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5:00Credit Ratings: How Moody's Decides, and What a Downgrade Triggers
A committee of analysts votes on one letter, Baa3 or Ba1, and that single notch can force pension funds to dump a company’s bonds overnight and lift its borrowing cost by hundreds of millions.
A credit rating is an opinion on the likelihood that a borrower will fail to pay a debt in full and on time. Moody’s does not score a probability of default in isolation: it estimates expected loss, which combines the probability of default with the loss given default (how much creditors recover after a bankruptcy). That is why a senior secured bond and a junior unsecured bond from the same company can carry different ratings, the issuer is identical but the recovery is not.
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