A credit rating is an assessment of the creditworthiness of a borrower in general terms or with respect to a particular debt or financial obligation. A credit rating can be assigned to any entity that seeks to borrow money — an individual, corporation, state or provincial authority, or sovereign government.
Credit ratings aim to enhance transparency in debt markets by providing an independent opinion of credit risk, thus reducing the information asymmetry between borrowers and lenders. It enhances investor confidence and allows borrowers to market their debt securities. However, credit ratings are not investment recommendations as an investment decision should be based on factors apart from credit risks, such as liquidity in the market and interest rate fluctuations.
Bangladesh Security Exchange commission and Bangladesh Bank are two regulators of the credit rating agencies in Bangladesh. BSEC is the regulator of the country capital market, enacted through the Securities and Exchange Commission Act 1993. In accordance to BSEC Rules 2004, every public offering of debt instruments, shares at premium and right share issued at premium are to be rated by an External Credit Rating Institution (ECAI). AlphaRating rating methodologies are developed within the guidance of Bangladesh Bank (BB), which is the central bank and apex regulatory body for the country monetary and financial system. In accordance to Bangladesh Bank circular no. 06 through BRPD, every financial institutions and NBFI are to be rated by an ECAI along with bank loans sanctioned by the financial institutions.
Each rating symbol is an alpha-numeric representation of degree of repayment risk associated with debt instruments. For a complete list of ratings definitions and their symbols refer to Rating Info> Rating Symbol section.
A rating is expected to remain valid until the rated debt obligation is fully paid or the rating is withdrawn and is subjected to a periodic review to ascertain the validity of the same.
Rating is an opinion based on information available at a point in time with the rating agency and expectations made on the basis of such information by the agency. However, information and expectations can change significantly over time, thereby affecting the future repayment abilities and thus, requiring the rating to be altered.
A credit rating agency relies on a variety of information sources, including published annual reports. An audit process is designed to detect fraud or misrepresentation of information, whereas credit rating process is not.
Yes. In a situation where an issuer is unhappy with the rating assigned, he may request for a review, furnishing additional information, if any, considered relevant. The rating agency will, then, undertake a review and thereafter indicate its final decision. Unless the rating agency had overlooked critical information at the first stage, (which is unlikely), chances of the rating being changed on appeal are rare.
The rating process is a fairly detailed exercise. It involves, among other things, analysis of published financial information, visits to the issuer’s office and works, intensive discussion with the senior executives of issuer, discussions with auditors, bankers, etc. It also involves an in-depth study of the industry itself and a degree of environment scanning. All this takes time and a rating agency may take three to four weeks or more to arrive at a decision, subject to availability of all the solicited information. It is of paramount importance to rating companies to ensure that they do not, in any way, compromise on the quality of their analysis, under pressure from issuers for quick results. Issuers would also be well advised to approach the rating agencies sufficiently in advance so that issue schedules can be adhered to.