Credit Rating – Analyzing The Credit Risk Of A Prospective Debtor

What is a Credit Rating?

A credit rating is a process of trying to know the credit risk of a debtor (an individual, a business, company, or a government), to predict their ability in paying back the debt. It seeks to know, if the debtor may default on the loan payment. It also flags a quick check of a credit rating agency which analyzes details for the prospective debtor. This includes details offered by the to be a debtor and other non-public details.

Credit Rating

Credit Ratings is Evaluated by Who?  

Credit ratings are checked by a credit agency. An agency evaluates the credit rating of a debtor by checking the attributes of the entity in question. The details can be gotten from internal details provided by the entity like audited financial statements, annual reports.  External information like analyst reports, published news articles, overall industry analysis, and projections.

A credit agency on the other hand is not involved in the deal.  Therefore, its thought to provide a fair opinion of the credit risk carried by an entity that is seeking to raise money. This could be: via loans or bonds issuance.

Currently, three popular credit agencies control 85% of the overall rating market. They include Moody’s Investor Services, Standard and Poor’s (S&P), and Fitch Group. Each of these agencies makes use of unique, but similar rating styles to indicate credit ratings.

Sovereign Credit Ratings

This rating is the rating of an entity like the state. It indicates the risk level of the investing room of a country. And it is used by investors when booking to invest in a sector.

Short – and long-term ratings

Typically, a time frame of one year or under is seen as short term in rating. Anything above that is seen as long term.

Types of Credit Ratings

Every credit agency has its own way of arriving at credit ratings. However, the processes are very similar among the three credit agencies. Ratings are grouped into two. They are below

Investment Grade:

This rating is one that is seen as solid by the rating agency. Here the issuer is likely to honor the terms of payback. And they are usually less priced.

Speculative Grade:

This investment is high risk and as such, offer higher interest rates to depict the quality of the investments.

Users of Credit Ratings

Credit ratings are used by investors, banks, debt issuers as well as companies.

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