Credit Rating Agencies
Credit Rating Agencies we mean an agency providing rating of “credit” taken by any company i.e. if any company wants to take any loan from the market they hire a credit rating agency to rate their loan so that the intended person providing the loan will have a fair idea about the risk associated with the loan they are providing to the company.
These credit rating agencies came to use in the market from early 20th Century when three rating agencies were formed which are Standard & Poor’s (S&P), Fitch and Moody’s, later on, many more credit rating agencies came into existence.
How does Credit Rating Agency work
When any company wants to issue any bonds or securities into the market, they tend to rate this debt instrument by any Credit Rating Agency so that they can attract more customers. Higher the rating of the debt lower is the risk associated with that debt and vice-versa. The intended buyer of the debt instrument often looks at the credit rating of the debt before investing their funds so that they can have a fair idea about the risk associated with their investments.
Once the companies approach the credit rating agency to evaluate their debt and rate the same the credit rating agencies check the following parameters:
- Subjective evaluation of the capacity of the company to repay the debt.
- Overall total debt of the company and its impact on the financial position.
- A thorough analysis of the finances of the company to ascertain the areas through which the principal and interest would be paid.
- Past debt repayment history of the company.
- A general study of the economy and industry in which the company is operating.
- The willingness of the company to repay its debt.
For example Bank Loan Rating Process & Methodology – by Fitch Ratings (In India) Source: www.fitchratings.com
The rating process typically takes six to eight weeks, and the steps involved are:
Step – 1 – Initiate Rating Process
Step – 2 – Collect publicly available information
Step – 3 – Perform pre-analysis & request non-public information, if appropriate
Step – 4 – Prepar a detailed questionnaire
Step – 5 – Hold meetings with entity management and other Stakeholders
Step – 6 – Perform in-depth analysis
Step – 7 – Draft report
Step – 8 – Hold ratings Committee
Step – 9 – Assign ratings, write & publish commentary
Step – 10 – Conduct ongoing surveillance
Repeat Step 2 to Step 10 (as required) before giving the final ratings
The above list is indicative and not exhaustive, and there are various other factors considered by credit rating agencies before giving a certificate on their credit rating. While issuing the rating certificate they also give an annexure wherein details are provided as to what assumptions they have taken or the method they have chosen to arrive at the ratings.
Grading by Credit Rating Agency
Ratings are divided into
- High grade
- Upper medium grade
- Lower medium grade
- Non-investment grade speculative
- Highly speculative
- Substantial risks or near default
- In default
However, there can be another grading also adopted by the agencies that shall be given in details in their report. But the basic fundamental remains the same – Highest – High – Moderate – Weak – Poor – Default.
In this article, we will cover a list of credit rating agencies sites in the world.
Credit rating is an important aspect of securities, especially bonds. There are several rating agencies in the world that analyze and give ratings to bonds and other securities. Let’s see the credit rating agencies listed as per their country.
The United States
2. Demotech, Inc.
8. Standard and Poors (S&P)
10. Veribanc, Inc.
The United Kingdom
2. Duff & Phelps de Colombia, S.A., S.C.V
2. China Lianhe Credit Rating, Co. Ltd.
3. Dagong Global Credit Rating Co., Ltd.
5. Shanghai Far East Credit Rating Co., Ltd.
1. Istanbul International Rating Services, Inc.
2. JCR Avrasya Derecelendime A.S.
4. Saha Kurumsal Yönetim ve Kredi Derecelendirme Hizmetleri A.Ş
Credit rating agencies in India
2. CRISIL, Ltd.
2. Interfax Rating Agency (IRA)
2. Ecuability, SA
2. Mikuni & Co., Ltd.
2. Korea Ratings Corporation
This is a partial list. You may Google to find out credit rating agencies in other countries.
To sum up in today’s date credit rating agencies play an important role in debt instruments, investors often decide on their investment decision based on the ratings provided by the credit rating agencies since it is third party rating and an unbiased one.
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At the same time it also has its limitations since the method of ratings are not universal each rating agency can have their methodology of ratings the debt of the company further, the company themselves appoint the agencies to rate their debt, and the payment is made by the company, so there are chances that the company manipulates the agencies to obtain a better credit rating.
So it's up to the investors to decide on the ratings and as such the goodwill of the rating agencies matters the most.