Credit Rating Agencies

Credit rating is an opinion of a Credit Rating Agency (CRA) on the likelihood of timely payment of interest and principal (credit risk) on the rated debt instrument. A credit rating agency (CRA) is a company that assigns credit ratings for issuers of certain types of debt obligations as well as the debt instruments themselves. Credit ratings are used by investors, issuers, investment banks, broker-dealers, and governments. For investors, credit rating agencies increase the range of investment alternatives and provide independent, easy-to-use measurements of relative credit risk; this generally increases the efficiency of the market, lowering costs for both borrowers and lenders.

Symbols for credit rating are based on Issuer Company’s operational efficiency, its strengths and weakness, level of technological development, financials, competence and effectiveness of management, past record of debt servicing, etc. Each rating symbol is a representation of the degree of repayment risk associated with debt instruments.

Symbol

AAA      Highest Safety

AA         High Safety

A            Adequate Safety

BBB       Moderate Safety

BB         Inadequate Safety

B            High Risk

C            Substantial Risk

D            Default

 Depending on the type of debt instrument that is rated (long term, short term or fixed deposits), rating symbols vary. The debt instruments rated ‘BBB’ and above are classified as investment grade ratings. Instruments that are rated ‘BB‘ and below are classified as speculative grade category ratings in which case the ability to meet the payment obligations is considered to be “speculative”. Instruments rated in the speculative grade are considered to carry materially higher risk and a higher probability of default compared to instruments rated in the investment grade. Credit Rating Agencies are required to continuously monitor the rating of debt instrument till its maturity and carry out periodic reviews of all published ratings. In case of any changes in the ratings so assigned, the agencies are required to disclose the same through press releases and on their respective websites.