What is Credit Rating & what credit rating is not!

What is Credit Rating?
Rating reflects the borrower’s accountability, expected capability and inclination to pay interest and principal in a timely manner.
Rating is an isolated function of credit risk evaluation.
Rating is useful in differentiating credit quality.
Rating will involve issue-specific evaluation.
What Credit Rating is not?
Rating is not a general purpose evaluation of the issuer.
It is not a recommendation to buy/sell/hold a security.
Rating is not an extensive audit of the issuing company.
Rating is not a one-time assessment of creditworthiness valid over the future life of the security.
Factors considered by credit rating agencies while rating an instrument:
Rating is search for long term fundamentals and the probabilities for changes in the fundamentals.
The analytical framework for rating methodology is divided into two independent segments. The first deals with operational characteristics and the second with financial characteristics. Besides quantitative and objective factors, qualitative aspects like assessment of management capabilities play a very important role in arriving at the rating for an instrument. The relative importance of qualitative and quantitative components of analysis varies with the type of issuer.
Following are some of the key factors generally considered by the rating agencies for the purpose of ratings:
a) Business Analysis
b) Market position of the company
c) Operating advantages of the company
d) Financial Risk Analysis
e) Working capital indicators
f) Project risk
g) Management Evaluation
h) Legal Position
i) Regulatory and Competitive Environment

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