To help debt and fixed income investors better evaluate the risk of any given investment, the capital market uses the publicly available independent assessments of rating agencies.
Through regular discussions with the senior management of companies, rating agencies gain an insight into the strategy and planning of the companies that they rate. Using this information as a base, supplemented by quantitative analysis, rating agencies evaluate the creditworthiness of the issuer companies through a system of rating classifications. Companies which want to raise money in the capital markets in the form of bonds, commercial paper and other debt instruments normally need a minimum of one or better two ratings.
The leading international rating agencies are Standard & Poor's, Moody's Investors Service, Fitch Ratings and DBRS.
|Standard & Poor's||Moody's||Fitch||DBRS|
|long-term rating||A-||A3||A-||A (low)|
|short-term rating||A-2||P-2||F2||R-1 (low)|
The higher the rating classification, the smaller is the potential risk that a company cannot meet its debt obligations (interest and principal). The debt investor charges a higher rate of interest for financing a higher risk. Thus a company with a strong rating can raise capital more advantageously than a company which has a less favourable rating. Additionally, the outlook given by a rating agency provides a supplementary reference point for the investor in assessing the probable development of the rating.