Block I · Ratings & research
‹ NadirAlpha financial markets handbook: overview
Independent NadirAlpha working reference. Product and feature names mentioned are trademarks of their respective owners. No investment advice.
Ratings answer different questions; credit ratings estimate the default probability of debtors, fund ratings assess investment products; whoever confuses the two draws wrong conclusions.
118 · S&P Global Ratings (AAA-D scale)
The largest agency; scale AAA to D, fine-graded with +/-.
The standard reference in investment guidelines and indices.
Broad coverage; ratings react sluggishly (by design: "through the cycle").
Reading a rating as the market's opinion; CDS/spreads usually run ahead of downgrades.
119 · Moody's (Aaa-C scale) · 123 · Investment grade boundary (BBB-/Baa3) · 124 · Issuer vs. issue rating
119 · Moody's (Aaa-C scale)
Scale Aaa to C with digits (1/2/3) instead of +/-; methodologically more loss- (not just default-)oriented.
A second opinion; many mandates require two ratings.
Its own recovery logic; the notation confuses beginners.
Not recognizing Baa3 as the IG floor (equivalent to BBB-).
120 · Fitch
The third-largest agency, scale like S&P.
Frequently the "tie-breaker" for split ratings (index rules often take the middle of three).
Strong on banks/sovereigns; smaller coverage.
Ignoring split ratings; what governs is the rule of the respective index/mandate.
121 · Scope (European)
A European agency with growing recognition (accepted by the ECB since 2023, among others).
A European perspective, a second rating in the EUR area.
EU focus; lower global market penetration.
Assuming recognition in one's own investment guidelines without checking.
122 · DBRS Morningstar (credit)
The fourth large agency (Canadian origin), part of Morningstar; NOT to be confused with the fund stars.
Above all securitizations, covered bonds, European sovereigns.
A niche with weight (ECB collateral framework).
"Morningstar rating" without context; credit or fund assessment? Always clarify.
123 · Investment grade boundary (BBB-/Baa3) & fallen angels
BBB-/Baa3 as the regulatory-market dividing line; fallen angel = descent from IG to HY.
Mandate limits, anticipating forced sales by IG-only investors.
Downgrades create price pressure through forced selling; and often recovery opportunities afterwards.
Not knowing the portfolio's BBB share.
118 · S&P Global Ratings (AAA-D scale) · 119 · Moody's (Aaa-C scale) · 15 · Corporate bonds investment grade
124 · Issuer vs. issue rating
Issuer rating = overall debtor quality; issue rating = the specific bond including rank/collateral.
Correctly classifying subordinated/secured paper.
An issue can sit above (secured) or below (subordinated) the issuer rating; notching.
Transferring the issuer rating to all bonds of the house.
125 · Outlook & CreditWatch
Outlook (stable/positive/negative, horizon 1-2 years) vs. watch (a short-term, concrete review, mostly event-driven).
Early warning of rating changes.
Watch negative leads to a downgrade within ~90 days in the majority of cases.
Equating outlook and watch; the urgency is completely different.
126 · Morningstar star rating (funds, quantitative)
1-5 stars, purely quantitative from risk-adjusted past return within the peer group (3/5/10 years); top 10% = 5 stars.
A quick backward-looking filter in the fund universe.
Says how the fund WAS; predictive power for the future is empirically low.
Reading stars as a buy recommendation; 5-star phases are often followed by reversion to the mean.
127 · Morningstar Medalist Rating (funds)
127 · Morningstar Medalist Rating (funds, qualitative)
Gold/Silver/Bronze/Neutral/Negative; an analyst- or model-based assessment of the FUTURE ability to add value after costs (pillars: People, Process, Parent).
A complement to the stars for the selection decision.
Forward-looking, but an opinion; the expense ratio is the strongest single factor.
Treating stars (rear-view mirror) and Medalist (windshield) as the same thing.
126 · Morningstar star rating (funds) · 47 · Active mutual funds
128 · ESG ratings (MSCI, Sustainalytics, ISS)
Sustainability assessments with completely different methods (MSCI: industry-relative, Sustainalytics: absolute risk).
ESG integration, exclusion/best-in-class filters.
Correlation between providers is low (~0.4-0.6); "the" ESG rating does not exist.
Mixing ESG scores from different providers.
129 · Internal ratings & probability of default (PD)
Own, model-based credit estimates (e.g. Bloomberg DRSK, banks' internal IRB models) with an explicit PD.
Early warning between agency updates; portfolios without an agency rating.
Market-data-based PDs (DRSK) react quickly but fluctuate with the market.
Treating a model PD as objective truth instead of an estimate with assumptions.
130 · Sell-side research & price targets (perspective)
Analyst recommendations (buy/hold/sell) and the banks' 12-month price targets.
A picture of consensus and expectations; a collection of arguments.
Structurally buy-heavy (conflicts of interest); price target changes are more informative than levels.
Ascribing predictive power to price targets; keep dispersion and revisions in view.