We are all used to giving things a score out of 10 for how good we perceive it to be, whether it is a rugby player in a test match, a book or a movie.
But when it comes to financial products we tend to ignore scores or ratings. Although there are a number of ratings scales out there it just seems New Zealand doesn't have a ratings culture.
That's a shame because if you take notice of the better raters you are more likely to see a collapse, like Provincial Finance, coming. Or even better still avoid companies like the failed National Finance 2000.
There are plenty of raters out there - some good and some not so good.
The gold-plated ones are those from international agencies such as Standard and Poor's, Moodys and Fitch. You can search for credit ratings on their websites for free, you just need to register.
What's good about them is that they are developed by organisations which have huge amounts of experience and expertise in this area.
Andrew Dinsdale, Chairman of KPMG Banking Group, says:
"We strongly support the use of an internationally recognised and accepted credit rating standard, for example, Standard & Poor's or Moody's. That way, there can be no doubt about what each credit rating means, and comparison of credit ratings between financial institutions will be much easier. Investors can then judge for themselves the level of security offered and the quality attaching to their investments.*"
[*Source: KPMG Financial Institutions Performance Survey 2006]
There are other local offerings that tend to do smaller companies including the finance company sector.
While no-one rates the raters it's important to understand what they do. Key questions to ask are is this rating measuring and analysing the financial strength of the companies or is it doing something else? Who are the people behind it, and what (if any) experience do they have?
One of the New Zealand ones that is proving to be quite good is Grosvenor's Bondwatch service which has a team of people with experience as fixed interest managers as well as lenders.
They know the business and how to look at it.
Others aren't quite so strong.
While ratings are good, here is a word of warning: When it comes to ratings you have to know how to look at them and understand what they are saying as some scores appear good, but actually aren't that fantastic.
Generally with rating scales there is a cut off point where ratings above a certain point are considered investment grade. Anything below this point is colloquially known as "junk bonds", sub-investment grade or speculative.
With Standard and Poor's the rating scale starts at AAA and moves down to D. Anything above BBB- is considered investment grade and from BB+ downwards is "speculative".
So while a B+ mark in your varsity paper on finance is a good pass, it isn't such a flash S&P rating.
For my money following good ratings systems helps with making investment decisions.
Selecting companies with strong ratings from the international agencies will give you a lot of confidence that your money is in safe hands and the likelihood of failure, and the loss of your capital, is small.
For more information on credit ratings visit: