Much has been written recently about Standard & Poor's December 2007 decision to downgrade its Bermuda outlook rating from "positive" to "stable", while retaining its Bermuda credit (or debt) rating as "AA". Apparently, Bermuda's rating is very important and impacts on all of us who live on the Island ¿ and so the time seems right for a discussion of what rating agencies do, and who makes use of their opinions.

Credit rating agencies are firms that assess and provide opinions on the creditworthiness and financial ability of individuals, corporations or even, as we have seen in respect of Bermuda, countries and territories, which are referred to as "sovereign credit ratings". Sovereign credit ratings provide investors with a gauge of the applicable risk level of the investment environment of countries or territories, and consider a variety of factors, including political risk. Generally, investors use these ratings when seeking to invest abroad in such countries or territories. In light of the vast amount of information available to modern-day investors, some of it useful and some not, rating agencies provide a useful tool in sifting through the information and analysing risk. The methodologies employed by each rating agency differ. Standard & Poor's own website states that the firm is the world's foremost provider of independent credit indices, risk evaluation, investment research and data and that it provides investors with independent benchmarks in order to provide them with confidence about their investments and financial decisions. Rating agencies are regulated and operate differently depending on the jurisdiction in which they operate.

The US Securities and Exchange Commission (SEC) has registered seven rating agencies, which are referred to as "Nationally Recognised Statistical Rating Organisations". These firms are:

¦ A.M. Best Company, Inc.

¦ DBRS Ltd.

¦ Fitch, Inc.

¦ Japan Credit Rating Agency, Ltd.

¦ Moody's Investors Service, Inc.

¦ Rating and Investment Information, Inc.

¦ Standard & Poor's Rating Services

As the regulatory requirements applicable to rating agencies vary by jurisdiction, the International Organisation of Securities Commissions has, through its Technical Committee, developed Principles and a Code of Conduct Fundamentals for Credit Rating Agencies. These requirements are designed to set out how ratings firms should operate and the manner in which market participants should use the opinions of these firms.

Rating agencies are themselves not always free from criticism. Accusations include anti-competitive behaviour, conflicts of interest and a lack of accountability. According to recent reports, these firms are struggling with criticism over their failure to spot signs of the global credit crunch. The SEC and Congress in the US are investigating rating agencies in respect of the firms' positive assessment of mortgage-backed securities leading up to the collapse in the US home loans market. Indeed, these criticisms have led to job cuts at Standard & Poor's.

Notwithstanding the criticisms that have been levelled against rating agencies, it is an undeniable fact that they perform an essential function in modern financial markets and transactions. While it may be that rating agencies will come under increasing scrutiny and regulatory oversight in the future, the ratings and opinions that these firms provide will continue to be closely monitored and influence investment decisions internationally.

Jeffrey Kirk is an attorney in the Insurance Team within the Corporate and Commercial Practice Group of Appleby. A copy of Mr. Kirk's column can be found on the Appleby website at www.applebyglobal.com This column should not be used as a substitute for professional legal advice. Before proceeding with any matters described herein, persons are advised to consult with a lawyer.