A credit rating signifies an assessment of the credit risk of a potential debtor (a person, organization, corporation, or government), foretells the capacity to repay debts, and offers an inexplicit prediction of the possibility of defaulting. Credit ratings present a valuation of the ability to pay off debts, encompassing details obtained from debtors and confidential information acquired by agencies’ analysts. Credit scores, with respect to credit rating, present a numerical assessment of creditworthiness, which is carried out by credit bureaus or reporting agencies (Bowe & Larik, 2014). A credit rating may address a company’s monetary tools, for instance, debt securities such as bonds, over and above the organization itself. The most reputable credit rating agency that assigns ratings is Standard & Poor’s. This agency employs letter designations such as A, B, and C, where AAA is the highest rating. A high rating denotes a low possibility of defaulting.
Credit ratings are given to a company based on a comprehensive economic assessment, mostly to establish the available revenue to service debts. When a company has adequate resources to cover a huge debt, it is assigned a high rating (Bendig, Strese, & Brettel, 2017). Some of the occurrences that may result in a change in a company’s credit rating encompass the inability to pay off a debt in time and economic decline that influences an organization’s profitability negatively. Dramatic rating variations at times happen in the corporate bond sector; for instance, when a business acquires another that has debts, it may have its rating decreased sharply overnight. Investors often depend on credit ratings to determine the merit of investment in a company’s bonds. To safeguard their investment, most investors avoid purchasing bonds from companies whose credit ratings are low, or at least BBB.
References
Bendig, D., Strese, S., & Brettel, M. (2017). The link between operational leanness and credit ratings. Journal of Operations Management, 52, 46-55. Web.
Bowe, M., & Larik, W. (2014). Split ratings and differences in corporate credit rating policy between Moody’s and Standard & Poor’s. Financial Review, 49(4), 713-734. Web.