Factors considered in assigning a credit rating, Financial Management

Credit rating agencies carry out credit rating. Companies appoint these agencies to assign credit rating for their corporate issues. The rating agencies may conduct credit examination either for the entire company or on a specified debt obligation of that company. In case of bankruptcy, the rating agency may assign different ratings for different issues of the company. For example, the rating may depend upon the seniority of the bondholders of each issue of a company.

The factors to be considered in assigning a credit rating are - Character, Capacity, Collateral and Covenants:

Character: This is a measure of the firm's reputation, its willingness to repay, and its credit history. In particular, it has been established empirically that the age factor of an organization is a good proxy for its repayment reputation. The history of the business and experience of its management are critical factors in assessing a company's ability to satisfy its financial obligations.

Capacity: The ability to repay debts reflects the volatility of the borrower's earning. If repayments on debt contracts prove to be a constant stream over a period of time, but earnings are volatile (and thus have a high standard deviation), it is highly probable that the firm's capacity to repay debt claims would be at risk.

Collateral: In the event of a default, a lender has a claim on the collateral pledged by the borrower. Greater the proportion of this claim and greater the market value of the underlying collateral, lower will be the remaining exposure risk of the loan in case of a default.

Covenants: Agreed terms and conditions between the borrower and lender are called covenants. Two types of covenants are seen in a lending agreement - affirmative covenants (promise of the borrower to meet certain promises like paying interest, principal, taxes, etc.), and negative covenants (restrictions to the borrower regarding what actions are prohibited).

Posted Date: 9/8/2012 7:01:06 AM | Location : United States







Related Discussions:- Factors considered in assigning a credit rating, Assignment Help, Ask Question on Factors considered in assigning a credit rating, Get Answer, Expert's Help, Factors considered in assigning a credit rating Discussions

Write discussion on Factors considered in assigning a credit rating
Your posts are moderated
Related Questions
Cost of Preference capital (K ) The fixed rate of dividend payable to the Preference share holders is the cost of Preference capital.  Exactly, the cost of Preference capital

Why do we focus on cash flows in place of profits when evaluating proposed capital budgeting projects? We focus on cash flows in place of profits while evaluating proposed capita

• Graph the Current and Quick Ratios for the five years. • Analyze observations of the trends you observed. • Support you analysis with information you observe from the Trend and

the approach focussed mainly on the financial problems of a corporate enterprise

Q. Explain Traditional Method of Measurement? Computation of yield to measure a financial asset's return is the simplest and oldest technique of measurement. Yield can be find

Define the basic motivations for a counterparty to enter into a currency swap.  Answer:  One major reason for a counterparty to enter into a currency swap is to exploit the comp

What is the matching principle of working capital financing?  What are the advantages of following this principle? The matching principle is while short-term financing is employe

Bonds pay interest periodically at a pre-specified rate of interest. The annual rate at which this interest is paid is known as the coupon rate or simply the coup

Compare and contrast the potential liability of owners of proprietorships, partnerships (general partners), and corporations. The sole proprietor has limitless liability for ma

Incremental Cost The measured change in a firm's cost of production due to an additional activity pursued by the firm. Incremental costs can be measured by the cost difference