Analysis of Credit Ratings - Copy

8/3/2019 Analysis of Credit Ratings - Copy

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RAMAN CHAWLA (125)JASMINE MAKKAR (67)


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INTRODUCTION

Credit rating are one of the several tools that investors can use when

making decisions about purchasing bonds and other fixed income

investments.

The purpose of this guide is to help explain what credit ratings are,

and are not, who uses them, and how they may be useful to the

Capital Market.

It also describes generally how Standard & Poors forms its ratings

opinions about issuers and individual debt issues, monitors and

adjusts its ratings, and studies ratings changes over time.


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Credit Ratingsy Acredit rating evaluates the credit worthiness of an issuer of

specific types of debt, specifically, debt issued by a businessenterprise such as a corporation or a government. It is an evaluationmade by a credit rating agency of the debt issuers likelihoodof default.

y Credit ratings are determined by credit ratings agencies. The creditrating represents the credit rating agency's evaluation of qualitative

and quantitative information for a company or government; includingnon-public information obtained by the credit rating agenciesanalysts.

y Credit ratings are not based on mathematical formulas. Instead,credit rating agencies use their judgment and experience in

determining what public and private information should beconsidered in giving a rating to a particular company or government.The credit rating is used by individuals and entities that purchase thebonds issued by companies and governments to determine thelikelihood that the government will pay its bond obligations.


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Usesof ratings

y Credit ratings are used by investors, issuers, investmentbanks, broker-dealers, and governments. For investors, creditrating agencies increase the range of investment alternatives andprovide independent, easy-to-use measurements of relative creditrisk; this generally increases the efficiency of the market, lowering

costs for both borrowers and lenders. This in turn increases thetotal supply of risk capital in the economy, leading to strongergrowth. It also opens the capital markets to categories of borrowerwho might otherwise be shut out altogether: small governments,

startup companies, hospitals, and universities.


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Why credit ratings change

When ratings change Credit rating adjustments may play a role in

how the market perceives a particular issuer or individual debt

issue.

Sometimes, for example, a downgrade by a rating agency maychange the markets perception of the credit risk of a debt security

which, combined with other factors, may lead to a change in the

price of that security.


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y List of credit rating agencies.

y Agencies that assign credit ratings for corporations include.

y Capital Standards Rating(Kuwait)

y Egan-Jones Rating Company (U.S.)

y Fitch Ratings (Dual-headquartered U.S./UK), 80% of which is

owned by FIMALAC, a French firm.

y CRISIL (India)

y Japan Credit Rating Agency, Ltd. (Japan)[

y Moody's Investors Service (U.S.)

y Rapid Ratings International (U.S.)

y Standard & Poor's (U.S.)

y Weiss Ratings(U.S.)


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Standard and Poor's

Standard and Poor's is a division of publisher McGraw-Hill (NYSE:ticker MHP) which provides bond ratings for fixed

income investments, publishes reports on stocks and related

investments, and maintains the S&P 500 Index.

Overall, S&P the company provides information ("financial market

intelligence," as the company likes to say) to help investors make

decisions

It offers credit ratings, maintains various stock market indices, and

provides equities research as well as research on industries and

trends.An S&P credit rating represents its analysts' opinions of the

creditworthiness of the business in question. Standard & Poor's

Ratings Services is one of several "nationally recognized statistical

rating organizations"


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Standard & Poor's Ratings Criteria

y Standard & Poor's Ratings Services Criteria is thewritten guidance that governs the analytic basis fordetermining our credit ratings. It includes all

fundamental quantitative and qualitative elements,analytical methodologies, and assumptions that we usein the ratings process to produce our opinions. Ourcriteria may be global, regional, or local, be specific to

an individual industry or subject area, or apply acrossseveral industries or subject areas.


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Standard & Poor's warned onWednesday that it could cut the credit ratingsof the European Union and large euro-zone banks if a mass downgrade ofeuro-zone countries materializes.

y S&P rates companies and governments by their ability to repay debt. The higher therating (AAA is the highest) the more investors trust them, and the less interestcompanies or governments have to pay to borrow money.

y S&P threatened to lower its rating on 15 nations even Germany, the most powerful

economy in Europe if their leaders don't agree on a tough response to the European debtcrisis.

y Borrowing costs for European countries were little changed after S&P's announcement,which came Monday night Europe time. But ratings cuts later could force countries topay higher interest rates on the national bonds they issue to investors, creating adangerous debt spiral and pushing them closer to default.

y In a debt spiral, a country is forced to put aside an ever larger share of its budget forinterest. That leaves less for everything else, and the country has to borrow even more tomake up the difference or cut services, hurting the economy.

y S&P's warning drew angry responses from some European officials who are scramblingto contain the crisis, and outrage from critics who sayS&P plays an outsize role in

markets.

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Analysis of Credit Ratings - Copy