What is Credit Ratings of financial instrument?
Credit rating is, essentially, the opinion of the credit rating agency on the relative ability of the issuer of a debt instrument to meet the debt service obligations (about that particular debt) as and when they arise. This opinion is given on the basis of past performance and all available information (audited financial statements, audit reports, information from management, banks and FIs, industry trends and management capabilities). The rating is for a particular instrument and not for the company as a whole, two debt instruments issued by one issuer may have different ratings.
Credit rating is an opinion expressed by an independent professional organization, after making detailed study of all relevant factors. Such opinion is of great assistance to the investors as it helps them in taking investment decisions. It also helps the issuer in determining the price and interest rate of the debt instrument under consideration. There are three important credit rating agencies in India :
(i) Credit Rating Information Services of India Limited (CRISIL).
(ii) Investment Information and Credit Rating Agency of India (ICRA).
(iii) Credit Analysis & Research Limited (CARE).
Credit rating is expressed in the form of symbols, this helps in their easy understanding. (For example: CRISIL’s AAA expresses a long-term debt's highest safety and timely payment of principal and interest.) Plus symbol is used to indicate finer distinctions within a rating category.
A rating is an opinion given at a particular point of time. As the time passes, many things change affecting the debt servicing capacity, the change may upgrade or downgrade the rating.
A rating is neither an investment advice nor it is a recommendation to buy or sell the security that has been rated by the credit agency. A credit rating is not a guarantee against future losses.