Credit Report and Rating Agencies

Credit Rating Agencies
Credit rating can be defined as a process that assesses the credit worthiness of an individual, institution, or even a country.

A credit rating agency or CRA is a company that is responsible for handing over credit ratings to companies that are issuers of certain debt obligations. In majority of the cases, these are organizations, cities, NGOs and even governments that issue debt like securities which can be traded on a secondary market. There are more than 100 credit rating agencies all across the globe.

What are the uses of the ratings that are performed by the agencies?
As discussed earlier, the credit ratings are used by almost all sections of the society – from bankers, investors, issuers to national governments. For investors, credit rating agencies open new avenues for investment, provide alternatives and furnish easy-to-use measurements of relative credit risk. This automatically increases the market’s efficiency by reducing costs for both the borrowers and the lenders. This consecutively increases the total supply of risk capital in the whole economy resulting in a stronger growth. It also opens the door of capital market to a lot of new borrowers like small governments, universities, hospitals and newly established companies.

How are the ratings used by bond issuers?
Bond issuers depend on these ratings as an indicator of their

credit worthiness. In majority of the cases, to issue a successful bond, the issuer needs to have at least one rating from a respected CRA. A recent study conducted by the Bond Market Association has revealed that many institutional investors today prefer that a debt issuance have at least three ratings. Some issuers also use credit ratings in some structured finance transactions. For instance a company that has a very credit rating wishes to undertake a project that involves high risks will do so by creating a legally separate entity with some resources that would do the research work. This SPE or “special purpose entity” will do all the risk work and issue its own debt securities to finance the study. This credit rating will be very low and the issuer will have to pay a high return rate for the bonds that are issued. Nevertheless, this risk will not affect the original company’s overall credit rating as SPE is a legally separate entity.

How are the ratings used by investment banks and broker-dealers?
Credit ratings are used by investment banks and broker-dealers to calculate their risk portfolios (i.e. the collective risk of all their investments). Though large financial institutions perform their own risk calculations, they depend on the CRA ratings as a ‘check’ on their own analyses.

Various credit rating agencies in the world:
Usually credit ratings for individuals are provided by the credit bureaus; for corporates and countries, the ratings are provided by the credit rating agencies. The major credit bureaus in the United States are Experian, Equifax and Trans Union. In the United Kingdom credit bureaus are called credit reference agencies; Equifax, Experian and Call Credit are the three main agencies in UK.

The principal credit bureaus in Canada are Northern Credit Bureaus, Trans Union and Equifax.
The credit rating agencies that have their networks worldwide include Moody’s, Standard & Poor’s and Fitch.

The credit rating agencies in India:
• Credit Rating Information Services of India Limited (CRISIL)
• Investment Information and Credit Rating Agency of India (ICRA)
• Credit Analysis & Research Limited (CARE)
• Duff & Phelps Credit Rating India Private Ltd. (DCR India)
• ONICRA Credit Rating Agency of India Ltd

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