12-08-2016, 09:38 AM
Credit Rating
A credit rating is an evaluation of the credit risk of a prospective debtor (an individual, a business, company or a government), predicting their ability to pay back the debt, and an implicit forecast of the likelihood of the debtor defaulting. The credit rating represents an evaluation of a credit rating agency of the qualitative and quantitative information for the prospective debtor, including information provided by the prospective debtor and other non-public information obtained by the credit rating agency's analysts.
Credit Ratings are issued by credit rating agencies (CRA) like ICRA, CARE , CRISIL, Standard& Poors, Moody’s and Fitch.
They assign ratings for several issuers (e.g. firms. nations and local governments) of specific types of debt.
Credit ratings try to capture the creditworthiness of corporations and provide an ordinal ranking of default risk across firms. Such rankings are based on a complex rating process due to the tact that credit ratings provide information about the quality of a firm beyond publicly available information. To set up the respective ratings, the agencies accumulate and evaluate qualitative information, such as the market share of the company and the competiveness within its industry as well as quantitative factors. Moreover, the agencies have access to insider information ratings therefore include estimates of the company’s development potential as well as their ways of financing. Consolidated credit ratings provide a lot of information on various aspects.
A sovereign credit rating is the credit rating of a sovereign entity, such as a national government. The sovereign credit rating indicates the risk level of the investing environment of a country and is used by investors when looking to invest in particular jurisdictions, and also takes into account political risk.
Corporate credit ratings apply solely to corporations. Credit rating agencies typically assign letter grades to indicate ratings. Standard & Poor’s, for instance, has a credit rating scale ranging from AAA (excellent) and AA+ all the way to C and D. A debt instrument with a rating below BBB- is considered to be speculative grade or a junk bond, which means it is more likely to default on loans.
Credit ratings for borrowers are based on substantial due diligence conducted by the rating agencies. While a borrower will strive to have the highest possible credit rating since it has a major impact on interest rates charged by lenders, the rating agencies must take a balanced and objective view of the borrower’s financial situation and capacity to service/repay the debt.
A credit rating not only determines whether or not a borrower will be approved for a loan, but also the interest rate at which the loan will need to be repaid. Since companies depend on loans for many start-up and other expenses, being denied a loan could spell disaster, and a high interest rate is much more difficult to pay back. Credit ratings also play a large role in a potential buyer's determining whether or not to purchase bonds. A poor credit rating is a risky investment; it indicates a larger probability that the company will not pay off its bonds. For more on why a high credit rating is essential for a business.
Why credit rating
· Independent & unbiased evaluation of credit quality
· Increased accessibility to funds from the capital markets for infrastructure projects
· Helps the investors in pricing the debt offer
· Increased marketability of debt issues by municipal entities
· Improved visibility - facilitate flow of international capital
· Indicative of transparency
· Benchmarking with other municipal entities and corporate entities - highlights strengths and weaknesses
· Use of market borrowings to bridge demand-supply gap in critical infrastructure can accelerate economic growth in the municipal area
· Municipal corporations like Ahmedabad, Bangalore & Nasik have used market borrowings to fund capital expenditure
· Helps in monitoring overall debt level & finances
CRISIL’s Credit Rating Methodology involves an in-depth assessment of the following factors
· Legal and administrative framework
· Economic base of the service area
· Municipal finances
· Existing operations of the municipal body
· Managerial assessment
· Project specific issues
· Credit enhancement structure
A credit rating is an evaluation of the credit risk of a prospective debtor (an individual, a business, company or a government), predicting their ability to pay back the debt, and an implicit forecast of the likelihood of the debtor defaulting. The credit rating represents an evaluation of a credit rating agency of the qualitative and quantitative information for the prospective debtor, including information provided by the prospective debtor and other non-public information obtained by the credit rating agency's analysts.
Credit Ratings are issued by credit rating agencies (CRA) like ICRA, CARE , CRISIL, Standard& Poors, Moody’s and Fitch.
They assign ratings for several issuers (e.g. firms. nations and local governments) of specific types of debt.
Credit ratings try to capture the creditworthiness of corporations and provide an ordinal ranking of default risk across firms. Such rankings are based on a complex rating process due to the tact that credit ratings provide information about the quality of a firm beyond publicly available information. To set up the respective ratings, the agencies accumulate and evaluate qualitative information, such as the market share of the company and the competiveness within its industry as well as quantitative factors. Moreover, the agencies have access to insider information ratings therefore include estimates of the company’s development potential as well as their ways of financing. Consolidated credit ratings provide a lot of information on various aspects.
A sovereign credit rating is the credit rating of a sovereign entity, such as a national government. The sovereign credit rating indicates the risk level of the investing environment of a country and is used by investors when looking to invest in particular jurisdictions, and also takes into account political risk.
Corporate credit ratings apply solely to corporations. Credit rating agencies typically assign letter grades to indicate ratings. Standard & Poor’s, for instance, has a credit rating scale ranging from AAA (excellent) and AA+ all the way to C and D. A debt instrument with a rating below BBB- is considered to be speculative grade or a junk bond, which means it is more likely to default on loans.
Credit ratings for borrowers are based on substantial due diligence conducted by the rating agencies. While a borrower will strive to have the highest possible credit rating since it has a major impact on interest rates charged by lenders, the rating agencies must take a balanced and objective view of the borrower’s financial situation and capacity to service/repay the debt.
A credit rating not only determines whether or not a borrower will be approved for a loan, but also the interest rate at which the loan will need to be repaid. Since companies depend on loans for many start-up and other expenses, being denied a loan could spell disaster, and a high interest rate is much more difficult to pay back. Credit ratings also play a large role in a potential buyer's determining whether or not to purchase bonds. A poor credit rating is a risky investment; it indicates a larger probability that the company will not pay off its bonds. For more on why a high credit rating is essential for a business.
Why credit rating
· Independent & unbiased evaluation of credit quality
· Increased accessibility to funds from the capital markets for infrastructure projects
· Helps the investors in pricing the debt offer
· Increased marketability of debt issues by municipal entities
· Improved visibility - facilitate flow of international capital
· Indicative of transparency
· Benchmarking with other municipal entities and corporate entities - highlights strengths and weaknesses
· Use of market borrowings to bridge demand-supply gap in critical infrastructure can accelerate economic growth in the municipal area
· Municipal corporations like Ahmedabad, Bangalore & Nasik have used market borrowings to fund capital expenditure
· Helps in monitoring overall debt level & finances
CRISIL’s Credit Rating Methodology involves an in-depth assessment of the following factors
· Legal and administrative framework
· Economic base of the service area
· Municipal finances
· Existing operations of the municipal body
· Managerial assessment
· Project specific issues
· Credit enhancement structure