I) Presentation of the Credit Rating process
* What is it?
The credit rating of a corporation is a financial indicator to potential investors of debt securities such as bonds. This evaluates thecredit worthiness of an issuer of specific types of debt, specifically, debt issued by a business organization such as a corporation or a government. It is an evaluation made by a credit ratingagency to determine if it is risky to invest in a country and/or security.
The ratings grades have letter designations such as A, B, C assigned by credit rating agencies such as Standard & Poor's,Moody's or Fitch Ratings . Each agency has got its own credit ratings system that you will see further in the text.
A poor credit rating represents a credit rating agency's opinion that the company orgovernment has a high risk of defaulting, based on the agency's analysis of the entity's history and analysis of long term economic prospects.
Credit ratings can be either long-term or short-term.Short-term ratings are generally assigned to those obligations considered short-term in the relevant market less or equal to one year. In the U.S., for example, there are obligations with an originalmaturity date of no more than 365 days. Before, investors considered only long-term ratings. Nowadays, short-term ratings and long-term ratings are used commonly.
* The methodology
Thecredit rating agencies examine qualitative and quantitative information that evaluate all sources of risk to an organization's financial health, including credit, interest rate, country and market risks,as well as economic and regulatory factors.
1. Collect Information
Agencies process to management meetings with the company to review the factors that may affect the company rating, includingmanagement practices, financial objectives and strategic goals. The company will be able to share information and the agency will be able to rank the information according to its importance for the...
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