Credit rating agencies (CRAs) evaluate the creditworthiness of debtors such as individuals, companies, and governments. They establish a link between risk and return, with higher rated debt having a lower risk of default. CRAs issue short-term and long-term ratings for corporate and sovereign debt. Their role is to maintain investor confidence, protect less knowledgeable investors, and provide transparency about borrowers' ability to repay debt. CRAs analyze financial and other data to assess default probability, though ratings are not guarantees of repayment and do not consider other investment risks. While useful, credit ratings also have limitations such as potential bias, subjectivity, and responsiveness to changing conditions.

1. Role of Credit
Rating Agencies
(‘CRA’)
Team: Tejas Soman
Shochis N
Nikleshwar W
Mayur T
Yadnesh S
Manish S

2. MEANING
 A credit rating evaluates the credit worthiness of a debtor,
especially an individual, business (company) or a government.
 Credit Rating establishes a link between risk and return
The credit rating has an inverse relationship with the possibility of
debt default.
 An investor uses the ratings to optimize his risk-return trade-off.
Helps to purchase the bonds issued by companies and
governments to determine the likelihood that the issuer will pay its
bond obligations

3. TYPES OF RATINGS
SOVEREIGN CREDIT RATING:
The sovereign credit rating indicates the risk level of the investing
environment of a country
SHORT TERM RATING:
A short-term rating is a probability factor of a borrower going into
default within a year.
LONG TERM RATINGS:
A long-term rating is a probability factor of a borrower going into
default more than a year.
CORPORATE CREDIT RATINGS:
A short-term rating is a probability factor of an individual going
into default within a year.

4. ROLE OF CRA
 Maintenance of investors’ confidence in the market
 Protect the interest of investors who can not understand merits
of the debt instruments of a company
 Improves a healthy discipline on borrowers
 Determine the interest costs for companies
 Determine the eligibility of debt and other financial instruments
for the portfolios of certain institutional investors due to national
regulations that restrict investment in speculative-grade bonds
Continue...

5. ROLE OF CRA….
 CRAs analyze public and non-public financial and accounting
data as well as information about economic and political factors
that may affect the ability and willingness of a government or firms
to meet their obligations in a timely manner
 The most significant change in the recent relates to emphasis on
their accountability and more important, the caution in regulators'
use of ratings.

7. What a credit rating is not
 A CRA does not reflect other types of risk, such as market
or liquidity risks, which may also affect the value of a
security.
 CRA does not a consider the price at which an investor
purchased a security, or the price at which the security
may be sold.
 One should not interpret a credit rating as investment
advice and should not view it as a recommendation to
buy, sell, or hold securities.
 A credit rating is not a guarantee that a financial
obligation will be repaid. For example, an ‘AAA’ credit
rating on a debt instrument does not mean the investor
will always be paid with absolute certainty—instruments
rated at this level sometimes default.

8. Evaluation of Risks
Business
Risks
Financial
Risks

9. Business
Risk
Country
Risk
Company
Position
Industry
Factors
Profitability
/ Peer Group
Comparisons
• Political
• Economic
• Industry – Specific factors
• Foreign exchange
• Industry Trends
• Industry Structure
• Market Size
• Growth Potential
• Cyclicality
• Bases of Competition
• Changing Technology
• Operating Risk
• Regulatory Environment
• Competitive Factors
• Market position
• Keys to Success
• Size
• Diversification
• Management
• Validation of “Company
Position”
• Trends
• Quality of Earnings
& Analytical adjustments
• Peer Group Comparisons

10. Financial
Risk
Accounting
Cash Flow
Adequacy
Governance
Risk
Liquidity /
Short-term
Factors
• Accounting Regime
• Reporting & Disclosure
• Analytical adjustments
• Ownership
• Board of directors
• Management practices
• Financial Strategy
• Risk Tolerance
• Accounting Practices
• Internal controls
• Focus on debt
service capability
• Analytical distinctions with
profitability
• Cash flow measures /
• ratios
• Operating sources & uses
Of liquidity
• Other potential calls on
Liquidity
• Debt Characteristics
• Bank credit facilities

11. DEMERITS OF CREDIT RATING
 Possibility of Bias Exist
 Credit ratings are subjective
 Improper Disclosure May Happen
 Impact of Changing Environment
 Problems for New Companies
 Downgrading by Rating Agency

12. THANK YOU