Not all companies that borrow money by issuing bonds pay to have those bonds rated by the credit agencies. But every bond sold does receive an ‘implied rating’ by how “the market” prices that debt. When the ‘agency-assigned’ ratings differ from the ‘market-implied’ ratings, trust the latter. So here’s an example, meant to be non-political.
Like many countries, Israel has to borrow money. In order to sell that debt, it pays Moody’s and S&P to rate that debt. The current ratings for Israel’s debt are ‘Baa1’ and ‘A’ respectively, which I found interesting. Previously, like many years ago, I was buying their debt, and it was rated top-tier, Aaa/AAA, likely because of the implicit assumption that the US government would back that debt. It has to be assumed that the US government still offers such an implied guarantee. But the bond market is disagreeing about the creditworthiness of both of those issuers.
Currently, E*Trade lists three bonds for Israel, the 5.75’s of '54, the 5.875’s of '56, and the 4.5’s of 2021. In other words, two when-issued 30-year bonds and a 100-year bond having the following YTMs: 6.014, 6.016, and 6.031, or a very flat yield-curve. But how is “the market” pricing that debt? This is where comparison shopping kicks in.
If bonds of comparable maturity and comparable credit-ratings are priced to offer comparable yields to maturity, then the credit-ratings assigned to Israel’s debt are credible. If the yields are higher, then the rational assumption is that Israel true creditworthiness is lower and that Israel’s debt was assigned a higher credit-rating than it merited on the basis of its financials alone.
So, run this exercise. Ask E*Trade to show you all comparable bonds. Among the list of the 390 returned, you’ll see American Wtr Cap Corp’s 5.7’s of '55 that carries the same Baa1/A split rating as Israel, but offers a lower, 5.719 YTM and their 5.45’s of '54 with its 5.651 YTM. So, this question has to be asked: “Did the rating agencies give a pass to Israel or to American Water?” because a difference in yield of 40 bps between bonds of the exact same credit-rating and very nearly the exact same maturity is NOT a negligible difference in the low interest rate environment which we are now experiencing.
Frankly, my guess is that Israel that got an undeserved pass, because it’s easy to find bonds that are lower rated than Israel’s debt and that offer lower yields. Said another way, bond traders are pricing Israel’s debt as if it were merely one notch above spec-grade debt, or Baa3/BBB-, and certainly not the agency-assigned ratings of Baa1/A.
As always, every one of my assumptions and conclusions can and should be challenged. But I’ve been involved with bond investing a long enough time, like 25 years, that I’d trust my instincts abut this and avoid buying Israel’s debt. What you do about buying or not is for you to decide.