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
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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.
6.
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.
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