Rating Agencies

Posted in Finance, Accounting and Economics Terms, Total Reads: 603
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Definition: Rating Agencies

Rating agencies are independent organizations which assign a rating to the credit issuing companies and well as their debt securities, generally issued in public markets.  The ratings are indicative of their creditworthiness, i.e., the ability to pay back their debt.

The rated entities are generally companies, state or central government, countries, non profit organizations and more.

Some examples of Ratings agencies in India are CRISIL, ICRA, and CARE etc.

S&P (Standard and Poor), Moody’s and Fitch are the largest rating agencies in the US.

THE RATING

Rating agencies generally assign a letter grade to such organisations to indicate their ability to pay back the principal and the interest as they fall due for payment.

The rating scale is generally made in a descending order. The rating scale is shown below:

CRISIL AAA

(Highest Safety)

CRISIL AA

(High Safety)

CRISIL A

(Adequate Safety)

CRISIL BBB

(Moderate Safety)

CRISIL BB

(Moderate Risk)

(High Risk)

CRISIL C

(Very High Risk)

CRISIL D

Default

Bonds below BB are considered Junk Bonds.

Similar Rating scales are available for S&P, Moody’s, Fitch and other agencies.

A low rating means that the probability that the company would default on its borrowings is high. A high rating means that the company is least likely to default on its borrowings.

IMPORTANCE OF RATING

These issued ratings inform the investors of a company’s creditworthiness and help them in their investment decision making activity.

These ratings affect the interest rate paid by the companies on their issued securities.

The rating creates an image of the company in the market.

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