What is Credit Rating?

Credit rating is the financial risk associated with entities such as governments, non-profit organisations, and countries, among others. The rating is given to entities by the credit rating agencies after analysing their business and finance risk. The agencies prepare a detailed report after taking into consideration some additional factors such as the ability to repay the debt.

Types of Credit Ratings

All credit agency agencies use various terminology for determine credit ratings. However, the notations are very similar. Ratings are always grouped into two: an ‘investment grade’ and also a ‘speculative grade’.

• Investment grade:

These ratings mean that the investment is a solid one and the issuer will most likely meet the repayment terms. These investments are priced less as compared to speculative grade investments.

• Speculative grade:

These investments are known to be high risk. So, they come with higher interest rates.

Users of Credit Ratings

Credit ratings are used by investors, and intermediaries like:

• Issuers of debt

• Businesses

• Investment banks

• Corporations

• Institutional and individual investors:

 

They use credit ratings for assessing the risk that is linked to investing in an issuance, in the context of the portfolio.

• Intermediaries:

These include investment bankers who use credit ratings for evaluating the credit risk and also reaching the pricing of debts.

• Debt issuers:

These include governments, corporations, and municipalities and they use credit ratings as an independent evaluation of their creditworthiness. They also look into the credit risk associated with the debt issuance. The ratings can also provide prospective investors an idea of the quality of the instrument.

• Businesses and corporations:

They look to evaluate the risk involved with a counterparty transaction. Credit ratings help entities that want to participate in ventures and partnerships with other businesses in evaluating the viability.