WHAT IS A CREDIT RATING?
A credit rating is
- An opinion that provides a measure of credit quality
- An unbiased, independent, third-party evaluation of an issue or issuer
- A grading system which focuses on a company’s capability and willingness to pay its obligations upon maturity
- A tool that can be used by investors, regulators, and the general public to augment their own assessment of a particular investment
A credit rating is not
- A guarantee against future losses
- A recommendation to buy or sell a specific security
TYPES OF CREDIT RATING
ISSUE CREDIT RATING
- An assessment of a company’s capability to pay a specific debt instrument according to the terms (e.g. amount and maturity) of the issue
ISSUER CREDIT RATING
- A measure of a company’s overall creditworthiness
- Sometimes called a corporate credit rating, a company rating or a counterparty credit rating
FINANCIAL STRENGTH CREDIT RATING
- Evaluates the financial security characteristics of insurance companies.
USES OF CREDIT RATINGS
Credit ratings contribute to capital markets development. Through credit ratings, improved disclosure and transparency are achieved, thereby making the financial markets more efficient. In particular, these can be used by the following capital market participants for various purposes.
Companies
FUNDRAISING
Tapping the capital markets for funding provides a company with improved financial flexibility and can allow it to negotiate for better terms and interest rates. Credit Ratings can also provide access to other forms of financing.
MARKETING AND BENCHMARKING
Through the rating process, a company’s strengths, weaknesses, opportunities and threats can be highlighted.
Investors, Regulators, and the General Public
EVALUATION AND MONITORING OF SPECIFIC COMPANIES/INVESTMENTS
Credit rating is a tool that can be used to augment their own assessment of a particular investment. Credit rating agencies typically have access to confidential information which are not readily available to other market participants.