How Credit Rating Agencies Make Money
Direct answer: Rating agencies earn revenue primarily through the issuer-pays model, in which the entity seeking a rating pays the agency a fee. Secondary revenue comes from subscription sales to investors who pay for research, data, and analytics. The conflict between rating issuers who pay and investors who rely on ratings has been a persistent regulatory concern.
The Issuer-Pays Model in Detail
Credit ratings exist to inform debt investors about the likelihood of repayment. A bond issuer that receives a high rating (investment grade) can borrow at lower interest rates because investors view the debt as lower risk. A lower rating (speculative grade, or high yield) requires offering a higher interest rate to compensate investors for higher perceived risk.
Given this value, issuers have strong incentives to engage rating agencies. The issuer-pays model charges the debt issuer for this service. The fees have two components: an initial rating fee charged when the rating is first assigned (typically tied to the size of the issuance and the complexity of the analysis), and ongoing annual surveillance fees charged as the rating agency continues to monitor the issuer and maintain the rating over time.
Initial rating fees for corporate bonds typically range from $50,000 to over $300,000, depending on the issuer's size and the issuance size. Annual surveillance fees are lower, often $25,000 to $150,000 per year. Government issuers may pay lower rates. Structured finance transactions, which involve complex analysis of multiple underlying assets and multi-tranche deal structures, generate substantially higher fees, sometimes several hundred thousand to over one million dollars for a single large deal.
Why the Issuer-Pays Model Creates a Conflict of Interest
The conflict is structural: the entity that pays the agency is also the entity being evaluated by the agency. If a rating agency assigns a lower rating than an issuer expected, the issuer faces higher borrowing costs and may reduce or end its relationship with that agency, shifting future business to a competitor. This creates a financial incentive for the agency to please the paying issuer.
This dynamic is most dangerous in structured finance, where the fees per transaction are highest and where the issuer is often a special-purpose vehicle created specifically to sell a new security. The rating is essential to the deal, and if the initial contact with the agency suggests a poor rating, the deal may be restructured or the agency's services not retained. Pre-crisis evidence showed rating analysts were sometimes aware of pressure to maintain issuer relationships when assigning ratings on structured products.
The credit rating agencies did not simply make errors of judgment. Internal communications revealed during post-crisis litigation and congressional investigations showed some analysts expressed concerns about the quality of structured products they were rating while the published ratings remained high. This created significant reputational and legal consequences, including a $1.375 billion settlement between S&P Global Ratings and the U.S. Department of Justice and various state attorneys general in 2015.
The Analytics and Subscription Business
All three major agencies have invested significantly in building subscription-based businesses that serve investors rather than issuers. These businesses reduce reliance on the issuer-pays model and create revenue streams with a different conflict profile.
Moody's Analytics offers credit risk software (RiskCalc, CreditEdge), economic research, banking supervisory software, and data products. Its customers are banks, asset managers, and corporate treasury departments. The segment contributes roughly half of Moody's Corporation's total revenue.
S&P Global has expanded aggressively. Its 2022 merger with IHS Markit created a financial data business with capabilities across commodity pricing (Platts), financial market data (Market Intelligence), automotive data, and indices (S&P Dow Jones Indices, a major business in its own right). These segments collectively contribute more revenue than S&P Global Ratings itself.
Fitch Group includes Fitch Solutions, which sells country risk research, macroeconomic data, and bank analysis products to institutional subscribers. Fitch Ratings is smaller than Moody's or S&P in market share, but Fitch Group as a whole benefits from the same diversification strategy.
Index Businesses: A Hidden Revenue Engine
Both Moody's and S&P have equity and fixed-income index businesses that generate revenue through licensing fees. When an investment product (ETF, mutual fund, or derivatives contract) tracks a licensed index, the index provider earns an annual licensing fee, typically a few basis points on assets under management. S&P Dow Jones Indices, which includes the S&P 500 and Dow Jones Industrial Average, is one of the most valuable financial franchises in the world and contributes substantial operating profit to S&P Global.
Regulatory Changes After 2008
The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 included several provisions specifically addressing credit rating agency conflicts of interest and quality. The SEC was required to establish a new Office of Credit Ratings to annually examine NRSROs. Requirements for the disclosure of preliminary ratings in structured finance were introduced to reduce rating shopping. Agencies must disclose the methodologies behind ratings, historical performance statistics, and the organizational policies designed to manage conflicts of interest.
Despite these reforms, the issuer-pays model remains dominant. Several academic studies have examined whether post-2008 reforms reduced rating inflation and found mixed results. The core economics that create the conflict, specifically that the issuer pays and therefore has leverage over the agency, have not changed. The reforms improved transparency and accountability without restructuring the fundamental incentive architecture.
Why do issuers pay for their own credit ratings?
Issuers pay for ratings because having a recognized credit rating is essential for accessing debt capital markets. Bond investors typically require a rating before purchasing debt, and many investors are prohibited by their investment mandates or regulations from holding unrated debt. An issuer without a rating is effectively excluded from large segments of the investor base, so paying for a rating is a practical necessity for any entity seeking to borrow in the public bond markets.
How large are the fees that credit rating agencies charge?
Rating fees vary widely by issuance type and size. A typical corporate bond rating might cost $50,000 to $300,000 for an initial rating, plus annual surveillance fees of $25,000 to $150,000. Structured finance transactions are substantially more expensive, sometimes generating fees in the hundreds of thousands to over one million dollars for complex multi-tranche deals. Some sovereigns receive unsolicited ratings that generate no fee at all.
What was rating agency shopping and how did regulators address it?
Rating shopping is the practice of an issuer approaching multiple rating agencies informally, sharing preliminary deal information, and then only formally engaging the agency that gives the most favorable preliminary indication. Post-2008, Dodd-Frank and subsequent SEC rules for structured finance required that all preliminary ratings and methodological discussions be disclosed, reducing the ability to shop quietly for better ratings without paying the agencies approached.
How profitable are credit rating agencies?
Credit rating businesses are highly profitable. Moody's Corporation's ratings segment consistently reports operating margins above 50%. S&P Global Ratings similarly generates very high margins. Once an agency has built its analytical infrastructure and reputation, the marginal cost of rating additional issuers is low relative to the fee revenue, creating a favorable operating leverage structure.
Can investors pay for credit ratings instead of issuers?
Yes, the subscriber-pays model does exist. Egan-Jones Ratings and a few other smaller agencies use a model where investors subscribe and pay for ratings, eliminating the issuer-pays conflict. The disadvantage is scale: subscriber revenue is limited by how many investors are willing to pay, while the issuer-pays model can generate fees from every major debt issuance globally. Subscriber-pays models have historically struggled to achieve the scale needed to rate all issuers comprehensively.