How Credit Rating Agencies Make Money
Direct answer: Credit rating agencies (Moody's, S&P Global Ratings, Fitch) generate revenue primarily through the issuer-pays model: the issuer of debt (corporation, government, structured product) pays the rating agency for an initial rating and ongoing surveillance. This model creates a potential conflict of interest that regulators and market participants monitor carefully.
The Issuer-Pays Business Model
Credit rating agencies occupy an unusual position in financial markets: they produce information (credit ratings) that benefits investors, but the entities being rated (not the investors) pay for the service. This is the issuer-pays model, and it dominates the industry today.
When a corporation decides to issue a bond, it typically engages one or more rating agencies to rate the debt before it goes to market. Investors rely on these ratings to assess credit risk. Investment mandates and regulatory requirements in many jurisdictions require that only rated bonds can be held by certain types of investors. The issuer pays an upfront fee to have the rating assigned, and then ongoing annual surveillance fees for as long as the rating is maintained.
The fees vary by the size and complexity of the issuance. A large corporate bond issuance by an investment-grade company might generate tens of thousands to hundreds of thousands of dollars in rating fees. Structured finance transactions (collateralized loan obligations, mortgage-backed securities, asset-backed securities) can generate much higher fees because they are complex and labor-intensive to analyze. Sovereign government ratings, by contrast, generate lower fees relative to the analytical work involved, and some sovereigns receive unsolicited ratings that the agency assigns without being paid.
Structured Finance: The Highest-Fee Segment
Structured finance ratings are the most lucrative segment of the issuer-pays business. A collateralized loan obligation (CLO) or a mortgage-backed security (MBS) involves dozens or hundreds of underlying instruments, and the structured product creates multiple tranches each requiring a separate rating opinion. Rating agencies can charge large fees for these complex analyses.
This is also where the issuer-pays conflict of interest has been most acute. In the years leading up to the 2007 to 2009 financial crisis, rating agencies assigned AAA ratings to tranches of structured products backed by subprime mortgages. These ratings subsequently proved to be significantly inflated. Investigations and litigation following the crisis revealed evidence that competition between rating agencies for structured finance business created pressure to provide favorable ratings to win mandates. The SEC, under the Dodd-Frank Act of 2010, implemented reforms including enhanced disclosure requirements and conflict-of-interest rules for structured finance ratings.
Subscription Revenue: Data, Analytics, and Research
All three major rating agency parent companies have invested heavily in subscription-based data and analytics businesses that serve investors rather than issuers. This diversifies their revenue beyond the issuer-pays model and creates a second, investor-oriented revenue stream that is less subject to the inherent conflict.
Moody's Analytics offers credit risk software, economic data, and financial intelligence subscriptions. S&P Global has expanded through acquisitions (including IHS Markit in 2022) to create a major financial data and analytics business that includes S&P Global Market Intelligence, S&P Global Platts (commodities data), and index businesses. Fitch Group includes Fitch Solutions, a data and research business aimed at institutional subscribers.
The Regulatory Landscape
The Credit Rating Agency Reform Act of 2006 and subsequent Dodd-Frank provisions established a formal regulatory framework for Nationally Recognized Statistical Rating Organizations (NRSROs) in the U.S., overseen by the SEC. Rules require disclosures about fee arrangements, methodologies, and conflicts of interest. Despite these reforms, the issuer-pays model remains dominant because it has proven difficult to find a sustainable alternative that funds the work of rating thousands of issuers while maintaining analytical quality.
What is the issuer-pays model in credit rating?
In the issuer-pays model, the entity seeking a credit rating (the issuer of debt, such as a corporation or government) pays the rating agency for the rating rather than the investors who use it. This is the dominant model for Moody's, S&P Global Ratings, and Fitch. The issuer pays an initial rating fee when the rating is assigned and ongoing surveillance fees as the rating is monitored over time.
What is the conflict of interest in credit rating?
The core conflict is that the issuer who pays for the rating is also the subject of the rating. An issuer who receives a lower-than-expected rating can threaten to take its business to a competing agency, creating pressure on agencies to maintain relationships and avoid ratings that displease issuers. This conflict was highlighted during the 2007 to 2009 financial crisis, when structured finance products backed by subprime mortgages received high ratings that subsequently proved unjustified.
Who are the three major credit rating agencies?
The three major credit rating agencies globally are Moody's Investors Service (a subsidiary of Moody's Corporation), S&P Global Ratings (a subsidiary of S&P Global Inc.), and Fitch Ratings (owned by Hearst Corporation). These three agencies dominate the market and their ratings are embedded in regulations, investment mandates, and capital requirements globally. Smaller agencies such as DBRS Morningstar and Kroll Bond Rating Agency operate in more specialized niches.
What is a Nationally Recognized Statistical Rating Organization?
A Nationally Recognized Statistical Rating Organization (NRSRO) is a credit rating agency that the SEC has formally designated as meeting certain criteria. NRSRO status matters because many regulations and investment mandates specify that only ratings from NRSROs can be used for compliance purposes, such as minimum credit quality requirements for money market funds. This regulatory recognition historically created a significant barrier to entry for new competitors.
Do credit rating agencies also sell subscriptions to investors?
Yes. In addition to the issuer-pays rating business, Moody's, S&P Global, and Fitch all generate revenue by selling data, research, and analytics subscriptions to institutional investors, asset managers, and banks. S&P Global's Market Intelligence and Platts segments and Moody's Analytics division contribute significant subscription revenue from credit risk tools, financial data, and macroeconomic analysis products.