A credit rating is an opinion that provides a measure of credit quality. It is an unbiased, independent, third-party evaluation of an issue or issuer. It is a grading system which focuses on a company’s capability and willingness to pay its obligations upon maturity.
A credit rating is typically used to obtain funding from the public. Raising funds from the capital markets provides a company with improved financial flexibility and can allow it to negotiate for better terms and interest rates. A credit rating can also be used for marketing and benchmarking purposes as through the rating process, a company’s strengths, weaknesses, opportunities, and threats will be highlighted. On the part of regulators and investors, credit ratings can assist in their own evaluation and monitoring of specific companies and instruments. Credit rating agencies typically have access to confidential information which will not be readily available to other market participants.
Credit rating agencies are regulated by Bangladesh Securities and Exchange Commission (BSEC). The BSEC (Credit Rating Agencies) Regulations, 1996 govern the credit rating agencies and provide for eligibility criteria for registration of credit rating agencies, monitoring and review of ratings, requirements for a proper rating process, avoidance of conflict of interest and inspection of rating agencies by BSEC, amongst other things.
Each credit rating agency may have its own set of criteria and different weight age for each component for assigning the ratings. Some of the common factors that may be taken into consideration for credit rating are Issuer Company’s operational efficiency, level of technological development, financials, competence and effectiveness of management, past record of debt servicing, etc.
The lead analyst for a particular account reviews the specific issue or issuer on a continuous, daily basis. The analyst is expected to keep himself/herself informed regarding developments relating to his or her account. On a formal basis, updated information is requested quarterly while it is mandatory to meet with a company’s management, for as long as there is an outstanding credit rating, at least once a year.
A credit rating can be changed at any time depending on prevailing circumstances and/or prospects. Any potential upgrade or downgrade, however, will necessitate meeting or discussing with the company concerned to ensure the accuracy of facts and rating considerations in arriving at the revised credit rating.
Ratings can be withdrawn due to the following reasons: 1. Rated debt security has been paid in full upon maturity. 2. Company has decided not to renew its credit rating agreement after the yearly agreement lapses. 3. Company being rated does not provide enough information which WCRCL can use as basis for regularly updating and monitoring the credit rating. As much as possible, WCRCL refrains from withdrawing credit ratings due to lack of information for surveillance purposes.
A credit rating does not guarantee lower borrowing costs. Investors and lenders are free to set lending margins at any level that makes commercial sense. Additionally, at low levels of rating, the capital costs applied may be the same whether or not a borrower is rated, or may in fact be higher (for example, if a borrower has both a small exposure and a very low rating). However, to the general benefit of higher rated entities, implementation of Basel II in Bangladesh is expected to make the bank system in general more risk-sensitive in assigning lending margins.
If the issuer is not satisfied with the rating outcome, an appeal on the decision can be constituted as per the provisions laid out in the rating process and signed agreement as well.