| Fund Credit Quality Rating 101 |
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| 01/05/2005 | |
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Philipp Sterner, Associate director of origination at Standard & Poor's, answers this week's 101 on S&P's Fund Credit Quality Rating. 1-What is a fund credit quality rating? A Standard & Poor's Ratings Services fund credit quality rating captures a fund's overall exposure to default risk. When assigning this rating, S&P evaluates the fund's portfolio credit risk and conducts a qualitative assessment of fund management's credit procedures. Fund credit quality ratings are based on a credit matrix approach, derived from S&P's historical default and ratings transition studies, and a detailed examination of both a fund's management and its credit analysis capabilities. S&P's fund credit quality criteria calls for the assets of a fund and its counterparties to be consistent with the fund credit quality rating. The assessment is based on the credit quality and/or ratings of the investments held by the fund, as well as the credit quality of the counterparties with which the fund engages in market transactions, such as swaps or repurchase agreements. S&P checks the integrity of the fund credit rating through a monthly surveillance process. Fund Credit Quality ratings usually come 'paired' with a fund volatility rating. 2-Which investors should take a particular interest in those ratings? Any investor that takes an interest in credit risk and default probabilities should have a particular interest in a fund credit ratings. Also, investors that appreciate the methodology underlying S&P's criteria - such as a transition studies dating back to 1981 - and the monthly surveillance by dedicated analysts to check the integrity of the rating should take an interest in fund credit ratings. We mainly see institutional investors and high net worth to fall into these categories but also receive enquiries from sophisticated retail investors. 3- What is the current rate of global default? (bfinance) The global corporate default rate for rated entities fell to 0.57% at the end of the first quarter 2005 from 0.69% for full-year 2004, according to a report by Standard & Poor's Ratings Services. According to Diane Vazza, head of Standard & Poor's Global Fixed Income research Group, the total number of defaults in the first quarter was the lowest in any quarter since the fourth quarter of 1997, but the global default rate is expected to edge up slowly from its trough in the remainder of 2005. S&P's analysis of the transition rates over the four quarters ended March 2005 suggests that ratings behavior continues to exhibit consistency with long-term trends, showing a clear negative correlation between credit quality and default probability. Expectations for economic strength, financing conditions, and corporate profitability in 2005 are still favorable, albeit lower than the growth rates posted in 2004. |
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Articles of the same Serie : 101 |
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