Do Credit Ratings Obscure Risk and Deter Opportunities?

In this video, Portfolio Managers John Lloyd and Seth Meyer discuss why credit ratings may not be an accurate reflection of risk and could obscure opportunities for active managers to capitalize on.

Key Takeaways

  • Fundamental, bottom-up credit analysis provides opportunities to find companies that have improving credit quality, getting ahead of rating agencies that are often late to recognize credit improvement.
  • Rating agencies rate the company, not the bonds. Because it is easier to forecast short-term risk than long-term risk, a lower-rated short-term bond could have less risk than a higher-rated long-term bond.
  • Bank loan credit ratings are often capped by the parent company, but a particular loan could have a structure that would allow it to be rated higher if it was a standalone company.