Definition of Credit Rating Credit rating may be defined as the assessment of the credit worthiness of individuals and corporations.
It is based upon the history of borrowing and repayment, as well as the availability of assets and extent of liabilities. It is measured through various credit rating agencies, thus, it represents the evaluation of qualitative and quantitative information for a company or government; including non-public information obtained by the credit rating agencies analysts. These ratings are not based on mathematical formulas. Instead, credit rating agencies use their judgment and experience in determining what public and private information should be considered in giving a rating to a particular company or government. The credit rating is used by individuals and entities that purchase the bonds issued by companies and governments to determine the likelihood that the government will pay its bond obligations. A poor credit rating indicates a credit rating agency's opinion that the company or government has a high risk of defaulting, based on the agency's analysis of the entity's history and analysis of long term economic prospects.
Below is an example of credit rating provided for different countries:
Source: Euromoney country risk
Country risk rankings (June 2012)[4][5] Least risky countries, Score out of 100 Previous Rank Country Overall score
Norway
90.37
Switzerland
88.83
Singapore
88.03
Luxembourg
87.90
Sweden
86.79
Finland
84.30
Canada
84.26
Denmark
83.52
Netherlands
83.07
10
Germany
82.24
Note that these countries are the least risky countries as per Euromoney country risk. 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 risk and/or payment default risk for exporters (a.k.a. "trade credit" risk). The credit rating of a corporation is a financial indicator to potential investors of debt securities such as bonds. Credit rating is usually of a financial instrument such as a bond, rather than the whole corporation. These are assigned by credit rating agencies such as A. M. Best, Dun & Bradstreet, Standard & Poor's, Moody's or Fitch Ratings and have letter designations such as A, B, C. The Standard & Poor's rating scale is as follows, from excellent to poor: AAA, AA+, AA, AA-, A+, A, A-, BBB+, BBB, BBB-, BB+, BB, BB-, B+, B, B-, CCC+, CCC, CCC-, CC, C, D. Anything lower than a BBB- rating is considered a speculative or junk bond.[8] The Moody's rating system is similar in concept but the naming is a little different. It is as follows, from excellent to poor: Aaa, Aa1, Aa2, Aa3, A1, A2, A3, Baa1, Baa2, Baa3, Ba1, Ba2, Ba3, B1, B2, B3, Caa1, Caa2, Caa3, Ca, C. 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. Moody's S&P Fitch
Longterm
Shortterm
Longterm
Shortterm
Longterm
Shortterm
Aaa P-1 Aa1
AAA A-1+ AA+
AAA F1+ AA+
Prime
High grade
Aa2
AA
AA
Aa3
AA-
AA-
A1
A+ A-1
A+ F1 A Upper medium grade
A2
A3 P-2 Baa1
AA-2 BBB+
AF2 BBB+ Lower medium grade F3 BBB-
Baa2 P-3 Baa3
BBB A-3 BBB-
BBB
Ba1
BB+
BB+ Non-investment
Ba2 Not prime Ba3
BB B BB-
BB B BB-
grade speculative
B1
B+
B+
Highly speculative
B2
B3
B-
B-
Caa1
CCC+
Substantial risks
Caa2
CCC
Extremely speculative C CCC C In default with
Caa3
CCC-
CC Ca C
little prospect for recovery
DDD
DD
In default
Mentioned
above
are
different
credit
rating Ratings
agencies
like
Dun
&
Bradstreet, Moody's, Standard & Poor's and Fitch
among others. These
agencies are actually the largest credit rating agencies operating worldwide.
CREDIT RATING
Czarina L. Gonzales BBF 4-8D
