In some countries, for example, specific institutions look at a company's rating before they look at its name. In Spain, this particular financial habit has yet to catch on, but it might certainly have prevented the disappointment of many investors who pumped their savings into Banesto or Galer�as Preciados, for example.

 

Investors are convinced that ratings should be of prime importance when it comes to deciding on whether to make the investment. The prestige of the companies that come up with these ratings is beyond doubt. They are reputed independent companies that formulate their ratings on consulting the myriad data they have at their disposal, such as the management of the company or public body, the socio-economic, political and competitive environment in which the company operates, the predictions, results, liquidity, characteristic of the management team and financial and business health, both in the present and in the future. The existence of a rating is a clear guarantee of certain characteristics (risk of the investment), as well as a way of clarifying investments. To fully understand the effectiveness this tool, one only need look at the 5,000-plus funds registered in the Comisi�n Nacional del Mercado de Valores (the Spanish stock market's governing body): a fact that confirms the usefulness of these ratings.

 

To give just one example, any reader of the economic press can find headlines similar to the following: Moody's lowers Endesa's long-term rating from A3 to Baa1 due to excessive debts. These figures can only be understood with the help of a ratings table. The two main ratings companies are Moody's and Standard & Poors.

 

Moody's long-term debt ratings
- Aaa. The values with this rating have the lowest investment risk. Interest rate payments are covered by an exceptionally stable margin and the payment of the main debt is secure.
- Aa. Double A values are considered of high quality across the board, although long-term risk is higher than triple A values.
- A. These values are high quality investment tools, with a medium-high rating. The factors that ensure security in covering payments and interests are adequate, but there are signs of a possible deterioration in the future.
- Baa. Of medium quality in that they are neither highly protected nor highly risky. They lack the qualities of the A-rated values.
- Ba. These are considered to have speculative elements in that they lack security and their payments could be vulnerable in the future.
- B. These values lack the qualities desired of investors, such as security in covering long-term payments.
- Caa. The values with this rating are of low quality. They tend to be related to companies that have not met their payments or that have elements of danger with respect to covering capital or interests.
- Ca. These are highly speculative values.
- C. This is the lowest rating, the equivalent of failure, as the chances of these values being the object of investment are remote.

 

Moody's adds numerical values (1,2,3) to each generic category to specify the quality of investment. As for Standard & Poors, the ratings agency offers a scale of values and a categorisation similar to Moody's and ordered in the same fashion: AAA, AA, A, BBB, BB, B, CCC, CC, C, D. What's more, Standard & Poors adds plus (+) or minus (-) signs to enrich the information provided in each category.