What Does a Credit Rating Represent?
A bond’s credit rating is a forward-looking prediction about the bond’s relative creditworthiness. Bond market participants value credit rating stability for a variety of reasons. Accordingly, agencies attempt to provide credit ratings that, while responsive to changes in the overall economic environment, also provide a realistic and accurate measure of the bond’s creditworthiness over time.
A credit rating represents the following factors:
» An independent opinion on the future ability of the issuer to make timely payments on its financial commitments
» A measure of relative credit risk based on fundamental credit assessment
» A statement of expected loss
FACTORS DETERMINING CREDIT RISK
» Structural risk focuses on the risks inherent in both the structure of the specific bond issue and the issuer’s corporate structure.
» Financial risk focuses on the issuer’s respective operating and financial position relative to its immediate competitors, and the quality of the issuer’s management team.
» Business risk focuses on the major market and regulatory trends facing the issuer’s industry, as well as the forecasted sovereign and macro-economic trends.