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by GoldenPi
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Credit Rating Agencies

You must have heard the phrase “The Zero Moment of Truth.” Zero moment of truth is all about the research we do on the product before we purchase it. Whether we are buying a villa or vase, we go through reviews and ratings. The same happens in the bond market as well. Here the rating is a systematic process executed by independent organizations, and they are called Credit Rating agencies. Credit rating agencies are well-regulated entities. Let’s discuss more about Credit Rating Agencies (CRA).

The credit rating is an evaluation of prospective debtors. The debtor could be a country or organization that owes money. Credit Rating Agencies study the debtor’s credit history and predict the ability to pay back the bonds or other debt instruments and a forecast on anticipated debtor defaulting. Credit ratings help both institutional and individual investors to invest appropriately.

 


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A credit rating agency is a company that assigns credit ratings.
Credit Rating Agencies consider the following factors to understand and predict the creditworthiness of the borrower.

  • Financials: Financials include the income statement, balance sheet, and cash flow.
  • Performance: The performance of a company is determined based on production, sales, sales growth, and market coverage. 
  • Management Quality: An organization with a value-based leadership team that is compliant with regulations performs better in the long run and sounds promising to the investors.  
  • Prospect of usage of the fund: Understanding the business development strategies and purpose of fundraising. 
  • Payment History: Payment history includes repaying debts, dividends, taxes, and compensation to the employees. 

The CRA and issuer make a contract. Credit rating agencies periodically collect credit history, credit type, duration, credit utilization, credit exposure, etc. They collect other financial details from banks and Financial Institutions that are related to the issuers. Considering all these collated data, agencies generate a report. These ratings guide investors and banks to make investment decisions. The CRAs disclose the report even if the issuer doesn’t accept the report and ratings. But the issuer can appeal to CRA to review the rating.

Credit Rating Agencies provide a later based rating. In India, “AAA” to “BBB” rated bonds are considered relatively safer instruments, and bonds rated below “BBB” are considered relatively riskier instruments.

Benefits of Credit Rating

For Investors :

It helps the investors to make better decisions. A high credit rating means an assurance about the safety of the money and that it will be paid back with interest on time and principal amount on maturity.

For companies(issuers):

For borrowing companies (issuers), credit rating works as a tool to convince investors. It facilitates the capital raising and saves time.

Top Credit Rating Agencies 

Moody’s:

Moody’s was founded in the year1909 by John Moody is headquartered in Newyork. Later in 1962, it was acquired by Dun and Bradstreet. Moodys rate the commercial and public debt securities that include G-Secs, corporate bonds, money market funds, fixed-income funds, and hedge funds.

Fitch:

John Knowles Fitch founded Fitch rating in 1914. It is headquartered in Newyork. FIMALAC acquired it in 1997. The fact to be is Fitch delivered risk management software to IBM.

Standard and Poor’s:

Standard and Poor’s is one of the three largest CRAs in the world. Its a subsidiary of S&P Global. S&P Global was founded in 1860 headquartered in Newyork.


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CRISIL:

CRISIL was incorporated in 1987. CRISIL happens to be the first credit rating agency in the country. It offers eight types of credit rating, which are as follows:
AAA, AA,  and A ratings indicate a higher level of safety.
BBB and BB ratings indicate medium safety.
B, C, and D ratings indicate a lower level of safety.

ICRA:

ICRA was established in 1991. ICRA is headquartered in Mumbai. Its rating system includes symbols that are mapped to the list of financial instruments. The rating services of ICRA are:

  • Bank Loan Rating
  • Public Finance Rating
  • Corporate Governance Rating
  • Infrastructure Sector Rating
  • Insurance Sector Rating

CARE:

Credit Analysis and Research Limited (CARE) has been functioning since 1993. Its rating scale includes two categories – long term debt instruments and short term debt ratings.

 

CRAs study the overall economic condition of different countries. They consider political stability, capital market transparency, foreign currency reserves, and investments. CRAs prepare reports on the government’s general creditworthiness and give credit ratings called a sovereign credit rating.

 

The credit rating agencies are well-regulated by SEBI Credit Rating Agencies Regulations, 1999 of the Securities and Exchange Board of India Act, 1992. SEBI has a detailed framework of guidelines to control the operations of CRAs to protect investors’ interests. Hence investors can rely on credit ratings and make investment decisions.

 


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You, as a bond investor, are trying to know what Bond Rating is?

Credit rating is the rating given to the issuer, and whereas Bond-rating is the rating assigned to the Bond, i.e., the issue. Rating the issuer and rating the issue are like two faces of the same coin. In either case, the process and purpose remain the same. The same issuer may offer multiple issues; hence having a different rating system for the issuer, and each of the issues helps the issuer to make informed decisions.

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9 comments

K. S. Narayan November 22, 2020 - 12:35 am

Great information of CRAs.
But a given rating shall take care of all aspects of a company , with out investor going into other details. But I see ‘A’ rating for shriram transport ( example ) is given for both its secured bons aa well as UNSECURED bonds . But it is always preferable to go for secured bonds . But why same rating is given example ‘ A ‘ for these bonds ?
Please clarify.

Reply
GoldenPi
GoldenPi November 25, 2020 - 6:45 am

Credit rating takes into account a lot of parameters specific to a bond tranche. Every bond tranche, even from the same issuer, is invested separately into business activities with varying safety levels, assurance of capital invested, risk levels in the business area in which the bond money is invested, etc. There could be two tranches of bond from the same issuer, and one tranche is tagged “secured” and the other “unsecured.” The point to be noted here is that there are many different parameters considered for evaluation in addition to the security of the bond. The overall weighted average/ assessment across all such parameters for these two bond tranches can mark both the bonds in the same zone of safety/ risk. This is the probable cause of the same rating across the two tranches of bonds from Shriram.

Keep reading; keep exploring. We would be glad to answer your queries.
GoldenPi Team

Reply
julius moylan December 12, 2020 - 4:28 pm

if golden pi shut the business in future
then how can investors redeem the amount invested in a bond after maturity

Reply
GoldenPi
GoldenPi December 14, 2020 - 5:13 am

Hi Julius,

Rest assured that your investment is safe. GoldenPi is only an enabler of transactions in bonds. Even in the unlikely case of us shutting down in the future due to some unforeseen circumstances, your investments will remain intact. You will continue to hold your Bond units in your Demat account and receive the Bonds’ regular interest payouts into your Bank Account. On maturity, the Bond’s face value will be credited to your bank account, as well.

Thanks for visiting our website.

Regards
Sushma

Reply
Anu Dev M February 28, 2021 - 6:53 pm

In credit rating AAA- means?

Reply
GoldenPi
GoldenPi March 1, 2021 - 4:40 am

Hi Anu,

‘AAA ‘ is the highest rating that can be assigned to a bond or bond issuer. ‘AAA ‘ indicates a high level of creditworthiness. AAA-rated bonds are considered investment-grade bonds.

We hope you find this answer helpful. Thanks for reaching us.

Regards
GoldenPi Team

Reply
RKSHARMA March 1, 2021 - 11:53 am

what is means of A- RATING

Reply
GoldenPi
GoldenPi March 9, 2021 - 11:47 am

Every Credit Rating Agency presents ratings in a unique format. However, “Rating- A” is a good rating indicating a relatively higher level of creditworthiness.

Reply
GoldenPi
GoldenPi March 19, 2021 - 11:10 am

Hi,

A bond with an “A -Rating” is considered an investment-grade bond that indicates a relatively higher safety level.

Regards
Sushma

Reply

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