Chapter Sixteen

Credit Ratings and Bank Credit Assessment

A CORPORATE CREDIT RATING IS a score given to reflect qualitative and quantitative aspects that assess both business and financial risks of corporate issuers of fixed income debt and their individual debt issues. Many large banks have their own methods of assessing corporate debt from a point of view of lending to these corporates. In this chapter, we summarise both approaches and explore some of the factors that a Treasurer can incorporate during review discussions with these entities.

CREDIT RATINGS

A credit rating is generally a score that indicates an independent agency’s opinion on the degree of credit risk of an issuer of debt, indicating the agency’s assessment of the intention and ability of the issuer to fulfil its debt obligations over a period of time.

Ratings are typically established for short term (generally around a year or lower tenor) or long term, with various types of ratings as given in Figure 16.1.

FIGURE 16.1 Different Corporate Ratings

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These can be:

  • Issuer ratings. The individual obligor is rated as an organisation.
  • Issue ratings. The corporate finance obligation or specific issue is rated for creditworthiness.
  • Structured finance obligation ratings. Specific issuances related to a securitised pool of assets or other derivative financing transactions are rated. This process typically is more complicated ...

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