Credit Rating Symbols and Ratings Outlook

Rating symbols may vary depending on the type of debt instrument and the tenure i.e. long-term or short-term. Each rating symbol is an alpha-numeric representation of the degree of repayment risk associated with debt instruments. The following image gives you an idea about the symbols given by the CRAs.

Credit rating agencies employ unique terminologies within their credit rating scales to delineate the risk inherent to corporate entities. These credit rating systems are designed for this purpose.

Please see the following image of different credit rating agencies indicating their credit rating uniquely.

+++

Plus and minus symbols are used to indicate finer distinctions within a rating category. The minus symbol associated with ratings has no negative connotations. For example, you may observe from the following image that the ratings in a higher rating category such as ‘AA-’ are stronger than ratings in a lower rating category such as ‘A+‘. Credit rating agencies are regulated by the Securities and Exchanges Board of India (SEBI). The SEBI (Credit Rating Agencies) Regulations, 1999 govern the credit rating agencies and provide for eligibility criteria for registration of credit rating agencies, monitoring and review of ratings, requirements for a proper rating process, avoidance of conflict of interest, and inspection of rating agencies by SEBI, amongst other things.

A rating outlook indicates the direction in which a rating may move over a medium-term horizon shortly of six months to two years. A rating outlook can be ‘Positive’, ‘Stable’, Negative, and No outlook.

 A “Stable” outlook demonstrates a little likelihood of rating change in the near to medium-term

A “Positive” outlook demonstrates that the rating is likely to be upgraded in the near to medium term.

A “Negative” outlook demonstrates that the rating is likely to be downgraded in the near to medium term.

The “Positive” or a “Negative” rating outlook replicates business, financial, or other trends that are taking shape. However, it has not yet reached the level or the certainty that would trigger a rating action in the direction conveyed by the outlook.

Sometimes, a change in regulation increases the threat of imports, whose impact on the rated entity is less ascertainable immediately and is likely to manifest over the near to medium term.  In such case, a change in rating outlook to “Positive” or “Negative” could also be event-induced when the implications of the event, while being less certain, are expected to play out over the near to medium term. So, we cannot take it for granted the “Positive” or a “Negative” outlook would necessarily be upgraded or downgraded shortly. Understanding the above implication helps investors distinguish among rated entities or debt instruments having the same ratings but different rating outlooks.

Watch Ratings:

A rating ‘watch’ reflects the view of a credit rating agency on expected rating movement in the short term and is applicable only when there is an event, the credit implications of which are either unclear or not fully ascertainable immediately. Changes affecting the rating movement may be due to a proposed change in ownership control, a merger, a demerger, an acquisition a sudden regulatory development, a force majeure event, proposed equity infusion, proposed refinancing, proposed asset monetization, material deviation in performance vis-à-vis expectations, etc. A rating may also be placed on “Watch” if there is a methodology change whose implications on the rating might be in the process of being evaluated.

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