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Moody’s Upgrades Philippines from High Credit Risk to Questionable

January 7, 2011

The Inquirer was giddy about Aquino’s pronouncements that Moody’s upgrades PH outlook to ‘positive’ .

Moody’s has assigned a Ba3 rating for the country’s local- and foreign currency-denominated liabilities. The rating, which has stood since July 2009, is three notches below investment grade.

Before you all jump like retards about this latest rating – ya know like a kid that get’s a stamp on the wrist – let’s do better and read the news like… adults.

What’s the Moody ratings all about and is the Inquirer and the Philippine government telling the real story?

Ba3 Rating Explained

Wikipedia provides the following explanation:

B Grade – Speculative grade (Also known as High Yield or ‘Junk’)

Ba1, Ba2, Ba3 – Moody judges obligations rated Ba to have “questionable credit quality.”

B1, B2, B3 – Moody judges obligations rated B as speculative and “subject to high credit risk”, and have “generally poor credit quality.”

A more detailed description is provided by by Investopedia

What Does Ba3/BB- Mean?

Bonds rated Ba3/BB- are generally considered speculative in nature and are not considered to be investment-grade bonds suited for people wishing to avoid the risk of losing their principal. These bonds are commonly referred to as junk bonds, though this rating indicates that they are towards the more stable end of the junk-bond rating spectrum.

Ba3 is a long-term bond rating provided by the Moody’s rating service, while BB- is the parallel rating provided by both the S&P and Fitch rating services.

Ba2/BB is the rating that falls directly above Ba3/BB-, while B1/B+ falls directly below.

Investopedia explains Ba3/BB-

Bonds rated Ba3/BB- provide a yield-to-maturity or yield-to-call rate that is well above bonds with higher ratings, especially those issued by the U.S. government, municipalities and the largest global corporations. However, it is important for investors to realize that this higher rate serves as compensation for investing money in a company or government that may not be financially sound and may result in the loss of one’s investment.

For short, Philippine bonds remain as junk bonds. You hear that? The bond’s JUNK – JUNK BOND!

And what’s a junk bond exactly?

In finance, a high-yield bond (non-investment-grade bond, speculative-grade bond, or junk bond) is a bond that is rated below investment grade at the time of purchase. These bonds have a higher risk of default or other adverse credit events, but typically pay higher yields than better quality bonds in order to make them attractive to investors.

The lower-rated debt typically offers a higher yield, making speculative bonds attractive investment vehicles for certain types of financial portfolios and strategies. Many pension funds and other investors (banks, insurance companies), however, are prohibited in their by-laws from investing in bonds which have ratings below a particular level. As a result, the lower-rated securities have a different investor base than investment-grade bonds.

The value of speculative bonds is affected to a higher degree than investment grade bonds by the possibility of default. For example, in a recession interest rates may drop, and the drop in interest rates tends to increase the value of investment grade bonds; however, a recession tends to increase the possibility of default in speculative-grade bonds.

http://en.wikipedia.org/wiki/High-yield_debt

Inquirer should be reminded about the adage – truth in advertising. Junk bonds aren’t “positive” or they will not be called “junk” in the first place.

From → Economy, Government

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