CREDIT RATING AND ITS RELEVANCE TO EQUITY INVESTORS

Credit rating refers to the rating of the ability of a borrower to service its debt related

obligations. These ratings, which are provided by a credit rating agency, are issued at issuer level as well as at individual debt levels. Further, separate ratings are provided for short term and for long term.

Although credit rating pertains to debt, it is also of relevance to equity investors as a company can provide returns to equity investors only if the lenders are serviced first. Thus, credit rating provides an investor with the level of financial risk involved and can thus drive the return expectations of investors.

Further, going through the historical evolution of credit rating of the company can also provide perspectives on how the management reacts to external feedback. Typically, credit rating reports specify what are the factors that have led to the rating agency conclude on a particular rating. It also specifies what the rating agency considers as key concerns. If a company has worked on such concern areas, it indicates that the management of the company has been very responsive to external feedbacks. Reading through historical credit rating and how the concerns have changed (or otherwise) from one report to the next can provide the information for obtaining such insights.