Credit rating agencies asses the creditworthiness of issuers of debt obligations, such as corporate bonds and sovereign bonds, but also non-listed debt such as credit facilities. Rating agencies provide credit ratings in which is the debtor’s ability to repay and the likelihood of default are reflected.
The best-known and largest rating agencies are Moody’s, Fitch and Standard & Poor’s. Rating agencies generate revenue from various credit rating-related activities. The issuers of the securities or the investors are generally the source of income for rating agencies.
Credit ratings and grades
The credit rating represents the credit rating agency’s evaluation of qualitative and quantitative information regarding a company or government. The ratings are based on due diligence performed by the rating agencies who, in order to issue a reliable rating, must take a balanced and objective view of the borrower’s operational and financial situation and capacity to repay the debt.
Credit rating agencies use letter grades to indicate ratings. The three largest agencies use AAA (Moody’s: Aaa) as the prime rating description. For high and medium grade ratings, the agencies use AA+, Aa2 or varieties on these, going all the way down to ‚D’ rating (default).
Credit rating adjustments have a substantial effect on financial markets, as they enjoy a high level of authority.