What is a rating and what is it not?

Ratings are conventionally, and erroneously, regarded as metrics about the probability of default of a debt issuer. Ratings are not the product of calculation, however. In fact, rating is a judgement on a debt issuer's prospect of repayment of the liability on time and in full. Legally speaking, a rating is not an investment recommendation. In line with the rating industry's original business idea, a rating offers an opinion about the creditworthiness of a financial product. Investors may consider this opinion before taking their investment decisions, but a rating does not exempt investors from due diligence. This distinction is highly relevant, as it protects credit rating agencies from liability claims by virtue of the first amendment of the US constitution, which guarantees freedom of speech and of the press, among other things. According to Moody's Investors Service (2013b: 4), credit ratings are “forward- looking opinions of the relative credit risks of financial obligations issued by non- financial corporates, financial institutions, structured finance vehicles, project finance vehicles, and public sector entities”. According to the website of S&P Global Ratings, a credit rating is best described as an “informed opinion”, conveying the impression of an underlying well- thought- out process instead of an ad hoc, spontaneous whim:

From these official definitions of credit rating, we can make a few observations: First, the two major CRAs concur in defining ratings as “forward- looking opinions”. The word “judgement” does not appear. There is an emphasis on ratings being relative in two ways: first, because of the ordinal scale, ratings are supposed to be relative measures of credit risk in comparison to each other; and, second, ratings should be used as one input among many to assess creditworthiness, which suggests that the CRAs reject claims of absoluteness.