What benefits can companies get from rating agencies?

What benefits can companies get from rating agencies?

What benefits can companies get from rating agencies?
John Dou - 08/11/2017

What benefits can companies get from rating agencies?

A rating agency is a specialized company that, by analyzing and evaluating such parameters as creditworthiness, financial stability, and other economic performance indicators, determines the credit rating of an organization. This parameter shows how reliable the company is, is developing steadily and is attractive for investment.

This type of activity was born in the USA, where it was concentrated for a long time. Now the work of rating agencies is actively developing in many countries of the world. The number of such firms is also growing.

 

Agency Requirements

In carrying out their tasks, rating agencies must meet certain conditions:

Rely on reliability and objectivity. Determine the rating based on data over a long period of time. Periodically review the data, based on the current situation in the company, and change the rating if it is really required.

Independence from external factors. Give a real assessment of the company, which should not be influenced by political events, as well as the possible pressure exerted on the agency by the organization being evaluated.

Accessibility and openness. Data on the analysis should be available. Including for foreign individuals and legal entities.

Competent human resources in sufficient quantities. Carrying out company analysis is a time-consuming process that requires a large staff.

Recognized calculation methodology. Each agency uses its own methods in determining the rating, which is kept secret. But the main stages of the analysis must comply with the principles established by professional communities and bodies regulating the work of this area.

 

How is the rating assigned?

The rating service is paid. It is ordered by companies and firms, enterprises, municipal organizations, regions, countries.

To determine the rating, information obtained from both the organization itself and from open sources is analyzed. As a result, an assessment is made of various indicators of the company: financial, managerial; the state and availability of property is being studied; the market situation and other data necessary for applying the analysis method used by the agency are examined. Each indicator is assigned a certain score, which, upon subsequent summation, constitutes a rating. As a rule, the rating has a literal expression: from “AAA” - the highest creditworthiness, to “C” - a high probability of bankruptcy, or “D” - the default of the company.

It should be noted that the rating is influenced by the personal opinion of the person who analyzes and calculates it. But it is not a summary. This is the result of the work of the entire rating agency, since the final decision is made, as a rule, with a general vote of representatives of the rating committee of the agency.

 

Thus, the presence of a company rating allows the investor to assess its condition and make the right decision when placing its capital, thereby reducing possible risks. And this allows the companies themselves to increase the number of their investors.

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