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Interest rates.
Ratings tell you how risky a debt instrument is; this also means a rating
indicates the returns from that instrument. A Triple A security will have a lower
rate of interest, with rates increasing as ratings drop.
Independence.
Rating agencies are independent organisations; they don't buy or sell securities.
Their opinion on any debt instrument is that of an outsider. This gives a rating
its credibility.
Symbols.
Different rating agencies offer different symbols. But these are differences only
in nomenclature. Crisil uses different symbols for different instruments. It uses
the international symbol system for the debentures issued by companies and
prefixes an F to the rating of a Fixed Deposit. Both ICRA and CARE have
ratings given for long term (debentures) and medium term (fixed deposits)
instruments with prefixes L and M attached to the rating.
Ratings are not stock recommendations...
A high credit rating should not be construed as a stock recommendation. It is
not necessary that if the debt issue of a company has a Triple A rating, the
company's stock is worth investing in. Stock market analysts are mainly
concerned with a company's earnings growth prospects. Credit raters, however,
are more interested in the company's solvency and its ability to repay its debt,
especially during recessions. That's why their analysis is more focused on cash
flows and ability of the company to liquidate assets during an emergency to pay
interest and principal liabilities than future growth prospects. A credit rater's
concerns reflect those of a banker making a loan-can the borrower pay back the
principal and interest on the loan in time?
...and are issue specific. Ratings are given for a particular instrument or issue
and not for the company. It is possible for two issues of the same company to
have different ratings depending on the characteristics of the instrument.
Moreover, ratings also depend on the terms and conditions of the particular
instrument. For example, an instrument backed by collateral security will have a
higher rating than one that is unsecured. This also means that strictly speaking,
a debenture AAA rating and a fixed deposit (which is an unsecured instrument)
AAA rating are not strictly comparable.
Ratings are opinions...
Credit ratings are opinions of the credit rating agencies on debt issues of
companies. It is quite possible to get different ratings for the same company
from two different agencies, and it happens often. For example, ICRA has rated
Apple Credit's fixed deposit program as MAA, higher than Crisil's FA.
The two agencies could have different views about the company's prospects.
The difference could also stem from an agency taking a particularly harsh or
lenient view of an industry. For instance, Crisil has taken a much harsher view
of finance companies than others have
Countries are issued sovereign credit ratings. This rating analyzes the general
creditworthiness of a country or foreign government. Sovereign credit ratings
take into account the overall economic conditions of a country including the
volume of foreign, public and private investment, capital market transparency
and foreign currency reserves. Sovereign ratings also assess political conditions
such as overall political stability and the level of economic stability a country
will maintain during times of political transition. Institutional investors rely on
sovereign ratings to qualify and quantify the general investment atmosphere of a
particular country. The sovereign rating is often the prerequisite information
institutional investors use to determine if they will further consider specific
companies, industries and classes of securities issued in a specific country.
Credit ratings, debt ratings or bond ratings are issued to individual companies
and to specific classes of individual securities such as preferred stock, corporate
bonds and various classes of government bonds. Ratings can be assigned
separately to short-term and long-term obligations. Long-term ratings analyze
and assess a company's ability to meet it's responsibilities with respect to all of
its securities issued. Short-term ratings focus on the specific securities' ability to
perform given the company's current financial condition and general industry
performance conditions..
Credit Ratings
John Knowles credit rating founded the credit Publishing Company in 1913.
Credit rating published financial statistics for use in the investment industry via
"The credit Stock and Bond Manual" and "The credit Bond Book." In 1924,
john introduced the AAA through D rating system that has become the basis
for ratings throughout the industry. With plans to become a full-service global
credit rating agency, in the late 1990s merged with IBCA of London,
subsidiary of Fimalac, S.A., a holding company. Fitch also acquired market
competitors Thomson BankWatch and Duff & Phelps Credit Ratings Co.
Beginning in 2004, Fitch began to develop operating subsidiaries specializing in
enterprise risk management, data services and finance industry training with the
acquisition of Canadian company, Algorithmics, and the creation of credit