Morningstar just entered into the credit rating business. The Chicago-based research company, well known for its mutual fund star-ratings, will analyze the credit security of about 100 of the U.S.'s largest companies, competing with established ratings firms like Moody's, S&P and Fitch as those firms have faced substantial flak over their role in the events leading up to the recession.
The ratings range from AAA, for businesses with "extremely low default risk," to D, for "payment default," and are based on quantitative factors such as a risk analysis, cash-flow measurements and speculation, financial health equations, and the probability that a firm will default.
Of the 100 companies, 70 percent of Morningstar's ratings were similar to those of S&P, Moddy's and Fitch, according to the Wall Street Journal. In the 30 percent that were several grades different, Morningstar's rating was usually higher.
Morningstar's new venture also may have helped raise its share price, which increased $1.08 per share to $48.10 Wednesday.
Company Press Release
CHICAGO, Dec. 2, 2009—Morningstar, Inc. (NASDAQ: MORN), a leading provider of independent investment research, today began publishing credit ratings for approximately 100 of the largest U.S. companies. During the next year, Morningstar plans to produce credit ratings for up to 1,000 companies currently covered by its equity analyst team. The ratings are available for free at Morningstar.com, the company’s investment Web site. Forecasts and scores underlying the ratings are available to Morningstar’s institutional equity research clients.
“Investors benefit when they have access to multiple perspectives on an investment,” said Catherine Odelbo, president of equity research for Morningstar, Inc. “Credit ratings are a natural extension of the equity research we’ve been producing for the past decade. We believe we have a unique viewpoint to offer on company default risk that leverages our cash-flow modeling expertise, proprietary measures like Economic Moat, and in-depth knowledge of the companies and industries we cover.”
Morningstar has been producing equity research since 1998 and draws on this experience to bring a distinct perspective to debt ratings. Morningstar’s equity analysts produce detailed five-year forecasts of cash flows to evaluate stocks. They then compare those forecasts with liabilities coming due to provide insight into companies’ creditworthiness. Another distinction of Morningstar’s credit rating methodology is its emphasis on an Economic MoatTM calculation of competitive advantage when evaluating both a company’s financial prospects and its business risk.
Morningstar’s credit rating is based on four key quantitative and qualitative factors:
• Business Risk—an evaluation of industry and company risk factors, including Morningstar`s proprietary Economic Moat and Uncertainty Rating. Economic Moat is a measurement of a company’s competitive advantage and the Uncertainty Rating measures the predictability of future cash flows.
• Cash-Flow CushionTM—a proprietary, forward-looking ratio that measures Morningstar analysts` forecasts of future cash flows against firms’ financial obligations.
• Solvency ScoreTM—a proprietary scoring system that measures a firm`s financial leverage, liquidity, interest coverage, and profitability to determine its financial health relative to other firms.
• Distance to Default—a quantitative model that estimates the probability of a firm falling into financial distress based on the market value and volatility of its assets.
Morningstar’s credit committee reviews all ratings initiations and proposed changes. The committee, which includes Morningstar’s director of stock research, sector specialists, and senior members of its research team, evaluates each rating factor with an emphasis on cash-flow, financing, and business-risk assumptions. Morningstar assigns scores for each key factor and issues one of the following overall ratings to each company:
AAA (extremely low default risk)
AA (very low default risk)
A (low default risk)
BBB (moderate default risk)
BB (above average default risk)
B (high default risk)
CCC (currently very high default risk)
CC (currently extreme default risk)
C (imminent payment default)
D (payment default)
As of Sept. 30, 2009, Morningstar had more than 100 equity analysts around the globe with approximately 2,000 companies under coverage. Institutional investors and portfolio managers can access Morningstar analysts’ equity and credit valuation models and engage directly with the entire analyst staff through Morningstar® Institutional Equity Research ServicesSM. For additional information about Morningstar’s credit rating methodology, please visit http://global.morningstar.com/CreditRatings.
About Morningstar, Inc.
Morningstar, Inc. is a leading provider of independent investment research in North America, Europe, Australia, and Asia. The company offers an extensive line of Internet, software, and print-based products and services for individuals, financial advisors, and institutions. Morningstar provides data on more than 325,000 investment offerings, including stocks, mutual funds, and similar vehicles, along with real-time global market data on more than 4 million equities, indexes, futures, options, commodities, and precious metals, in addition to foreign exchange and Treasury markets. The company has operations in 20 countries and minority ownership positions in companies based in two other countries.