Define Credit Rating

Meaning

Credit rating is an opinion of rating agency about a debt instrument. The opinion is expressed through symbols which indicate the degree of risk associated with repayment of principal and payment of interest on debt instrument. Credit rating agency gets fee for their services from corporate entities which approach for rating of their instruments. Credit rating is not mandatory to all corporate sectors except for certain instruments. The financial position of the corporations is reviewed frequently and the ratings are revised by the credit rating agency.

Origin

In 1841, the first mercantile credit agency was set up in New York to rate the ability of merchants to pay their financial obligations. Later on, it was taken over by Robert Dun. This agency published its first rating guide in 1859. The second agency was established by John Bradstreet in 1849 which was later merged with first agency to form Dun & Bradstreet in 1933. It became the owner of Moody’s Investor’s Service in 1962. Since 1970’s, a number of credit rating agencies have been set up all over the world including countries like Malaysia, Thailand, Korea, Australia, Pakistan, Philippines etc. In India, CRISIL (Credit Rating and Information Services of India Ltd.) was setup in 1987 as the first rating agency.

Rating Indications

Rating symbols assigned to a security issue is an indicator of the following:

the nature and terms of the particular security being issued;

the ability and the creditworthiness of the issuer of a security to make payments in time;

the probability that the issuer will make a default in payments.