Rating FAQ’s

Credit rating is an opinion expressed by an independent professional organization, after making a detailed study of all relevant factors. Such an opinion enables investors in making investment decisions. It also helps the governments and corporations to raise money from the capital markets to price their issues correctly and to reach out to new investors. In general, credit rating is expected to bridge information asymmetry in the market and establish, over time, a more meaningful relationship between the quality of debt and the yield from it. 

The advantage of rating symbols is their simplicity, which facilitates universal understanding. Rating companies also publish explanations for their symbols used as well as the rationale for the ratings assigned by them, to facilitate deeper understanding. 

It does not. The reason is that some factors, which are of significance to an investor in arriving at an investment decision, are not taken into account by rating agencies. These include reasonableness of the issue price or the coupon rate, secondary market liquidity and pre-payment risk. Further, different investors have different views regarding the level of risk to be taken and rating agencies can only express their views on the relative credit risk. 

A credit rating is a professional opinion given after studying all available information at a particular point of time. Nevertheless, such opinions may prove wrong in the context of subsequent events. Further, there is no privity of contract between an investor and a rating agency and the investor is free to accept or reject the opinion of the agency. Nevertheless, rating is essentially an investor service and a rating agency is expected to maintain the highest possible level of analytical competence and integrity. In the long run, the credibility of a rating agency has to be built, brick by brick, on the quality of its services. 

To answer the second question first, it is neither possible nor even desirable, to totally eliminate the subjective element. Ratings do not come out of a pre-determined mathematical formula, which fixes the relevant variables as well as the weights attached to each one of them. Rating agencies do a great amount of number crunching, but the final outcome also takes into account factors like quality of management, corporate strategy, economic outlook and international environment. To ensure consistency and reliability, a number of qualified professionals are involved in the rating process. Ratings are assigned by Committees, not individuals. Rating agencies also ensure that the rating process is insulated from any possible conflicts of interest. 

The answer to both the questions is yes. In the well-developed capital markets, debt issues are, more often than not, rated by more than one agency. And it is only natural that the opinions given by two or more agencies will vary, in some cases. But it will be very unusual if such differences are very wide. For example, a debt issue may be rated DOUBLE A PLUS by one agency and DOUBLE A or DOUBLE A MINUS by another. It will indeed be unusual if one agency assigns a rating of DOUBLE A while another gives a TRIPLE B. 

A rating is an opinion given on the basis of information available at a particular point of time. As time goes by, many things change, affecting the debt servicing capabilities of the issuer, one way or the other. It is, therefore, essential that as a part of their investor service, rating agencies monitor all outstanding debt issues rated by them. In the context of emerging developments, the rating agencies often put issues under rating watch and upgrade or downgrade the ratings as and when necessary. Normally, such action is taken after intensive interaction with the issuers. 

Yes. In a situation where an issuer is unhappy with the rating assigned, he may request for a review, furnishing additional information, if any, considered relevant. Such representations are placed before the Rating Committee. 

Both. Rating of instruments would consider instruments’ specific characteristics like maturity, credit enhancements specific to the issue etc. Issuer ratings consider the overall debt management capability of an issuer on a medium-term perspective, typically three years. While issuer ratings are more often than not, one-time assessments of credit quality, instrument ratings are monitored over the life of the instrument.