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A credit rating is an evaluation of the
credit risk A credit risk is risk of default Default may refer to: Law * Default (law), the failure to do something required by law ** Default (finance) In finance Finance is the study of financial institutions, financial markets and how they ope ...
of a prospective
debtor A debtor or debitor is a legal entity (legal person) that owes a debt Debt is an obligation that requires one party, the debtor, to pay money or other agreed-upon value to another party, the creditor. Debt is a deferred payment, or series ...
(an individual, a
business Business is the activity of making one's living or making money by producing or buying and selling products (such as goods and services). Simply put, it is "any activity or enterprise entered into for profit." Having a business name A trad ...

business
,
company A company, abbreviated as co., is a Legal personality, legal entity representing an association of people, whether Natural person, natural, Legal person, legal or a mixture of both, with a specific objective. Company members share a common pu ...

company
or a government), predicting their ability to pay back the debt, and an implicit forecast of the likelihood of the debtor defaulting. The credit rating represents an evaluation of a
credit rating agency A credit rating agency (CRA, also called a ratings service) is a company that assigns credit ratingA credit rating is an evaluation of the credit risk of a prospective debtor (an individual, a business, company or a government), predicting their a ...
of the qualitative and quantitative information for the prospective debtor, including information provided by the prospective debtor and other non-public information obtained by the credit rating agency's analysts. Credit reporting (or
credit score A credit score is a numerical expression based on a level analysis of a person's credit files, to represent the creditworthiness A credit risk is risk of default (finance), default on a debt that may arise from a borrower failing to make requi ...
) – is a subset of credit rating – it is a numeric evaluation of an ''individual's'' credit worthiness, which is done by a
credit bureau A credit bureau is a data collection agency that gathers account information from various creditors and provides that information to a consumer reporting agency in the United States, a credit reference agency in the United Kingdom, a credit reporti ...
or
consumer credit reporting agency A credit bureau is a data collection agency that gathers account information from various creditors and provides that information to a consumer reporting agency in the United States, a credit reference agency in the United Kingdom, a credit reporti ...
.


Sovereign credit ratings

A sovereign credit rating is the credit rating of a
sovereign Sovereign is a title which can be applied to the highest leader in various categories. The word is borrowed from Old French Old French (, , ; Modern French French ( or ) is a Romance language of the Indo-European family. It descende ...
entity, such as a national government. The sovereign credit rating indicates the risk level of the investing environment of a country and is used by investors when looking to invest in particular jurisdictions, and also takes into account
political risk Political risk is a type of risk In simple terms, risk is the possibility of something bad happening. Risk involves uncertainty about the effects/implications of an activity with respect to something that humans value (such as health, well-being, ...
. The "
country risk A country is a distinct territorial body or political entity A polity is an identifiable political entity—any group of people who have a collective identity, who are organized by some form of Institutionalisation, institutionalized social ...
rankings" table shows the ten least-risky countries for investment . Ratings are further broken down into components including political risk, economic risk. Euromoney's bi-annual country risk index monitors the political and economic stability of 185 sovereign countries. Results focus foremost on economics, specifically
sovereign default A sovereign default is the failure or refusal of the government A government is the system or group of people governing an organized community, generally a State (polity), state. In the case of its broad associative definition, gov ...
risk or payment default risk for exporters (also known as a
trade credit Trade credit is the loan In finance, a loan is the lending of money by one or more individuals, organizations, or other entities to other individuals, organizations etc. The recipient (i.e., the borrower) incurs a debt and is usually liable to ...
risk). A. M. Best defines "country risk" as the risk that country-specific factors could adversely affect an insurer's ability to meet its financial obligations.


Short and long-term ratings

A rating expresses the likelihood that the rated party will go into
default Default may refer to: Law * Default (law), the failure to do something required by law ** Default (finance) In finance Finance is the study of financial institutions, financial markets and how they operate within the financial system. It ...
within a given
time horizon A time horizon, also known as a planning horizon, is a fixed point of time in the future at which point certain processes will be evaluated or assumed to end. It is necessary in an accounting Accounting or Accountancy is the measurement, proce ...
. In general, a time horizon of one year or under is considered short term, and anything above that is considered long term. In the past institutional investors preferred to consider long-term ratings. Nowadays, short-term ratings are commonly used.


Corporate credit ratings

Credit ratings can address a corporation's
financial instrument Financial instruments are monetary contracts A contract is a legally binding document between at least two parties that defines and governs the rights and duties of the parties to an agreement. A contract is legally enforceable because it me ...
s i.e.
debt Debt is an obligation that requires one party, the debtor A debtor or debitor is a legal entity (legal person) that owes a debt Debt is an obligation that requires one party, the debtor, to pay money or other agreed-upon value to ...

debt
security Security is freedom from, or resilience against, potential Potential generally refers to a currently unrealized ability. The term is used in a wide variety of fields, from physics Physics is the natural science that studies matter, its El ...
such as a
bond Bond or bonds may refer to: Common meanings * Bond (finance) In finance Finance is the study of financial institutions, financial markets and how they operate within the financial system. It is concerned with the creation and management of ...
, but also the corporations itself. Ratings are assigned by
credit rating agencies A credit rating agency (CRA, also called a ratings service) is a company that assigns credit ratingA credit rating is an evaluation of the credit risk of a prospective debtor (an individual, a business, company or a government), predicting their ab ...
, the largest of which are
Standard & Poor's S&P Global Ratings (previously Standard & Poor's and informally known as S&P) is an American credit rating agency A credit rating agency (CRA, also called a ratings service) is a company that assigns credit ratings, which rate a debtor's abilit ...

Standard & Poor's
,
Moody's Moody's Investors Service, often referred to as Moody's, is the bond credit rating In investment To invest is to allocate money Image:National-Debt-Gillray.jpeg, In a 1786 James Gillray caricature, the plentiful money bags handed to King ...
and
Fitch Ratings Fitch Ratings Inc. is an American credit rating agency and is one of the " Big Three credit rating agencies", the other two being Moody's Moody's Investors Service, often referred to as Moody's, is the bond credit rating business of Moody's Corp ...
. They use letter designations such as A, B, C. Higher grades are intended to represent a lower
probability of default Probability of default (PD) is a financial term describing the likelihood of a default over a particular time horizon. It provides an estimate of the likelihood that a borrower will be unable to meet its debt obligations. PD is used in a variety ...
. Agencies do not attach a hard number of probability of default to each grade, preferring descriptive definitions such as: "the obligor's capacity to meet its financial commitment on the obligation is extremely strong," or "less vulnerable to non-payment than other speculative issues…" (Standard and Poors' definition of an AAA-rated and a BB-rated bond respectively). However, some studies have estimated the average risk and reward of bonds by rating. One study by Moody'sCantor, R., Hamilton, D.T., Kim, F., and Ou, S., 2007 Corporate default and recovery rates. 1920-2006, ''Special Comment:'' Moody's investor Service, June Report 102071, 1-48 page 24cited by authors Herwig Langohr and Patricia Langohr claimed that over a "5-year time horizon" bonds it gave its highest rating (Aaa) to had a "cumulative default rate" of 0.18%, the next highest (Aa2) 0.28%, the next (Baa2) 2.11%, 8.82% for the next (Ba2), and 31.24% for the lowest it studied (B2). (See "Default rate" in "Estimated spreads and default rates by rating grade" table to right.) Over a longer period, it stated "the order is by and large, but not exactly, preserved". Another study in ''Journal of Finance'' calculated the additional interest rate or "spread" corporate bonds pay over that of "riskless" US Treasury bonds, according to the bonds' rating. (See "Basis point spread" in table to right.) Looking at rated bonds for 1973–89, the authors found a AAA-rated bond paid 43 "
basis points A basis point (often abbreviated as bp, often pronounced as "bip" or "beep") is (a difference of) one hundredth of a percent or equivalently one percent of one percent or one ten thousandth. A very rarely used term, permyriad, means parts per te ...
" (or 43/100 of a percentage point) over a US Treasury bond (so that it would yield 3.43% if the Treasury yielded 3.00%). A CCC-rated "junk" (or speculative) bond, on the other hand, paid over 7% (724 basis points) more than a Treasury bond on average over that period.from Altman, Edward I "Measuring Corporate Bond Mortality and Performance" ''Journal of Finance'', (September 1989) pp. 909–22 Different rating agencies may use variations of an alphabetical combination of lowercase and uppercase letters, with either plus or minus signs or numbers added to further fine-tune the rating (see colored chart). The Standard & Poor's rating scale uses uppercase letters and pluses and minuses. The Moody's rating system uses numbers and lowercase letters as well as uppercase. While Moody's, S&P and Fitch Ratings control approximately 95% of the credit ratings business, they are not the only rating agencies. DBRS's long-term ratings scale is somewhat similar to Standard & Poor's and Fitch Ratings with the words high and low replacing the + and −. It goes as follows, from excellent to poor: AAA, AA (high), AA, AA (low), A (high), A, A (low), BBB (high), BBB, BBB (low), BB (high), BB, BB (low), B (high), B, B (low), CCC (high), CCC, CCC (low), CC (high), CC, CC (low), C (high), C, C (low) and D. The short-term ratings often map to long-term ratings though there is room for exceptions at the high or low side of each equivalent. S&P, Moody's, Fitch and DBRS are the only four ratings agencies that are recognized by the
European Central Bank The European Central Bank (ECB) is the prime component of the Eurosystem The Eurosystem is the monetary authority In finance Finance is the study of financial institutions, financial markets and how they operate within the financia ...

European Central Bank
(ECB) for determining collateral requirements for banks to borrow from the central bank. The ECB uses a first, best rule among the four agencies that have the designated ECAI status, which means that it takes the highest rating among the four agencies – S&P, Moody's, Fitch and DBRS – to determine haircuts and collateral requirements for borrowing. Ratings in Europe have been under close scrutiny, particularly the highest ratings given to countries like Spain, Ireland and Italy, because they affect how much banks can borrow against sovereign debt they hold. A. M. Best rates from excellent to poor in the following manner: A++, A+, A, A−, B++, B+, B, B−, C++, C+, C, C−, D, E, F, and S. The CTRISKS rating system is as follows: CT3A, CT2A, CT1A, CT3B, CT2B, CT1B, CT3C, CT2C and CT1C. All these CTRISKS grades are mapped to one-year probability of default. Under the EU Credit Rating Agency Regulation (CRAR), the European Banking Authority has developed a series of mapping tables that map ratings to the "Credit Quality Steps" (CQS) as set out in regulatory capital rules and map the CQS to short run and long run benchmark default rates. These are provided in the table below:


See also

*
Government budget by country The list is mainly based on CIA World Factbook ''The World Factbook'', also known as the ''CIA World Factbook'', is a reference resource produced by the Central Intelligence Agency (CIA) with almanac-style information about the list of sovereig ...
*
List of countries by credit rating This is a list of countries by credit rating, showing long-term foreign currency credit ratingA credit rating is an evaluation of the credit risk of a prospective debtor (an individual, a business, company or a government), predicting their abilit ...
*
List of countries by tax revenue as percentage of GDP This article lists countries alphabetically, with total tax revenue Tax revenue is the income In microeconomics, income is the Consumption (economics), consumption and saving opportunity gained by an entity within a specified timeframe, ...
*
List of sovereign states by public debt These are lists of countries by Government debt, public debt, based on data from the CIA's World Factbook and the International Monetary Fund, IMF. Net debt figure is the cumulative total of all government debt, government borrowings less repayments ...
Individuals: *
Credit history :''This article deals with the general concept of the term credit history. For detailed information about the same topic in the United States, see Credit score in the United States A credit score is a number that provides a comparative estimate of ...
*
Credit score A credit score is a numerical expression based on a level analysis of a person's credit files, to represent the creditworthiness A credit risk is risk of default (finance), default on a debt that may arise from a borrower failing to make requi ...


References


External links

* {{Authority control Credit Rating