Robert M. Soldofsky

Bond Quality Rating Changes for Electric Utilities: A Multivariate Analysis

Most bond issues of large utility companies are rated for quality by at least two of the three rating agencies. Bond investors individuals and institutions are concerned not only with original ratings of an issue but also with future ones. Since a rating change will affect prices of the outstanding bonds as well as interest rates and marketability of new issues, it may be a cause of portfolio readjustment for investors as well as a reason for the utility to reconsider its capital budgeting policies. Each rating agency maintains that models based on financial statements or data bases cannot replicate its ratings [4, 7]. Nevertheless, studies have explained bond quality ratings by using financial statement data [9, 19, 21, 25] and related bond quality ratings to systematic risk [15], prices [10], bond yield [26], and market-determined risk measures [22]. Several scholars have examined the impact of rating changes on borrowing cost [11] and on price adjustments [8, 12, 20]. No work has been uncovered, though, that centers upon forecasting rating changes by the various rating agencies. The purpose of this paper, therefore, is to investigate whether or not a multivariate discriminant model that incorporates the recent levels, past trends, and instability of financial ratios can explain and predict the quality rating changes of electric utility bonds. We used 1971 as a starting point because bond rating changes were rare before then. In 1971, there were no quality rating changes announced by Moodys for industrial or utility bonds graded B or above. With rising interest rates and the environmental problems

What's in a change in an industrial bond rating?

Abstract Bond quality rating changes (BQRC) for industrial bonds are analyzed using both univariate statistical methods and discriminant analysis to find significant variables and their relationship with the changes. The single most important explanatory variable is found to be the rate of return on assets (ROA), followed by the trend in the return on assets (ROATREND). The univariate analysis found six of the seven proposed explanatory variables significant beyond the 0.01 level. The two-group discriminant analysis model achieved a correct classification rate of over 77%. The paper shows how the results of the two-group discriminant analysis can be used for a three-way prediction (upgrade, downgrade, or no change of bond ratings). The results of this study show that models based on financial statement data can predict rating changes with good accuracy and therefore may be a useful tool for rating agencies, at least as an initial screening device.

Securities as a hedge against inflation: 1910–1969

Abstract How well have marketable securities performed as a hedge against inflation? The question is a very old one to which many writers have addressed themselves. The evolutionary nature of financial markets, financial theory, and financial instruments requires continued reevaluation of previous investment decisions. The purpose of this study is to review the performance record of 14 risk classes of securities, which range from long-term government bonds through five different classes of common stock. The average annual investment relatives adjusted for price-level changes are compared for various periods during which the price level is essentially stable, rising, and falling.