By Vishweshwar HS, www.showmytrade.com
A credit rating agency quantifies the risk or creditworthiness (debt and financial obligation) of a borrower. A credit rating agency assigns credit ratings to a company, individual, state, statutory authority, or sovereign government.
A credit rating does a qualitative and quantitative assessment of a borrower’s creditworthiness. It also provides critical data points for equity investors and traders too.
If a credit rating agency upgrades a company’s rating, it indicates that the company has a higher chance of repaying its debt obligation. On the other hand, if the credit rating gets downgraded of a company, it indicates the company’s ability to repay has been reduced.
Once the company’s credit rating has downgraded to a higher risk level, it isn’t easy for the company to borrow money at favorable terms. Lenders look at it as a high-risk borrower (high probability of default). Financial institutions will not take much interest to lend money to companies with low credit ratings.
Top credit rating agencies in India are:
Each rating agency has its method to calculate credit ratings and assign ratings to companies, state governments, non-profit organizations, countries, securities, special purpose entities, and local governmental bodies.
Credit rating agency assigns ratings to vary from highest safety to default status.
Highest safety: lowest risk of turning into a defaulter: AAA
High safety: very low credit risk: AA
Low risk: A
Moderate safety: moderate credit risk: BBB
Moderate risk: moderate risk of default: BB
High risk: high risk of default: B
Very high risk: very high risk of default the obligation: C
Default: already in default or on the verge of default: D
Key benefits that help the investor and traders analyze are:
The credit rating report is a crucial resource for business information. Any business-sensitive information that is not available in the public domain is available in the credit rating report. The economic moat, the business advantage, capacity utilization, future expansion plans, etc. we can obtain such information from the credit reports.
Credit rating analysts have access to most of the information privy only to company management. It is essential to assess the credit strength of any company as an investor and trader to know. A summary/glimpse of crucial sections of such information helps the investor or traders to make an informed decision.
Credit rating reports are prepared by financial analysts who analyze the company’s financial information, including annual reports while making the reports. Apart from the company’s statutory auditor, a third-party credit agency checks the financial information that helps the investor to analyze for the authenticity of the data.
The positive rating movements of a company from “A” whose credit rating has improved from BBB- to A- over the years helps us understand the fundamental strength of the company. Similarly, if the rating is falling over the years, investors/traders should be careful about the company.
Credit ratings given to companies serve as a benchmark for financial market regulations. However, the ratings should not be considered as advice for investors and instead should use as a tool to make a sound decision. Critics say credit ratings are issuing a warning when something wrong happens, rather than of advice in advance. However, credit ratings are a useful kit for the investor and traders to analyze more in-depth into the company they are studying.
Kindly share your comments on the “How to Use Credit Rating Reports for Investors/Traders?” below. Any suggestions regarding this article will update in the next edition.
Thanks for reading.
Good Earning!
