Академический Документы
Профессиональный Документы
Культура Документы
Saunders Learning
Saunders Learning Group,
Group, LLC, LLC
Andover, KS
Topics
Saunders Learning
Saunders Learning Group,
Group, LLC, LLC
Andover, KS
Credit Rating
A credit rating estimates the credit
worthiness of an a financial security, a
corporation, local government or even
a country.
It is an evaluation made by credit reporting
agency of a risk of buying into a specific
security offering and based on a number
of factors.
Credit ratings are calculated from financial
history and current assets and liabilities.
Typically, a credit rating tells a lender or
investor the probability of the subject being
able to meet payment requirements for
interest and principal repayment.
Building
Pricing
Portfolios
Credit
Ratings
Contracts Trading
Regulatory
Requirements
Credit ratings are critical to the activities of securities markets, as they are depended on to create and
manage investment portfolios, the pricing of new securities, trading of securities, financial contracts (and
loans) and for some financial institutions to meet regulatory requirements.
Saunders Learning
Saunders Learning Group,
Group, LLC, LLC
Andover, KS Slide 8
Credit Reporting Agencies
Function Provides investors with unbiased reviews and opinion as the credit risk of
various securities.
A.M. Best; Credit Analysis & Research (CARE), India; Dominion Bond Rating
Example Service, Canada; Fitch Ratings, U.S. & UK; Investment Information and Credit
Companies Rating Agency (ICRA), India, Moody’s, S&P. Complete list @:
http://www.defaultrisk.com/rating_agencies.htm
Formation of public policy: Once the debt securities are rated professionally, it
would be easier to formulate public policy guidelines as to the eligibility of
securities to be included in different kinds of institutional portfolios.
Analysis
Adjusted Financial
Statement Data
Rating Committee
Other Company
Package and
Specific Data
Recommendation
Industry / Macro
Economic Data
Analysis
Key metrics
Weigh
Indicative Rating
Final rating
The typical methods used by credit rating agencies to compare a individual rating analysis to key
metrics about that company, and benchmark data to weighted values and produce an indicative
rating. This is then reviewed internally to produce a final rating.
An investor uses the ratings to assess the risk level and compares the offered rate of
return with his expected rate of return (for the particular level of risk) to optimize his
risk-return trade-off.
The risk perception of a common investor, in the absence of a credit rating system,
largely depends on his familiarity with the names of company and what they might
know about the company.
It is not feasible for the corporate issuer of a debt instrument to offer every
prospective investor the opportunity to undertake a detailed risk evaluation.
For the typical investor, it would difficult to assess all of the financial information
available to assign their own risk ratings.
Thus the need for credit rating in today’s world cannot be over emphasized.
Saunders Learning
Saunders Learning Group,
Group, LLC, LLC
Andover, KS 14
Nationally Recognized Statistical Rating
Organization
Adjusted Financial
XYZ Company DATABASE Statement Data
Saunders Learning
Saunders Learning Group,
Group, LLC, LLC
Andover, KS
Slide 23
Rating Methodology
The methodology for creating a rating involves an analysis of all the factors
affecting the creditworthiness of an issuer company: business, financial and
industry characteristics, operational efficiency, management quality, competitive
position of the issuer and commitment to new projects etc.
• A detailed analysis of the past financial statements is made to assess the
performance and to estimate the future earnings.
• The company’s ability to service the debt obligations over the tenure of the
instrument being rated is also evaluated.
• In fact, it is the relative comfort level of the issuer to service obligations that
determine the rating.
A rating analysis includes the following factors:
1. Business Risk Analysis
2. Financial Analysis
3. Management Evaluation
4. Geographical Analysis
5. Regulatory and Competitive Environment
6. Fundamental Analysis
Ba(1-3)
B(1-3)
Caa(1-3) Outlook =
likely direction
High Ca
Yield
C
In default,
little prospect of recovery
Saunders Learning Group, LLC, Andover, KS 30
Rating Categories
Ratings are constructed to represent the risk of default;
that is, a high (low) rating implies a low (high) probability of
default.
Default refers to any event that results in the issuer’s
breaching its financial contract.
Large companies with strong and stable cash flows are likely to
be rated higher than small companies with more volatile cash
flows.
Investment grade refers to the safest levels of financial
securities.
Investment-grade securities have historically exhibited
relatively low rates of default.
Speculative grade, or noninvestment grade, refers to the
riskier securities.
Debt rated BB (Ba for Moody’s) or below is noninvestment
grade, and is sometimes referred to as “high yield” or “junk.”
Default rates among these classes of securities are
comparatively high.
Within the major rating categories (AA, A, etc.), credit
ratings are often modified to show relative standing within
a category.
Moody’s uses numbers 1, 2, and 3, while S&P and Fitch use
plus (+) and minus (−) signs.
Saunders Learning
Saunders Learning Group,
Group, LLC, LLC
Andover, KS Slide 34
Benefits of Ratings
Saunders Learning
Saunders Learning Group,
Group, LLC, LLC
Andover, KS