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Rating Terminology

There are numerous credit rating specific terminologies that are commonly used when analyzing and interpreting credit quality. A brief overview of the important terms are presented below.

Rating lifetime

A rating is new when it has been assigned for the very first time to an issuer. Ratings are reviewed by agencies regularly. A rating is confirmed when the review does not undergo any changes. A rating is downgraded/upgraded when the rating has been lowered/raised in the scale. During the lifetime of the issue, the rating can be withdrawn or stopped for any reason such as

Withdrawal of a rating does not necessarily mean that rating withdrawals indicate higher risk.

Rating watch and outlook

Rating outlook indicates the medium-term potential evolution of the rating in the future. A favourable or unfavourable outlook means that the rating may be increased or decreased. A rating with a stable outlook will most likely not be changed. A developing rating outlook indicates that the rating may be lowered or raised. Credit watch lists are used to determine shorter-term change. This means that the rating is put on the watch list when an event deviates from the expected trend and there is a good probability of a change in the rating.

Rating qualifiers

Rating qualifiers give additional information on the specific meaning of the rating. The significant qualifiers are:

They are typically used as input opinions for other work. The rating may be subject to assumptions and information other than regular ratings.

Preliminary or expected ratings are given to issues that do not yet have completed documentation, and have not been given a concluded legal judgment. Many these rating qualifiers are specific to the rating agency. It is advisable confer with the agency’s rating structure for an accurate understanding of decisions made based on the rating.

Solicited and unsolicited ratings

‘Solicited ratings’ are ratings that are initiated and paid for by the issuer. Occasionally, issuers may not opt to be rated as they rarely raise debt or equity in international financial markets. Another reason is if the issuer is apprehensive about getting a negative rating that may limit his/her future access to funds. However, as public information is readily available on the issuers, they may anyway get rated, which will result in unsolicited ratings. Public information may or may not hold enough data to arrive at an accurate rating. Historical evidence has shown that unsolicited ratings are biased downwards in relation to solicited ratings. When categorizing an unsolicited rating, the agency normally has more restricted access to data.

Split ratings

The immense growth in the number of credit rating agencies has caused many debtors or debt instruments to be rated multiple times. A split rating occurs when more than one agency assigns different ratings to the same debtor or instrument. Ratings are key as they produce the main input for the regulatory capital calculation in a Basel II, split rating lead to alternate levels of safety capital. Banks and businesses then unfortunately proceed to ‘cherry-pick’ the preferred rating agencies so as to minimize their safety capital. Additionally, investors respond in different ways depending on whether a debt instrument is characterized by multiple equivalent ratings or when split ratings have occurred.

Regulations are also affected by split ratings as regulators tend to put restrictions on the number of speculative investments while a debt instrument may be considered speculative by one agency and non-speculative by another. Reasons for split ratings are,

Because of the existence of split ratings, there have had to be some refinements to the existing regulations. For this reason, banks and businesses are prohibited from cherry-picking their rating agencies and use a consistent rating policy based on a well-considered choice of rating agency. In the case of split ratings, the regulations specify the use of the worst rating in the case of two and the median rating when there are more ratings available.

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