A credit rating is a quantified assessment of the borrower in general term or with respect to a particular debt or financial obligation. A credit rating can be assigned to any entity that seeks to borrow money- an individual, corporation, State or Provincial authority, or Sovereign Government.
In other words Credit Rating Agency means that an Individual Company that evaluates the financial condition of issuers of Debt instruments and then assigns a rating that reflects its assessment of the issuer’s ability to make the debt payment. By doing calculation on the basis of its financial history, current assets and liabilities it establishes a link between risk and returns. Any person or investor uses the rating to assess the risk level and compares the offered rate of return with his expected rate of return.
Following Points may be noted in respect of Credit Rating :
- It is an assessment of Borrower’s willingness and ability to repay the rated obligation on the basis of its terms and conditions.
- It is only an opinion but not a recommendation to purchase, sell or hold a borrower’s security.
- These agencies change ratings only for a significant and permanent changes in company’s operating and financial and operating performances.
- These agencies only rate securities and not issuers.
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