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Importance of a Corporate Credit Rating for Issuers and Investors

 

What is a Corporate Credit Rating? Why is it important to Issuers and Investors? Why does Standard & Poor’s rate a company? How does a credit rating affect a company’s risk level? How does Standard & Poor’s differentiate investment grade from non-investment grade? And how does it relate to the rating of an issuer? In this article, Timothy Poole, Director of Client Business Management at Standard & Poor’s, explains what a credit rating means.

Investors

There are many implications of corporate credit ratings for investors. One important financial consequence of a credit rating is the interest rate paid on debt. Risk adjusted return on capital is a popular method used by most banks and other investors to evaluate profitability and make investment and lending decisions. Listed below are some of the important reasons why investors should pay attention to credit ratings. These financial implications are not limited to the investment industry, however. In fact, credit ratings have a wider scope than just lending decisions.

A corporate credit rating is a numerical assessment of a company’s creditworthiness and outlines the likelihood of a company defaulting on its debt. A corporate credit rating is issued by three major credit rating agencies: Moody’s, Standard & Poor’s, and Fitch. Each agency provides a different rating for different types of debt and offers different levels of risk. Investors use credit ratings to determine whether to invest in a company, but the agency’s credit rating is a useful tool to assess risks associated with a specific investment.
Issuers

A corporate credit rating for issuers is an important factor in determining the company’s overall credit worthiness. This rating is based on a third-party agency’s judgment of the company’s financial strength and ability to repay its debt. The rating agencies also consider cross-default provisions, which result in a default of one debt triggering default on all outstanding debt. This credit rating is applied to senior unsecured debt, while subordinated debt is ranked lower.

Standard & Poor’s issues issuer credit ratings are based on the issuer’s general creditworthiness and capacity to meet financial obligations. These ratings are not specific to individual financial obligations. They also take into account the obligor’s financial condition, statutory preferences, and any existing deterioration in financial condition. However, it is important to note that issuers may have a lower rating than the company’s credit rating.
Standard & Poor’s

The Standard & Poor’s Corporate Credit Rating is an important tool for investors. Approximately 37,000 issuers use this rating to inform their decision-making. Its ratings are considered authoritative by investors and market participants worldwide. This agency publishes reports and rationales on issuers, industry trends, and credit quality. It holds more than 200 telephone conferences with investors and sponsors hundreds of print interviews. Almost half of its business is done with the public.

Analysts at Standard & Poor’s review companies’ financial statements and other public information to calculate their rating. They may meet with management to discuss their key operating and financial plans, management policies, and other credit factors. These meetings may be conducted on a regular basis, depending on the issuer’s risk profile, size, and complexity. Standard & Poor’s has a Chief Quality Officer, who is dedicated to ensuring the quality of its credit ratings.

Moody’s

Moody’s has nine categories of ratings for long-term debt. Investment-grade ratings are Aaa or higher, and speculative-grade ratings are Baa or lower. While ratings provide a relative measure of risk, they do not necessarily predict the likelihood of default. Consequently, the lower a bond’s rating, the more likely it is to default. The purpose of the ratings is to group bonds of similar risk, which is why Moody’s has created a system that allows the company to determine the risk level of a debt.

The Moody’s Corporation is an integrated risk assessment firm that publishes ratings for various debt obligations worldwide. It also provides risk management software and economic analysis. In general, Moody’s ratings are closely watched by investors. The firm also publishes the “Moody’s” rating for corporate bonds. However, investors pay close attention to the company’s ratings for a variety of reasons. If you are considering investing in a company’s stock, the ratings from Moody’s are worth paying attention to.

Standard & Poor’s Code of Ethics

The Standard & Poor’s Code of Ethics requires its credit-rating personnel to follow strict policies regarding conflicts of interest and confidential information. For example, they can’t own securities of companies with which they frequently interact. Nor can they vote on those securities during a rating committee meeting. Similarly, they must disclose any stock ownership to their superiors in advance. Moreover, they must report any potential conflicts of interest to the companies in question within five days.

In addition to following the Code of Ethics, Standard & Poor’s publishes detailed reports describing its methodology and criteria. In addition, it also publishes default studies to demonstrate its track record in credit rating. Standard & Poor’s also maintains a surveillance program for companies it rates. This means that the agency’s ratings are consistent across types of rating. Furthermore, the agency publishes detailed reports on its methodology and criteria, which are available to the public.

Influence of ratings on interest rate

The influence of corporate credit ratings on interest rates is vast and has many strategic implications. It is not just about the interest rate paid on a loan, but also the risk that the company poses to investors and customers. Risk adjusted return on capital, or RAROC, is a formula used by most banks and investors to determine the profitability of a company. The RAROC can differ by two to three notches, depending on the company.

The CR-CS hypothesis states that firms with a negative or a positive rating will issue less debt than those with a positive or neutral rating. This hypothesis is based on a number of studies, and is not the sole source of information. However, it may provide an indication of where rates are headed. The main conclusion is that the CR-CS hypothesis is relevant to interest rate forecasts. It also explains why firms issue less debt when they are rated lower.