsidiary Standard & Poor's Financial Services LLC agreed to pay the United States $1.38 billion to settle civil fraud charges that the firm had inflated the value of mortgage investments. The firm admitted no wrongdoing.

See also