How do rating agencies actually assign a rating to a corporate bond issuance?

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AcadiFi · Accepted Answer

The rating process is a structured engagement, not a black box. Consider Meridian Logistics Inc., a mid-size freight operator issuing a $400M senior unsecured note. The steps are: (1) Engagement — Meridian's treasurer contacts S&P and signs a fee letter (~3-7 bps on issuance size). (2) Information submission — five years of audited financials, covenant schedules, segment KPIs, and management projections. (3) Management meeting — analysts conduct a two-day site visit covering strategy, capex plans, and ESG exposures. (4) Analyst recommendation — the lead analyst drafts a rating proposal benchmarked against the Transportation peer group (UPS, J.B. Hunt, etc.). (5) Rating committee — a panel of 5-8 voting analysts debates the recommendation; majority rules. (6) Notification and appeal — Meridian receives the tentative rating and has ~24 hours to submit new information if it disagrees. (7) Publication — the rating and rationale appear on the agency's public website.

Key FRM exam points: the issuer pays (conflict of interest), the committee structure is supposed to depersonalize decisions, and agencies rate 'through the cycle' rather than point-in-time. The final rating reflects both quantitative metrics (leverage, coverage, margins) and qualitative factors (management quality, competitive position, country risk).

How do rating agencies actually assign a rating to a corporate bond issuance?

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