Credit Rating is a rating of the borrower. Transactions in the capital market are inherent in taking a risk. Purchase of securities can be a good or a bad investment. There are many shares and issuers on the market. As in such case, how to get the information about which borrower is in good financial condition, and which is in wrong? This is, after all important for the value of bonds that an investor is going to buy. Will the borrower be solvent?
The basic information for the evaluation of borrowers can be obtained through companies specialized in the evaluation of issuers (borrowers). They examine the financial position (financial standing) of the issuer, ie. companies, institutions. On this basis they give an assessment of the quality of the issuer, and therefore of the loan. This evaluation is important for the investor who by buying bonds provides a credit for the issuer. The activities of these companies, specifying the position of the issuer, is for the safety of the transaction. The most well-known companies, operating in the assessment of borrowers and their classification, ie., Credit Rating, include:
– Moody’s Investors Service,
– Standard and Poor’s,
– Mikuni and Value Line.
Quality classifications made by these companies are of great importance in the market. These companies have a reputation and are known for reliability. Classifications organize borrowers by the quality. This facilitates orientation in the market for investors.
Let’s take a look at the example of a simplified classification of bonds according to Standard and Poor’s:
Ratings issued to bonds are in the range from AAA (highest quality) to D (lowest quality, progressive collapse of the issuer). Classification of (scale in general outline) company, “S and P” are as follows:
– AAA: highest quality
– AA: in relation to AAA the difference is just prestigious (the issuer is basically just as good)
– A: high quality,
– BBB: changing environmental conditions may cause the risk of non-repayment obligations,
– BB, B, CCC, CC – the issuer of getting an inferior position,
– C – the borrower does not pay interest,
– D – incredible debtor with payment arrears.
In addition to specialized companies also banks can prepare a classification, but on a slightly different basis. With the use of a different scale rating is made with respect to the whole countries and the banks themselves.