Difference Between Moody's and S&P Ratings

Moody's Investors Service and Standard & Poor's (S&P) are top-tier credit rating agencies that meticulously evaluate the creditworthiness of governments, corporations, and securities. Despite their shared objective of assessing credit risk, disparities in methodologies and criteria can lead to slight differences in the ratings they assign. Moody's places greater emphasis on qualitative aspects such as industry-specific risks and the quality of management, while S&P leans more towards quantitative measures like financial ratios and prevailing market trends. Additionally, Moody's ratings typically offer insights into an entity's long-term financial stability, while S&P's evaluations may encompass short-term economic factors and current market conditions. However, both agencies are unified in their mission to equip investors with reliable assessments of credit risk, empowering them to make well-informed investment decisions and effectively manage their financial portfolios.

Because of their complementary approaches and shared goals, investors frequently rely on ratings from Moody's and S&P to gain a comprehensive understanding of an entity's creditworthiness. By considering evaluations from multiple perspectives, investors can better navigate the complexities of the financial landscape and mitigate risks associated with their investment ventures.

What is Moody's Ratings?

Moody's Ratings, formerly known as Moody's Investors Service, holds a central position within Moody's Corporation, serving as a cornerstone of its core operations and historical legacy. Alongside Standard & Poor's and Fitch Group, Moody's Ratings stands as one of the foremost credit rating agencies globally, specializing in evaluating bonds issued by both commercial enterprises and governmental bodies. Its recognition in the esteemed Fortune 500 list of 2021 underscores its significance in the financial landscape. Utilizing a standardized rating framework, Moody's assesses the potential investor loss in the event of default, offering thorough evaluations across diverse bond market segments encompassing government, municipal, and corporate bonds, as well as various investment vehicles like money market funds and fixed-income funds, financial institutions, and structured finance assets.

Established by John Moody in 1909, the company's initial focus was on compiling statistical manuals relating to stocks and bonds while also providing bond rating services. Designated as a Nationally Recognized Statistical Rating Organization (NRSRO) by the U.S. Securities and Exchange Commission in 1975, Moody's Ratings have undergone significant evolution over time. Transitioning from a period of ownership under Dun & Bradstreet, Moody's Investors Service underwent a restructuring, emerging as an independent entity in 2000, with Moody's Corporation established as its parent company. Notably, on March 6, 2024, the company embarked on a rebranding journey, renaming Moody's Investors Service as Moody's Ratings, reaffirming its dedication to its fundamental mission and range of services.

How Moody's Ratings Are Used

Moody's ratings serve as a critical tool for various institutions, individuals, and entities across the financial landscape. These encompass mutual funds, pension funds, insurance companies, and hedge funds, which rely on credit ratings to assess the risk associated with corporate bonds and other debt securities within their portfolios. Ratings assist institutional investors in making informed decisions regarding portfolio diversification and risk management strategies. Similarly, individual investors, including retail investors engaged in stock and bond markets, utilize credit ratings as a simplified gauge of the risk linked to investing in a specific company's debt.

Moreover, banks and lenders leverage credit ratings to evaluate the creditworthiness of corporations seeking loans or credit facilities, with ratings significantly influencing the terms and interest rates offered to borrowers. Additionally, companies planning to issue debt securities such as bonds refer to credit ratings to gauge the credit risk assessment of potential investors, as higher credit ratings often translate into lower borrowing costs for the issuing entity.

Furthermore, regulatory bodies and government agencies, such as central banks and financial regulators, may utilize credit ratings to assess the financial stability and risk profile of institutions under their supervision. This information aids in establishing regulatory requirements and monitoring systemic risk within the financial system.

What is the S&P Rating?

S&P Global Ratings, formerly known as Standard & Poor's and commonly referred to as S&P, is an American Credit Rating Agency (CRA) under the umbrella of S&P Global. It specializes in publishing comprehensive financial research and analysis covering a wide spectrum of assets, including stocks, bonds, and commodities. Regarded as the largest entity among the Big Three credit-rating agencies, alongside Moody's Investors Service and Fitch Ratings, S&P maintains its headquarters at 55 Water Street in Lower Manhattan, New York City.

S&P Credit Rating

S&P's issuer credit ratings are categorized into two types: short-term ratings, which evaluate a company's obligations lasting one year or less, and long-term ratings for longer-term obligations. The long-term issuer credit ratings provide a forward-looking assessment of an entity's ability to repay any debt it incurs. This measure can assist in evaluating an insurance company's overall financial strength and addresses three key inquiries.

• Is the company creditworthy, or, in other words, is it worth making a loan to?
• How well can a company manage and repay its debt obligations?
• What are the company's financial strengths and weaknesses?

Standard & Poor's insurance ratings form an integral aspect of this framework. When rating a home or auto insurance provider, S&P assesses the likelihood of the insurer having sufficient funds to fulfill claims, even amid economic instability or significant disasters resulting in numerous claims. A higher rating signifies greater financial stability for the insurer, enhancing the probability of seamless processing and payout of claims.

How S&P Rating Work

Standard & Poor's ratings are formulated by financial analysts who extensively review various sources such as annual reports, news articles, and business publications to gather insights into companies or governments. They also engage with chief financial officers (CFOs) and other financial experts within each organization to obtain a comprehensive understanding of the entity's financial well-being.

One of the paramount considerations in determining ratings is the company's approach to risk management. Companies that assume substantial, risky debt may receive a less favorable rating compared to those that prioritize safer investment options.

Role in Capital Markets

Moody's, S&P, and Fitch are collectively referred to as the Big Three credit rating agencies. Despite their interchangeable perception, they differ in their approach to rating bonds. While S&P and Fitch measure the likelihood of security defaulting, Moody's ratings focus on estimating the anticipated losses in case of default. Operating globally, these agencies rate securities worth tens of trillions of dollars, with only Moody's Corporation existing as an independent entity.

These rating agencies are vital in global capital markets, providing supplementary credit analysis for banks and other financial institutions to assess credit risks associated with securities. Their assessments are particularly beneficial for smaller or less experienced investors, offering an external benchmark for investment decisions. Furthermore, credit rating agencies play a significant role in regulatory frameworks worldwide, including in the United States and the European Union. In the U.S., their ratings are utilized by regulatory bodies such as the SEC for various regulatory purposes, impacting the ability of lower-rated companies to access the bond market and influencing the investment decisions of money market funds.

Apart from the Big Three, the SEC has designated other NRSROs, including A.M. Best, which focuses on insurance company obligations. Moody's competes with companies like Morningstar, Thomson Reuters, and Bloomberg in specific sectors. Moody's also engages in public outreach efforts, providing analysts for media inquiries and hosting seminars to educate securities issuers. In line with evolving market trends, Moody's expanded its portfolio by acquiring a controlling share of Four Twenty-Seven, a climate risk data firm, in 2019.

Difference Table

Conclusion

In summary, Moody's and S&P, as leading credit rating agencies, evaluate the creditworthiness of entities but diverge in their methodologies and focal points. Moody's emphasizes qualitative aspects like industry risk and management quality, while S&P prioritizes quantitative measures such as financial ratios and market trends. Moody's ratings typically reflect long-term financial stability, contrasting with S&P's consideration of short-term economic factors. Nonetheless, both agencies are vital in providing investors with credible assessments of credit risk for informed investment decisions and risk management. Investors commonly refer to ratings from both Moody's and S&P to gain a comprehensive understanding of an entity's creditworthiness, recognizing the valuable insights offered by each agency's distinct approach.