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Background: This article considers whether South African banks should utilise the credit ratings provided by US-based credit rating agencies when assessing the creditworthiness of corporate borrowers.
Aim: A review is conducted of the relevant literature and specifically the methodologies used by the credit rating agencies for ranking corporates i...
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... financial health of the issuer(Verster et. al., 2019).All three biggest CRAs were formed in the early 20 th century, and the first credit ratingwas assigned in 1909 by Moody's Investors Service founder John Moody, who at the time rated railroad bonds. Later, the rating industry was joined by Poor's Publishing Company and Standard Statistics Company (which later merged and formed Standard a ...
This research investigates the role of credit ratings in financial markets, focusing on smaller or geographically centralized companies. It applies Moody’s Investors Service credit rating assessment methodologies to a company listed on the Nasdaq Baltic Stock Exchange, specifically the Auga Group, providing a unique perspective on Baltic companies and their global positioning. The study emphasizes the need for financial analysis of smaller-size companies to guide policymakers, create business development opportunities, and attract investors. This research offers a novel perspective, as credit rating assessments for smaller corporations have not been extensively analyzed. The objective is to provide a comprehensive evaluation of Auga Group’s performance using credit rating assessment methodologies and techniques, which incorporate various qualitative and quantitative factors. The study concludes that agricultural company “Auga Group” falls within the lower end of the speculative ratings group, reflecting its increased vulnerability to default. It is found that Auga Group’s financial performance aligns with industry standards for smaller-scale companies. However, its qualitative performance in terms of market share and earnings stability is lower. It is suggested that Auga Group implements a debt management strategy and maintains its current product profile and exporting strategy. The research also recommends policymakers provide financial and regulatory support to corporations practicing environmentally-friendly organic agriculture. Finally, the research proposes that future studies should incorporate more qualitative factors in corporate credit rating assessments.
... Also, the contribution of CRAs towards structured financial product is limited. In addition to this, dependence on CRAs to determine creditworthiness must be defined by lenders (Tanja et al. 2019). Interestingly, studies have shown that credit rates and tendency to default are inversely proportional (Basil & Elgammal, 2013). ...
The Credit Rating Agencies (CRAs) are commercial enterprises that provide credit ratings. CRAs assess borrowers for their capacity to repay the debt as well as the credit risk associated with these borrowers. Moreover, no credit rating system is 100% perfect, and the actual predictive ability can be fetched from accuracy study vis-à-vis hit rate or default rate. A clear definition is necessary for computing default rates. The default rates may be computed over varying time frames and potentially exposing such computation in accordance with period-selection bias. CRAs compute default rates using the average cumulative default rate approach and weighted marginal default rate method. The credit rates assigned by different CRAs are not strictly comparable. Hence, there exists a scope to analyse the hit rate of different CRAs for same credit category. This study revealed that, there exists significant difference in the groups for higher rating categories such as AAA, AA, and BBB. Since the groups of higher credit category are significantly different from each other, the higher credit rates assigned by different credit rating agencies are not strictly comparable is justified. Also, credit rates below the median rate assigned by different CRAs can be accepted by lenders without further investigation. The future researchers can take this forward by considering the analysis over more CRAs and inclusion of CRAs across the globe.
... A borrower's credit rating reflects the likelihood that the borrower will not pay interest or principal when due (16). Currently, banks often use credit ratings from credit rating agencies, either directly or as a benchmarking tool for internal rating models (17). A credit rating reflects the creditworthiness of an enterprise. ...
... Some authors point out that CRA ratings should not be considered accurate. They are opinions about the riskiness of entities (17,22) and do not serve to predict gains and losses (22). For many enterprises, determining credit ratings is a complicated task. ...
Associated enterprises integrated into business groups may use the capital resources of the group. When setting the remuneration for their use, they must ensure that prices between them are set according to the rules of the Organisation for Economic Co-operation and Development (OECD). The core document is the Transfer Pricing Guidance on Financial Transactions. Based on the results of a qualitative analysis (content and contextual analysis of the document), the aim of the article is to systematize the procedures used to determine the transfer price in financial transactions such as loans and borrowings where the parties are related parties (hereinafter referred to as "intra-group loans"). The decision-making process is illustrated by means of a flow chart that establishes the basic decision framework, or the individual steps leading to the selection of an appropriate transfer pricing method for intra-group loans.
... According to efficient market hypothesis (Fama, 1998), share prices reflect all available information in the market at a particular point of time; hence, they reflect information about credit rating announcements. CRAs are important for investors in emerging economies due to their ability to assess default probability (Verster et al., 2019). A significant amount of research has been conducted in the area focusing on varied themes. ...
The current investigation aims to assess the effect of credit assessment changes on the share prices of Indian companies from 2009 to 2019. The data of top 100 companies listed on National Stock Exchange (NSE) across 10 industries stem from CMIE databases. The excess stock return is compared with the market in a 15-day window around credit rating changes. The event effect on share prices is more in the pre-event window compared to the post-event window. Positive abnormal stock returns around upgrades through downgrades are statistically significant compared to upgrades. Credit ratings are not significant across industries, and agency nationality is a critical factor for calculating the intensity of price reaction.
... On the other hand, contribution of credit rating to structured financial product is limited. Dependency on external ratings to determine the creditworthiness should be defined and its scope in the credit appraisal should be defined with proper weights assigned by lending institutions (Tanja et al., 2019). ...
... Lending institutions are concerned about credit ratings to price the debt (Tanja et al., 2019), (Raghunathan & Varma, 1992). ...
Creditworthiness is acknowledged worldwide as focal point of debt processing. Credit Rate, an output of credit-rating process, reflects such creditworthiness. We reviewed literature on elements of credit rating, viz. Credit Rate, credit-rating agencies (CRAs) and credit-rating model. Credit Rating is an independent evaluation of creditworthiness. CRAs perform this evaluation to support financial institutions in processing debts. Literature added in credit-rating domain from January 2001 to November 2020 is analyzed to explore the opportunities for further research. Bibliometric analysis is used to comprehend the existing literature. Subsequently, through structured review theories, methodologies used by researchers and CRAs are explored. Further, a hybrid literature review is developed by integrating bibliometric and structured review of research papers from widely recognized databases. A sample of 153 papers is constructed and studied to identify gaps in credit-rating domain and to develop suitable remedy to fill such gaps. We found that most of the studies emerged as after-effects of financial crisis reported in 2008 and 2016. The review revealed that 48% studies focused on development of new credit-rating mechanism without evaluating existing structure in-depth. This paper contributes to existing literature by encouraging researchers and CRAs to develop a sector-specific credit-rating system by evaluating existing models and improvising them by adopting advanced techniques like Multiple Regression, Neural Networking and Artificial Intelligence. We have provided a feasible research agenda to further explore credit-rating domain. In this study we have identified that the factors determining creditworthiness are different for different sectors.
... As the basis of analysis and assessment of ratings, Fitch observes several pillars: long-term default risk, short-term default risk, viability (company performance and organization), support, and derivative counterparty rating (see Figure). Fitch uses quantitative and qualitative assessments of various indicators, which can simply be expressed as economic and political factors (Verster et al., 2019). According to the same authors (2019) and Fitch (2014), these rates are the product of opinions, but not facts, and it cannot be express as accurate or inaccurate. ...
This paper analyzes methodologies of credit rating assessment of major rating agencies, with the focus on Fitch Ratings (Fitch). The methodology data were collected from Fitch Ratings. Also, the article review international literacy for factors and indicators adequacy in rating assessments. The purpose of this research is to overview literacy for the primary methodologies of banks' credit rating assessment. It was explained that ratios from financial indicators are most important for credit rating assessment. In some cases, in sovereign countries, support and macroeconomic factors are significant. We concluded that this area is still not enough researched and that in the future, the number of studies will appear with different methodological proposals and improvements.
... Furthermore, for investors to invest in a country, they would want assurance of political and economic stability (Manso, 2013). Which these are the main factors considered (Verster et al., 2019). As a result, rating agencies play a vital role in a country's economic prosperity, making them key actors in influencing governments policies in countries around the world, (in)directly impacting their development. ...
... In the world of sovereign credit rating many factors are in play. According to the RMB Global Markets Research (2016, p. 11), "political news flows, legislative developments and court outcomes have had an increasing bearing on the ratings risk", (also see Dijsselbloem, 2013;Verster et al., 2019). The study found that at least from 2010, rating agencies have become a prominent participant in influencing the kind of governance policies, especially fiscal policies, South Africa ought to be implementing. ...
... Again, although credit rating agencies' 'ratings' are just opinions about riskiness of entities or countries in this case and although their 'ratings' ought not be seen as accurate according to Verster et al. (2019), remain key actors in the policy-making environment in both developed and developing countries but especially in developing countries such as South Africa. ...
In the past decade South Africa has been mired by downgrades from international Credit Rating Agencies (CRAs) which has been detrimental to its policies and economy. This study explored the role played by CRAs in influencing South Africa’s governance prior the current global Corona (Covid 19) pandemic. The study adopted an interpretivist paradigm making it a qualitative enquiry. Data was collected through interviews, purposefully sampling key knowledge-holders while seeking a thematic analysis of the interview data. The study found that CRAs are key actors in the South African policy-making environment, they determine the creditworthiness of the country and are critical investment gatekeepers, while creating awareness as well as exerting pressure on policy makers in the policy- making process. Consequently, this has had a great impact on both monetary and fiscal policy of the country. Which underpins the overall domestic or local economic development path and eventually affects service delivery and the way of life of citizens. With the current adverse pandemic, and its impact on already fragile economies such as that of South Africa. The role of CRA will become ever more vital during and post the pandemic when countries scramble to borrow and pay debt accumulated before, during and post the pandemic. Making the behaviour of a country (policy-wise) greatly influenced by CRA. South Africa has not been exempted from this conundrum while it has already engaged in talks with the International Monetary Fund (IMF) for funds to help fight the pandemic.
It is necessary for decision-makers to have a rating system in the banking industry in order to reflect the banks' status and performance. Although most institutions across the countries have rating banks and financial institutions, there is a lack of a comprehensive rating system across Iranian banks. Rating requires identifying the appropriate criteria according to the environmental and macroeconomic conditions. For this purpose, 35 components are determined through the opinion of 34 banking and academic experts using the Delphi method and rating is done by the TOPSIS method for 15 banks listed on the Tehran stock exchange over the period of 5 years from 2015 to 2019. The results show that in addition to the quantitative aspects, the qualitative aspects and aspects related to environmental and macro aspects are effective in the native model of banks ratings. Also, there is a positive and significant relationship between banks stock prices variation and the suggested ratings. The obtained results showed that there is a positive and significant correlation between the comprehensive model and early warning system so that the bank's position can be relatively described in the early warning system by identifying it within the model. This evidence addresses the need for a comprehensive consideration of proposed indicators to evaluate and rate banks.
