Moody's Investors Service has come out with a study that targets long-heard criticism it is slow to change credit ratings and lags the market. Gaps between credit-implied trading levels and Moody's ratings tend to narrow over the course of a year and actually it is the market that does most of the adjusting--and not Moody's--according to the analysis from the agency. But when Moody's does adjust its ratings toward market levels, it is more likely to be in the event of a downgrade than an upgrade, said David Munves, managing director in charge of credit strategy research.
Moody's ratings lag the market--or adjust to market levelsmore often in high yield than in investment grade. Additionally, discrepancies between bond prices on the downside are a better leading indicator of rating downgrades than more volatile credit default swap trading levels, explained Munves, who will provide further detail on downgrade versus upgrade patterns in coming months.
Moody's intends the new research tool to help corporate bond investors interpret discrepancies in prices and ratings. Munves intends to further break down his analysis by industry sector, credit quality and issuer size. For example, he is examining why large issuers tend to have more negative ratings gaps and provide more color on the big movers in the index. He joined Moody's at the end of last year from Lehman Brothers and recently began providing commentary interpreting the differences between market trading levels and Moody's ratings (BW, 3/14).