Credit rating is done for debt instruments such as debentures, fixed deposits,

commercial papers, bonds, etc.

The company which issues debt instruments is called an issuer or issuing
company. The issuer, issues instruments to collect finance from investors.
Investor looks at the credit rating of instrument and issuer before investing.
1. If the credit rating is a high, investor will invest in the company. That is, he will
purchase the debentures, bonds, etc. issued by that company.
2. If the credit rating is low, investor will not purchase the debentures, bonds, etc.
of that company.
So, credit rating guides the investor while investing.
Credit rating is an opinion about a debt instrument and its issuer. It tells an investor,
whether the debt instrument is safe or risky. It tells whether the issuer will be able
to pay the interest and repay the principal amount in time.
Credit rating is only an opinion. It is not a recommendation. It does not ask an
investor to buy, hold or sell an instrument.
So, credit rating is an opinion about the future ability and legal obligation of the
issuer to make timely payments of principal amount and interest on their debt
instruments.
Credit rating is done by independent credit-rating agencies like:
1.
S & P, which is based in USA,
2.
while CRISIL, CARE and ICRA Ltd., which are based in India.
Credit rating is done by experts after examining various factors. The rating is
expressed in alphabetical or alphanumeric symbols.
Following are examples of credit rating:
1.
If the rating of debenture is AAA (Triple A), then it is considered to have the
highest safety for the investor.
2.
If the credit rating is DDD (Triple D),, then the debenture is considered to
have highest risk for the investor.
The issuing company asks the credit-rating agency to rate its instrument. This is
done before issuing the instrument. The agency collects and studies information
about the issuing company. Then it rates the instrument.
Credit rating is not permanent, and it is reviewed periodically.

Sovereign credit ratings

A sovereign credit rating is the credit rating of a sovereign entity, i.e., a national
government. The sovereign credit rating indicates the risk level of the investing
environment of a country and is used by investors looking to invest abroad. It takes
political risk into account

Source: Euro money country risk

Country risk rankings (June 2012)

Least risky countries, Score out of
100

Previous

Country

Overall score

Rank

Norway

90.37

Switzerland

88.83

Singapore

88.03

Luxembourg

87.90

Sweden

86.79

Finland

84.30

Canada

84.26

Denmark

83.52

Netherlands

83.07

10

Germany

82.24

The table shows the ten least-risky countries for investment as of June 2012.
Ratings are further broken down into components including political risk, economic
risk. Euro moneys bi-annual country risk index monitors the political and economic
stability of 185 sovereign countries. Results focus foremost on economics,

specifically sovereign default risk and/or payment default risk for exporters (a.k.a.
"trade credit" risk).
A. M. Best defines "country risk as the risk that country-specific factors could
adversely affect an insurer's ability to meet its financial obligations.
Short-term rating
A short-term rating is a probability factor of an individual going into default within a
year. This is in contrast to long-term rating which is evaluated over a long
timeframe. In the past institutional investors preferred to consider long-term
ratings. Nowadays, short-term ratings are commonly used.
First, the Basel II agreement requires banks to report their one-year probability if
they applied internal-ratings-based approach for capital requirements. Second,
many institutional investors can easily manage their credit/bond portfolios with
derivatives on monthly or quarterly basis. Therefore, some rating agencies simply
report short-term ratings.
Corporate credit ratings
The credit rating of a corporation is a financial indicator to potential investors
of debt securities such as bonds. Credit rating is usually of a financial
instrument such as a bond, rather than the whole corporation. These are assigned
by credit rating agencies such as A. M. Best, Dun & Bradstreet, Standard &
Poor's, Moody's or Fitch Ratings and have letter designations such as A, B, C. The
Standard & Poor's rating scale is as follows, from excellent to poor: AAA, AA+, AA,
AA-, A+, A, A-, BBB+, BBB, BBB-, BB+, BB, BB-, B+, B, B-, CCC+, CCC, CCC-, CC, C,
D. Anything lower than a BBB- rating is considered a speculative or junk bond. [8] The
Moody's rating system is similar in concept but the naming is a little different. It is
as follows, from excellent to poor: Aaa, Aa1, Aa2, Aa3, A1, A2, A3, Baa1, Baa2,
Baa3, Ba1, Ba2, Ba3, B1, B2, B3, Caa1, Caa2, Caa3, Ca, C.
A. M. Best rates from excellent to poor in the following manner: A++, A+, A, A-, B+
+, B+, B, B-, C++, C+, C, C-, D, E, F, and S. The CTRISKS rating system is as follows:
CT3A, CT2A, CT1A, CT3B, CT2B, CT1B, CT3C, CT2C and CT1C. All these CTRISKS
grades are mapped to one-year probability of default.
Moody's

S&P

Fitch

Longterm

Shortterm

Longterm

Shortterm

Longterm

Aaa

AAA

AAA

Aa1

AA+

AA+
A-1+

Aa2

Shortterm

Prime

F1+

AA

AA

Aa3

AA-

AA-

A1

A+

A+

High grade

P-1

A-1

F1

A2

A3

A-

A-

P-2

A-2

F2

Baa1

BBB+

BBB+

Baa2

BBB

BBB

P-3
Baa3

Ba1

A-3
BBB-

Not prime

BB+

Upper medium
grade

Lower medium
grade
F3

BBB-

BB+

Ba2

BB

BB

Ba3

BB-

BB-

B1

B+

B+

B
Non-investment
grade
speculative

Highly speculative

B2

B3

B-

B-

Caa1

CCC+

Substantial risks

Caa2

CCC

Extremely
speculative

Caa3

CCC-

CCC

C
In default with little
prospect for
recovery

CC
Ca
C

DDD

DD

In default