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Author: junkman02 Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 35363  
Subject: Credit Rating Methodology Date: 12/2/2009 10:32 PM
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Morningstar writes:

We think it's important to be as transparent as possible about how we arrive at the ratings for individual firms. Below you'll find links to more detailed explanations of our methodology.

Morningstar Corporate Credit Ratings (Sortable table): Here, you can find a complete listing of our corporate credit ratings in an easily sortable table.

Morningstar Corporate Credit Rating Coverage Universe (PDF): Here, you can find a complete listing of our corporate credit ratings, as well as summary statistics.

Is Your Investment At Risk? Morningstar's Cash Flow Cushion: Here we explain in detail our new Cash Flow Cushion MeasureTM and why it's such an important input into our corporate credit ratings.

Credit Rating Methodology (PDF): This document provides a detailed look at our methodology.
[My comment: this is where you should begin your reading/studying.]

Fact Sheet (PDF): A concise description of the methodology behind Morningstar's corporate credit ratings.


The links aren't "hot" in the quoted excerpt above. But if you'll go to their website, You'll be able to access the referenced papers. http://news.morningstar.com/articlenet/article.aspx?id=31617...

I poked around some more in their credit-ratings for utility bonds, and I ended up being more dismayed and puzzled than helped. This thought came to mind: "The man who has two watches never knows what time it really is." Yes, Morningstar is providing an independently-arrived at credit-rating for the same companies that Moodys and S&P are rating. But as I noted previously, Morningstar doesn't often agree with them, notch for notch, and sometimes departs quite a bit. So the question becomes: Who would you rather trust?

My temptation is to say: "A pox on all of them. I've got a method that works for me. Why add unneeded complications?" But I can't help but admire Morningstar's attempt to break into the field of credit analysis, and I very much can't help but admire their attempted transparency. For sure, many of their tools are "proprietary", but they don't have access to any information a diligent investor couldn't find on his own, and a reasonable bet has to be that any tool Morningstar uses could be reverse-engineered. For sure, securities analysis is all but a black art as most firms practice it. But numbers are numbers, and manuals aplenty exist on how to learn the craft.

If Morningstar does intend to be as transparent about the process as they suggest, then the chief value of their entry into the ratings business might be the chance to learn their methods from them. In other words, don't depend on their ratings to make buying decisions. Use their ratings to confirm that you understand their methods well enough that you will know when to make intelligent exceptions.
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