The Big Three Credit Rating Agencies Emphasis : Standard and Poor’s

Acknowledgement The below Project is submitted by ................. for the completion of assignment given on ........... This is to admit that the below work is of my own and any sort of information used from other sources are properly acknowledged. Any case of plagiarism has not been followed.

Study: The study is based on S&P recent failure in the credit rating in the market where in a lot of their credit ratings were criticized. Especially after 2008 their credit ratings are degraded and recently their biased rating on India have been criticized. Many major companies have been stripped off their credit rating so as being “superficial” Never the less S & P still has the value in the market to and majorly help investors understand their return on Investments.

Assignment 1

1) List down the influence of rating on the creditworthiness of issuers (country or /and company) On an Issuer side Credit worthiness is nothing but the rating of the company irrespective of its country or Field rated by the Credit rating agency like The Big Three. Each of these companies have their own powerful analytical tools to decide the credit rating of the issuer against that of the investor. It helps the investor to understand the maximum and minimum risk he can take to invest in a particular bond or other debt obligation to save his investment from default. Influence on the issuer: 1) To provide their Independent credit worthiness: This is the independent view open to the investors in the market. Even though the Big three are greatly criticized for their credit Rating in the Year 2008 it has been very helpful for investors to understand where to invest and what can be the risk for the all risk taker and risk adverse investor. 2) To Decide on the interest rates of the issue Once rated the issuer can decide on the interest rate given to the issuer so that depending on the risk taken by the investor and retaining the investor for over a period of time. 3) Helps in increasing the transparency between the issuer and the investor Credit rating agency can provide an exact rating to the company where in the investor can find more information about the company’s debt ratio and possibility of the premium.

Standards and Poor’s Credit Rating agency
“Standard & Poor’s is known to investors worldwide as a leader of financial- market intelligence. Today Standard & Poor’s strives to provide investors who want to make better informed investment decisions with market intelligence in the form of credit ratings, indices, investment research and risk evaluations and solutions.” S&P website

A) Importance and role of S & P
S and P in the early 2000’s was a competitive Credit rating agency based in the US. It credit rating is as follows:

Now depending on this chart the investor can decide to invest between the AAA credit rated company where there minor or no risk of default. Lowering down the grades indicate that the credit rating or in other words the risk on the investment increases. A risk Taker will exercise his investment even in the speculative areas. But if we see Category such as C or D where the credit risk is the most and there is a sure default in the return on Investment .

B) Rating Process of the Agency
Considering the risk factors the S&Phave, functionally divided their risk factors Rating process as follows: 1) Business Risk  Country Risk  Industry Characteristics  Company Position  Profitability and Peer group Comparison 2) Financial Risk  Accounting Risk  Governance, Risk tolerance and Financial Policy  Cash Flow Adequacy  Capital Structure  Liquidity and Short Term Factors

c) Relevance of their Rating
Similar to their importance Credit ratings help the investor in understanding the credit risk of a company. The grade that allows an investor to take investment decision It helps in building the transparency about the company’s issues of debt and Risk return ratio. They do not help in calculating the risk return or apply to any merit gained by using the credit rating. The credit rating is just a tool, which helps very effectively in deciding the risk factors involved in investing. According to the grading for the company the demand for the Issue arises most of the time in the financial market thus helping the issuer decide the Interest on the issue.

Incident 1: According to the Financial Review ( FR)
The European Union crisis and the Greek Debt crisis have been greatly criticized where S & P had failed to provide valid evaluation. S&P did not detect problems earlier, as their “throughthe-cycle” methodology, which focused on long-term performance. Ratings prove that governments’ balance sheets have been taking a hammering because of attempting to salvage the global financial system. S & P was criticised for having had political agenda behind the rating which was later cleared off by John Bailey the S & P director Australia’s

Incident 2: Credit Ratings on US in 2011
“The backlash against Standard & Poor's for downgrading the U.S. credit rating adds to the
company's problems in the nation's capital, where it faces investigations for its role in fueling the financial crisis with faulty assessments of mortgage-backed securities. S&P and the other credit-rating firms are widely believed to have enabled the near market meltdown by giving AAA ratings to many securities backed by risky subprime mortgages.”L.A Times