Financial corporations and investors face several types of risk. One major risk is credit risk. Despite the fact that market participants typically refer to “credit risk” as if it is one-dimensional, there are actually three forms of this risk: credit default risk, credit spread risk, and downgrade By Frank J. Fabozzi
of the interest on loans in order to compensate the lender for the higher risk that the loan may not be repaid. The rating agencies constantly monitor all the instruments they rate and will issue upgrades or downgrades if an issuer’s creditworthiness has changed.
A case study of the use of securitization to reduce funding costs is provided by Ford Motor Company. In 2001, the auto manufacturer was facing the downgrade of its credit rating to that of noninvestment grade status (more popularly referred to as “junk bond” status). As a result, in early 2002 its By Frank J. Fabozzi
In June 2011, Moody’s downgraded Bahrain’s sovereign credit rating to Baa1 from A3, citing the political turmoil and fundamental weaknesses in the country’s large banking sector as a motivation for the downgrade. According to the ratings agency, Bahrain is the only GCC member state that “does