What Is Corporate Credit Rating?
A corporate credit rating is an evaluation of the company’s creditworthiness. The information used to create a rating is gathered from companies with which the business has had financial relationships, such as suppliers or other lenders. Additional data can be gathered from corporate finance reports, business filings, or lawsuits.
How Does Corporate Credit Rating Work?
It is common today that credit rating agencies evaluate a corporation financial strength. By definition Corporate Credit rating agency is a private company whose purpose is to assess the ability of company either governments or private enterprises, to repay their debt. To do this, these agencies issue credit ratings based on the borrower’s ability to pay back the debt.
There are several factors which a credit rating used to measure the company fiscal position. These factors include size of the corporation, debt structure, company stock. By using a mathematical formula and consider these factors gives a credit rating.
What are the Top Corporate Rating Agencies?
The three biggest global rating agencies control 95% of the market. They include Fitch Ratings, Moody’s and Standard and Poor’s (S&P’s).These three companies providing opinions on credit worthiness in the US bond market and their opinion has been taken seriously by the investors.
S&P company issues credit ratings on debts such as government bonds, corporate bonds and countries. Moody’s Investors Service is a subsidiary of Moody’s Corporation and provides credit ratings, research and risk analysis. Fitch Rating was the first rating company to develop the “AAA” to “D” financial rating scale.
How to Read the Corporate Credit Rating Scales?
Corporate Rating agencies may use variations of an alphabetical combination of lowercase and uppercase letters, with either plus or minus signs or numbers added to further fine-tune the rating. The Standard & Poor's rating scale uses uppercase letters and pluses and minuses. The Moody's rating system uses numbers and lowercase letters as well as uppercase. Fitch Ratings with the words high and low replacing the + and –.
It goes as follows, from excellent to poor:
- AA+,AA,AA- (High grade),
- A+, A, A- (Upper medium grade),
- BBB, BBB+, BBB- (lower medium grade)
- BB+,BB-,BB (Non-Investment grade),
- CCC+, CCC, CCC- (Substantial risk),
- CC, C (Extremely speculative) and
- DDD,DD,D(In Default).
The following table gives an overview of the different rating symbols that Standard & Poor's and Moody’s issue:
Corporate Credit Rating Scale
|Standard & Poor's||Moody’s||Fitch Ratings||Grade||Risk|
|BB, B||Ba, B||BB, B||Junk||High|
The Advantages and Disadvantages of Corporate Credit Rating
Corporate credit ratings provide great advantages to issuers and investors. The companies have the advantage of rating helps investor to compare the issues by providing them a short and clear guide. Fair, honest and impartial rating motivates the public to invest their savings in company debentures, deposits, etc.
Thus, credit rating is beneficial to various parties like issuers, investors, regulators, brokers and financial intermediates. They all have a lot to gain from credit rating.
Corporate credit rating also has many disadvantages as the system relies heavily on expert judgments and subjective information. So, there is difficulty in objectively comparing and re-examining past credit assessments. credit rating agencies are not accountable for the ratings
given by them. If they do not work with high integrity and devotion, their ratings may mislead the investors. Further, the issuer company ‘s image may also be on stake due to this.
Thus, it must be concluded that credit rating agencies have played a vital role in a corporation overall financial position.