Advantages and of credit rating
Different benefits accrue from use of rated instruments to different class of investors of the company. These are explained as under:
A. Benifits to Investors:
(1) Safety of investments: Credit rating gives an idea in advance to the investors about the degree of financial strength of the issuer company. Based on rating he decides about the investment. Highly rated issues gives an assurance to the investors of safety of investments and minimises his risk.
(2) Recognition of risk and return: Credit rating symbols indicate both the returns expected and the risk attatched to a particular issue. It becomes easier for the investor to understand the worth of the issuer company just by looking at the symbol becausse the issue is backed by the financial strength of the company.
(3) Freedom of Investment decisions: Investors need not seek advice from the stock brokers,merchant bankers or the portfolio managers before making investments. Investors today are free and independant to take investment decisions themselves. They base their decisions on rating symbols attached to a particular security. Each rating symbol assigned to a particular investment suggests the creditworthiness of the investment and indicates the degree of risk involved in it.
(4) Wider choice of investments: As it is mandatory to rate debt obligations for every issuer company, at any particular time, wide range of credit rated instruments are available for making investment. Dependening upon his own ability to bear risk, the investor can make choice of the securities in which investments is to be made.
(5) Dependable credibility of issuer: Absence of any link between the rater and the rated firm ensures dependable credibility of issuer and attracts investors. As rating agency has no vested in interest in issue to be rated and has no business connections or links with the board of directors. In other words, it operates independent of the issuer company, the rating given by it is always by the investors.
(6) Easy understanding of investment proposals: Investors require no analytical knowledge on their part about the issuer company. Depending upon rating symbols assigned by the rating agencies they can proceed with decisions to make investment in any particular rated security of a company.
(7) Relief from botheration to know company: Credit agencies relieve investors from the botheration of knowing the details of the company, its history, nature of business, financial position, liquidity and profitibility position, composition of management staff and board directors etc. Credit rating by professional and specialised analysts reposes confidence in investors to rely upon the credit symbols for taking investment decisions.
(8) Advantages of continous monitoring: Credit rating agencies not only assign rating symbols but also continously monitor them. The rating agency downgrades or upgrades the rating symbols following the decline or improvement in the financial position respectively.
B. Benifits of rating to the company:
A company who has got its credit instrument or security rated is benefited in the following ways.
(1) Easy to raise resources: A company with highly rated instruments finds it easy to raise resources from the public. Even though investors in different sections of the society understand the degree of risk and uncertainty attached to a particular secirity but they still get attracted towards the highly rated instruments.
(2) Reduced cost of borrowing: Investors always like to make investments in such instrument which ensure safety and easy liquidity rather than high rate of return. A company can reduce the cost of borrowings by quoting lesser interest on those fixed deposits or debentures or bonds which are highly rated.
(3) Reduced cost of public issues: A company with highly rated instruments has to make least efforts in raising fund through public. It can reduce its expenditure on press and publicity. Rating facitities best pricing and timing of issues.
(4) Rating builds up image: Companies with highly rated instruments enjoy better goodwill and corporate image in the eyes of customers, shareholders, investors and creditors. Customers feel confident of the quality of goods manufactured, shareholders are sure of high returns, investors feel secured of their investments and creditors are assured of timely payments of interest and principal.
(5) Rating facilitates growth: Rating motivates the promoters to undertake expansion of their operations or diversify their production activities thus leading to the growth of the company in future. Moreover highly rated companies find it easy to raise funds from pulic through new issues or through credit from banks and financial institutions to finance their expansion activities.
(6) Recognition to unknown companies: Credit rating provides recognition to relatively unknown companies going for public issues through wide investor base. While entering into market, investors rely more on the rating grades than on 'name recognition'.
C. Benefits to Intermediaries.
Stock brokers have to make less efforts in pursuing their clients to select an investment proposal of making investment in highly rated instruments. Thus rating enables brokers and other financial intermediaries to save time, energy costs and manpower in convincing their clients.
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