How Credit Rating Agencies Make Money

The world’s major credit rating agencies—Moody’s, Standard & Poor’s, and Fitch—sell ratings to the very companies and governments whose creditworthiness they assess. This issuer-pays revenue model generates billions annually but inherently creates a conflict: the more generous the rating, the more likely the issuer will hire that agency again.

The Issuer-Pays Model

For decades, rating agencies funded themselves by selling credit reports to subscribers—banks, insurance firms, and investors who wanted opinions on creditworthiness. That changed in the 1970s and accelerated after the 1980s financial deregulation. Today, roughly 95% of agency revenue comes from issuers (or underwriters arranging issuances) paying for ratings upfront.

The economics are straightforward: a corporation planning a $500 million bond issuance contacts Moody’s or S&P, requesting a rating. The agency assigns an analyst team, models the company’s financials, compares the firm to peers, and delivers a rating—usually within a few weeks. The fee is typically 1–10 basis points of the issuance amount (1 basis point = 0.01%), yielding $50,000 to $500,000 per rating, depending on complexity and negotiation. A triple-A-rated mega-cap might pay $50,000; a riskier, smaller issuer might pay $200,000 or more (higher risk means more analyst time).

Repeat that across thousands of issuances per year, add subscription fees from institutional investors wanting access to agency platforms, and you arrive at a multi-billion-dollar enterprise. Moody’s generated ~$6.5 billion in revenue in 2023; S&P Global’s ratings division contributes a substantial portion of its ~$7 billion annual total.

The Conflict of Interest Problem

The flaw is structural: an issuer shopping for a rating knows that the agency is motivated to retain it as a client. If Moody’s rates a bond poorly while S&P rates it more favorably, the issuer is likely to hire S&P next time. Analysts are theoretically insulated from commercial pressure by compliance rules and legal liability, but they work for institutions whose compensation is tied to volume and client retention.

This dynamic gained visibility after the 2008 financial crisis. Agencies had rated mortgage-backed securities (MBS) and collateralized debt obligations (CDOs) at triple-A levels, even as the underlying mortgage portfolios deteriorated. Post-crisis research and litigation revealed that rating analysts had been aware of methodological shortcomings but had little incentive to downgrade aggressive assumptions that issuers (and their underwriters) were pushing for.

The problem is not that agencies always sell high ratings. Rather, it’s that the pricing mechanism—and client relationships—nudge them toward lenience at the margin. A company on the borderline between a single-A and triple-A rating faces an enormous value difference (lower-rated debt trades at higher yield); the issuer naturally prefers the higher rating, and the agency knows that a borderline triple-A decision will be remembered by that client’s CFO when the next issuance comes.

Regulatory Responses

After the 2008 crisis, regulators attempted to reduce the conflict. The Dodd-Frank Act (2010) introduced rules requiring agencies to separate commercial and analytical teams, disclose rating methodologies publicly, and prohibit certain conflicts. The SEC scrutinizes rating-shopping practices and enforces liability for egregiously reckless ratings.

But even with these safeguards, the structural incentive remains. An agency that consistently delivers unfavorable ratings loses issuers to competitors. An agency that consistently delivers generous ratings attracts deal flow but risks market backlash and regulatory fines if ratings prove catastrophically wrong.

Alternative Revenue Models

Some jurisdictions and market participants have explored subscriber-pays models, where investors (rather than issuers) pay for ratings. This inverts the incentive: an analyst wants credibility with subscribers, not with issuers. Japan’s rating agencies, including Japan Credit Rating Agency (JCR), have historically relied more heavily on subscription revenue, reducing issuer dependency.

Academic research suggests that subscription-funded raters produce more conservative and accurate ratings, particularly during credit bubbles. However, scaling a subscription model is difficult. Investors are reluctant to pay for data that is partially free (agencies typically publish ratings publicly), and the business model generates lower total revenue than issuer-pays. Most incumbent agencies have tried it as a secondary revenue stream (all three major agencies offer subscription platforms) but remain dependent on issuer fees.

Some issuers have explored unsolicited ratings—paying a third party to rate them, rather than soliciting a rating from Moody’s or S&P. But the market doesn’t price unsolicited ratings as heavily, so this remains a niche approach.

Market Concentration and Lock-In

The Big Three agencies (Moody’s, S&P, Fitch) control roughly 95% of the market, creating another incentive distortion. If a new, more rigorous rating agency entered the market and delivered consistently lower ratings, it would struggle to attract issuers—and thus couldn’t scale. The established agencies have a form of regulatory moat: investors and regulators are familiar with their methodologies and scale, making it costly to switch suppliers.

This concentration means issuers have limited alternatives if they dislike an agency’s rating approach. They can shop between the three, but they can’t easily vote with their feet by using an entirely different rater. An issuer facing an aggressive rating from Moody’s might approach S&P, hoping for a second opinion; but both agencies apply overlapping methodologies, and market-wide credit events (recessions, sector shocks) tend to move all three agencies’ ratings in the same direction.

Revenue Implications and Incentives

The issuer-pays model generates enormous profits: both Moody’s and S&P operate at ~40% operating margins in their ratings divisions, meaning nearly half of every rating fee flows to operating profit. This attracts investors to the agencies’ stock, which grows, which attracts more capital, which funds technological improvements and market dominance. The model is financially efficient but creates a stubborn misalignment between who pays (issuers) and who bears the risk if ratings are wrong (investors).

A perfectly competitive market would discipline this. But information asymmetries and regulatory reliance on Big Three ratings create stickiness. Investors trust established methodologies; regulators reference them in policy (the risk weights in bank capital adequacy rules depend on rating categories); and switching costs are high. This gives incumbent agencies pricing power and limited competitive pressure to improve accuracy.

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