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
Using Southwest Airlines as an example, please identify the largest potential threat, the strategy employed, and what types of capital budgeting projects would be used to operation

Public Financial Statements of a Company The final exercise is the valuation of a publicly held company's equity. You must base your valuation on the company's public financia

Concepts of Cost of Capital 1. Explicit Cost And Implicit Cost The explicit cost of any source of finance may be described as the discount rate that equates the current v

Q. Show the Compound Value of the Single Flow ? Compound Value of the Single Flow (Lump Sum):- The process of computing future value becomes very cumbersome if they have to be

Explain the aspects of financing decision The financing decision covers two interrelated aspects: (1) capital structure theory (2) capital structure decision.

Q. Determine Interest coverage ratio? Current interest coverage ratio = 7000/500 = 14 times Increased profit before interest and tax = 7000 × 1.12 = $7.84m Increased inte

Describe the general pattern of cash flows from a bond with a positive coupon rate. Cash flows from a bond along with a positive coupon rate contain periodic interest payments an

Monthly Returns: You now need to calculate the monthly "periodic" returns for all three stocks and the S&P index.  Adapting the holding period return formula (End - Beg) / Beg for

Explain the difference between performing the capital budgeting analysis from the parent firm’s perspective as opposed to the project perspective. The aim of the financial mana

What is meant by deadweight loss?  Why does a price ceiling usually result in a deadweight loss? Deadweight loss considers to the benefits lost to either consumers or producers