CREDIT RATING AGENCIES

Function, role and power of Credit ratings

Function, role and power of Credit ratings

Introduction

What are credit ratings?

I have prepared this essay to highlight the function, role and power of credit ratings. Credit rating is a series of indicators provided by various specialized and independent companies that indicate the general creditworthiness of a financial institution, a company, a country or its emissions of debt in particular. Creditworthiness is the ability to pay off debt issued via bonds, debentures, etc. The various financial instruments classify companies according to a scale specific to each company, by initials, which represent the risk of default of the issuer of the financial assets (Ong, 2002, Pp 85).

Discussion

Activities of top credit rating agencies:

Credit rating companies rate the emissions depending on the term of issue and related factors (www.spigel.de). According to my observation the standards used to establish the soundness and stability are:

Operations in the long term:

Stable Investments:

AAA: The highest rating for a reliable and stable company.

AA: Quality companies with very stable and low risk.

A: Companies whose finance functions can be affected by the economic situation.

BBB: Medium class companies in good standing at the time of qualification.

Risky or speculative investments:

BB: Very susceptible to economic changes.

B: The financial situation undergoes significant variations.

CCC: Vulnerable at the time and highly dependent on the economic situation.

CC: Very vulnerable and highly speculative.

C: Highly vulnerable to risk of default.

Short term operations:

A-1: The obligor has full capacity to meet the debt.

A-2: The obligor has the capacity to meet the debit even if the bond is likely to vary against adverse economic conditions.

A-3: Adverse economic conditions may determine the responsiveness of the obligor.

B: Speculative level is important.

C: Very speculative and dubious of required responsiveness.

D: Recovery impossible.

In all cases, the symbol [+] after the rating (to a maximum of three symbols, for example, BBB + +) is used to evaluate the intermediate situations, more positive symbol meaning that the closer is the next highest level (Collins, 2011, Pp.211-245).

Top firms of credit rating:

The top firms of credit rating are Moody's Investor Service, Standard & Poor's (S&P) and Fitch Ratings Inc (www.chartsbin.com).

Significance of credit rating:

I consider Credit rating as an important and indispensable tool of the financial market, which leads to transparent and efficient relations between borrower and investor. Credit rating on a national scale is a current opinion of the rating agency about the creditworthiness of certain borrower as a whole (borrower rating) or in respect of a debt instrument (the rating of a debt instrument). Credit rating is a versatile tool for assessing the reliability of the borrower's debt obligations and establishes fees for the appropriate credit risk. Credit rating is an assessment of the borrower's financial condition, and for each counterparty has its own method of evaluation - for businesses, banks, municipalities, insurance companies, etc. Rating report allows potential investors to offer the most favorable conditions. Furthermore, the fact that cooperation with the borrower's credit rating agency often is an additional argument for the investor.

The conclusions of experts on the financial condition and business performance are ...