Morningstar Begins Publishing Credit Ratings in U.S.

Morningstar Begins Publishing Credit Ratings, Initially Covering 100 Public Companies

Morningstar Analysts 10 December, 2009 | 0:00
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Morningstar, Inc., 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 MoatTM, 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 MoatTM and Uncertainty Rating. Economic MoatTM 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 .

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