IMPORTANT ISSUES IN CREDIT RATING :
Investments and Speculative Grades
Debt instrument rated ‘BBB’ & above are classified as investment grade ratings. Instruments that are rated ‘BB’ and below are classified as speculative grade ratings. Rating agencies do not recommend or indicate the rating levels of instruments up to which one should or should not invest.
Surveillance
The rating published by credit rating agencies is subjected to a continuous surveillance during the life of the instrument or so long as any amount is outstanding against the specific instrument. The frequency of surveillance may range between quarterly or yearly. A formal and extensive written review is taken at least once in a year but where some specific concern arises about the industry or the issuing entity, the review is taken up immediately. Where the rating agency justified may change the rating by upgradation or downgradation depending on the likely impact of changing circumstances on the debt servicing capability of the issuer. In other cases, the rating is retained at the same level.
Credit Watch
When a major deviation from the expected trends of the issuers business occurs, or when an event has taken place, it creates an impact on the debt servicing capability of the issuer and warrants a rating change, the rating Bagency may put such ratings under credit watch till the exact impact of such unanticipated development is analyzed and decision is taken regarding the rating change. The credit watch listing may also specify positive or negative outlooks. It should be noted that being under credit watch does not necessarily mean that there would be a rating change.
Ownership as a rating consideration
Ownership by a strong concern may enhance the credit rating of an entity, unless there exists a strong barrier
separating the activities of the parent and the subsidiary. The important issues involved in deciding the relationship are – the mutual dependence on each other, legal relationship, to what extent one entity has the desire and ability to influence the business of the other, and how important is the operation of the subsidiary to the owner.
Rating agency keeps the information provided by the issuer confidential and completes the rating within 2 to 4 weeks. Once the rating is assigned, it is communicated to the issuer, who is given an opportunity to make one request for a review, only in case fresh facts or clarifications become relevant. After these are considered, the final rating is assigned. In India, the issuer has the option of not accepting the assigned rate in which case the rating is not disclosed by the rating agency. However, if the rating is accepted, it comes under the surveillance process of the concerned agency.