Credit Rating Agencies

Functions of Credit Rating Agencies

The primary function of the credit rating agencies is to provide credit ratings to the service providers of various forms of debt products and services. They are also meant to provide ratings to the debt instruments being provided by these service providers. The clients of the credit rating agencies are those entities that deal in the provision of debt products and services. At times, it has been observed that the companies that provide debt products and services are rating the debt instruments by themselves.

Functions of Credit Rating Agencies

The primary function of the credit rating agencies is to provide credit ratings to the service providers of various forms of debt products and services. They are also meant to provide ratings to the debt instruments being provided by these service providers. The clients of the credit rating agencies are those entities that deal in the provision of debt products and services. At times, it has been observed that the companies that provide debt products and services are rating the debt instruments by themselves.

The providers of securities like the companies, the governmental organizations at the state and central level and special purpose entities are the major clients of the credit rating agencies. The non-profit seeking organizations and the national governments also avail the services of the credit rating agencies.

Basis of Credit Rating Agencies and Difference with Credit Bureaus

There is a certain basis to the activities of the credit rating agencies. The rating is mainly provided as per the creditworthiness of the debtor. This means the credit rating agency judges if the debtor would be able to pay the loan back or not. They tailor the rate of interest of the particular debt instrument being borrowed by the debtor. Even though the credit rating agencies and the credit bureaus operate in a similar domain the difference between them lies in the fact that the credit rating bureaus only deal with the individual borrowers whereas the clients of the credit rating agencies are mainly institutions.

Leading Credit Rating Agencies and Application of Ratings

Some of the leading credit rating agencies of the world are A. M. Best, Standard & Poor’s, Baycorp Advantage, Pacific Credit Rating, Dominion Bond Rating Service, Egan-Jones Ratings Company, Fitch Ratings, Capital Intelligence Ltd and Moody’s. Of these companies A. M. Best, Fitch Ratings, Moody’s, Standards and Poor’s and Egan-Jones Ratings Company are located in USA, Baycorp Advantage is in Australia, Dominion Bond Rating Service is in Canada, Pacific Credit Rating is in Peru and Capital Intelligence Ltd is in Cyprus.

The ratings of the credit rating agencies are applied across a wide variety of fields. These ratings are used by the issuers of bonds and similar debt financing securities, investment banks as well as dealers acting as brokers. The government regulators also use the ratings of the credit rating agencies. These ratings are normally instrumental in transactions of structured finance.