Key Notes On Credit Ratings And Their Impact

Introduction 

A credit rating determines how creditworthy individuals, groups, enterprises, non-profit organisations, governments, and even nations are. Credit ratings determine whether a borrower is authorised for credit and, if so, at what rate of interest will the loan be repaid. Special credit rating agencies assess borrowers’ financial risks to decide whether they will be able to repay loans on time. Credit rating agencies calculate this rating using a complete report that considers various characteristics, such as lending and borrowing history, capacity to repay debts, past debts, future economic potential, etc. An individual’s credit rating influences the likelihood of acceptance and favourable conditions for a loan. 

Credit ratings are prospective

S&P Global Ratings analyses current and historical data and assesses the possible impact of foreseeable future events as part of its rating process. For example, when rating a company as a debt issuer, the agency may consider expected business cycle ups and downs that might influence the company’s creditworthiness. While rating agencies’ far-sighted opinions can be helpful to investors and market participants making long or short-term investment and business decisions, credit ratings do not guarantee that an investment will pay out or that it will not default.

Credit ratings do not reflect the viability of an investment

While investors may use credit ratings to help them make investment decisions, they are not indicators of investment value. The ratings don’t buy, sell, or hold advice, nor are they an indicator of asset worth. They’re also not meant to indicate whether an investment is suitable. They handle one facet of an investment decision—credit quality—and, in certain situations, what investors might expect to recoup if a company defaults.

In addition to credit quality, investors should evaluate the current make-up of their portfolios, their investment strategy, and the time horizon of the security’s relative value in contrast to other securities they may pick when assessing an investment.

For instance, while a car’s reputation for reliability is significant, it is not the only factor drivers consider while making their purchasing decisions.

Credit ratings may make issuing and acquiring bonds and other debt issues easier by providing an efficient, generally recognised, and long-standing gauge of relative credit risk. Investors and other market players can use the ratings as a screening tool to match the relative credit risk or particular debt issue with their risk tolerance or credit risk standards in making investment and business choices. When evaluating the purchase of a municipal bond, an investor would look to determine if the bond’s credit rating is appropriate for the degree of credit risk they are prepared to take.

Credit rating: An issue 

S&P Global Ratings evaluates the credit quality of an individual debt issue, such as a corporate or municipal bond, using information from the issuer and external sources, among other factors, to determine the issuer’s credit quality and the chance of default. Before analysing the credit quality of given debt issuance, rating agencies usually survey the issuer’s creditworthiness in the case of bonds issued by firms or governments.

Investment recovery after a default

In the case of default, credit rating agencies may analyse recovery, which is the possibility that investors would collect the unpaid amount of their capital. Some rating agencies use recovery to determine the credit quality of an issue, especially for non-investment grade debt. Other rating organisations, such as S&P Global Ratings, provide recovery ratings in addition to debt ratings. Issuers, debt instruments and bank loans all have different credit ratings. S&P Global Ratings may also use recovery ratings when modifying a debt issue’s credit rating compared to the issuer’s credit rating.

Surveillance: Monitoring creditworthiness

Agencies often keep track of changes that might impact an issuer’s credit risk or a specific debt issuance for which they have assigned a rating opinion. In the instance of S&P Global Ratings, this surveillance maintains the rating current by detecting concerns that might result in an upgrade or degradation. While performing its surveillance, S&P Global Ratings may evaluate various reasons, including changes in the business climate or credit markets, new technology or competition that might harm an issuer’s profits or forecast revenues, issuer performance and regulatory developments.

Credit ratings have an impact on borrowing countries’ policies

A borrowing country’s types of credit rating decrease its access to credit and borrowing costs (Cantor and Packer, 1996). Although specific information on how CRAs weigh macroeconomic policies when determining sovereign ratings is not accessible, it is plausible to conclude that orthodox policies concentrating on lowering inflation and government budget deficits are preferred. As a result, there is a danger of preventing rating downgrades; borrowing nations implement policies that cater to portfolio investors’ short-term concerns, even if they contradict long-term development goals. However, this is a topic that has not yet been thoroughly researched.

Conclusion

Credit ratings are one tool that investors may use to help them decide whether to buy bonds or other fixed-income instruments. Ratings contribute to capital markets’ growth and efficient operation. Capital enables individuals to establish and expand enterprises; communities and states to construct highways and hospitals; and manufacturers to build factories and generate employment. Ratings are unbiased assessments of creditworthiness expressed in a standardised language that can assist investors in making informed investment decisions. S&P Global Ratings is a prominent source of independent credit ratings and research, with a global outlook and local knowledge.