Impact of credit ratings downgrades

The following Restructuring & Insolvency practice note provides comprehensive and up to date legal information covering:

  • Impact of credit ratings downgrades
  • Ratings outlooks and watch-lists
  • Practical effects of downgrades
  • Relevance to structured investment vehicles (SIVS)
  • Relevance to sovereign debt

Impact of credit ratings downgrades

Ratings outlooks and watch-lists

Three of the main credit rating agents (CRAs) are: Moody's Investors, Standard & Poor's (S&P) and Fitch Ratings, and they periodically review ratings.

The CRAs can issue rating outlooks, which are opinions about the likely direction of a rating over the medium term (ie in the next 6 to 24 months) which can be:

  1. positive

  2. negative

  3. stable

  4. developing or evolving

Typically, the outlook specifies the rationale for the potential change and the extent of the potential change; the majority of outlooks are generally stable. In practice, if an issuer's creditworthiness is deteriorating and it is expected to default on a payment, it may be placed on negative outlook or negative watch to signal its credit rating may be downgraded. Being given a negative outlook or being placed on a watch-list of itself is not a rating action, but may be a precursor to it.

Watch-lists are used to indicate that a rating is under review for possible change in the short-term (usually within 90 days), specifically:

  1. a possible upgrade

  2. a possible downgrade

  3. where the direction is uncertain

The watch period is typically used to gather further information. If the CRA is unable to obtain sufficient information to form a rating opinion, no credit rating will be assigned or maintained. Reasons for a downgrade can include changes in the business climate or

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