A credit rating is an evaluation of the credit risk of a prospective debtor (an individual, a business, company or a government), predicting their ability to pay back the debt, and an implicit forecast of the likelihood of the debtor defaulting.
The credit rating is performed by a credit rating agency, who evaluates the qualitative and quantitative information for the prospective debtor, including information provided by the prospective debtor and other non-public information obtained by the credit rating agency’s analysts.
There are a few credit rating agencies in the world, but the three (3) most popular are Standard and Poor’s, Moody’s and Fitch who control approximately 95% of the credit ratings business.
Sovereign Credit Ratings
This is the credit rating of a sovereign entity, such as the national government. The sovereign credit rating shows the level of risk associated with investing in a country and helps external investors who are looking to invest make informed decisions based on the level of risk. The risk is usually broken down into political and economic risk.
Corporate credit ratings
A corporate credit rating helps address a corporation’s financial instruments such as a bond. The rating agencies also analyze the corporation itself and its state of health.
The credit agencies usually use letter designations such as A, B, C to denote the probability of default or the obligor’s capacity to meet its financial commitment.