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CChaos on 16 October 2012
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the2real4mafol said:

CChaos said:

They are actually a very big deal. Standard and Poor's, Moody's and Fitch Ratings are considered 'The Big Three', which are the three most prominent rating companies around. Basically, if they speak, others listen, because they are the ones who rate corporations and countries alike. When the ratings for those three go down, the interest rates on debt and borrowing costs rise, sometimes a great deal, and which means that the company in question will require more money to pay back the totals, because of those larger interest rates.

Basically, a company's credit rating isn't that much different than a normal person's. If you have a bad rating, you won't be able to manage some things (like buying a car or house on credit) and, when you do, they'll see you as higher risk and will make you pay back more because of that risk. Here's a link to explanations on credit ratings and how they work.

http://www.investopedia.com/articles/00/091800.asp#axzz29OgOtmIA

Same thing for a company, but instead of having to pay a few hundred dollars more per month on your mortgage, we're talking the realm of tens of billions of dollars. That usually means that return pay on the debt is billions as well when your credit rating is bad enough. Basically, it amounts to 'the lower your rating, the more of your profit you're paying into payments and interest on your debt'.

I've heard of S&P, moodys etc. and know what they did basically but just don't really see the point in their existence. It's make the competition between countries or companies even more unfair than it should do in my view, even if a company like sony is in bad shape financially, all they seem to do is, make it harder for a company like sony to recover, while say microsoft or apple continue to grow rapidly, as they get a big advantage from sony's weak position. In terms of countries, it's the same thing America and Europe get it easy, while Africa which was not given a chance is left poor and without investment. I guess I don't understand how the financial system works, but it don't seem to fair to me

Their existence is mostly for the sake of informing investors and lenders, after looking at all angles of a business, whether or not a corporation or business has some amount of risk in the investment and allowing them to compensate by way of increasing interest payments and what not. They exist as a method of scale for investors, basically.

However, it should be noted that it takes internal screw ups before credit ratings start falling. In Sony's case, they've been in the red on their TV business for eight straight years, they have no products at present or announced that are going to give them a real burst of energy into profitability and they having been slowly accruing a great deal of debt over the past ten years in comparison to their assets, amongst other things. Sort of the same reason the US got a credit downgrade by S&P because of their huge national debt and political paralysis or Greece and their multitude of long standing issues.

What it really amounts to is a judgment on 'Are you good for it?' when it comes to money. Equality would be for a perfect world, but in the eyes of the financial system, we're only as good as how good we are at keeping ourselves afloat.