Question

Credit rating companies provides continuous surveillance of a rated instrument and acts as an eariy-waming system for investors.

Discuss the above statement.

Answer 1

The above statement is a fair and true statment.

Credit rating agencies such as S&P, Moody’s and Fitch, rank debt securities based on the creditworthiness of the issuer. The rankings are used to determine the market interest rate for a particular issue and also helps investors to understand the risk and return for a given issue. The debt issue is priced based on the stated interest rate and its market interest rate.

Credit Rating(s) are forward-looking opinions about credit risk, an opinion about the ability and willingness of an issuer, such as a corporation or state or city government, to meet its financial obligations in full and on time. It is a grade attributed to a person, an institution or a state in order to measure their ability to repay their debt at a specific point in time. It is an evaluation of the credit worthiness of a debtor, especially a business (company) or a government by a credit rating agency. It is an expression debtor's ability to pay back the debt and the likelihood of default. Thus credit rating is an assessment of the credit worthiness of a borrower in general terms or with respect to a particular debt or financial obligation.

And Credit rating agencies continuously monitor their ratings and the performance of the companies they have rated. The ratings undergo a change and modification based on the actual performance. Thus, Credit rating companies provides continuous surveillance of a rated instrument.

In case there is a rating downgrade, investors can take that as an early warning. It signals the investors to be cautious. Thus these rating agencies act as an eariy-waming system for investors.