Rating of Debt Instruments Homework Help

Rating of Debt Instruments

Credit rating is, essentially, the symbolic indicator of the current opinion of the rating agency on the relative ability and willingness of the issuer of a debt instrument to meet the debt service obligations as and when they arise. It provides a relative ranking of the credit quality of debt instruments or their grading according to investment qualities. In other words, credit rating provides a simple system of gradation by which the relative capacities of companies (borrowers) to make timely payment of interest and repayment of principal on a particular type of debt instrument em be noted.

Credit rating, however, is neither a general purpose evaluation of a corporate entity nor an overall assessment of the credit risk likely to be involved in all tlre debts instruments contracted or to be contracted by such issues. A rating is specific to a debt instrument and is intended to grade different and specific instruments in terms of the credit risk associated with the particular instruments. Although it is an opinion expressed by a independent professional organisation, on the basis of a detailed study of all the relevant factors, the rating does not amount to any recommendation to buy, hold or sell an instrument as it does not take into consideration factors such as market prices personal risk preferences of an investor and such other considerations, which may influence an investment decision.

Although credit rating has been a long-established part of the financial mechanism abroad, it is of relatively recent origin in the country. The first rating agency, Credit Rating Information Services of India Ltd (CRISI), was started in 1988. Initially, it played a rather subdued role presumably because the institutional investors did the wisdom of a rating agency. In a changed scenario where corporates are dependent on the public the removal of restrictions on interest rates and the stipulation of credit rating of a number of instruments since 1991 by the credit rating has emerged as a critical element in the functioning of the Indian debt/financial markets. In response to the ever-increasing role of credit rating two more agencies were set up in 1990 (Information and Credit Rating Services OCM) Lid and 1993 Credit Analysis and Research (CARE)LId respectively.

The first private sector institution set up as a joint venture between the JM Financials, Alliance Group and the international rating agency Duffs and Phelps in 1995, known as Phelps Credit Rating India LId OCRt It is now known as FITCH India Ltd.

Posted by: andy

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