Standard and Poor’s is one of the most
widely known credit risk providers. It provides ratings for companies,
governments, financial institutions. Ratings are seen on a scale ranging from
AAA to D, and reflect an independent opinion on the ability and willingness of
a borrower to meet its financial obligations. Those obligations must be met on
time and in full. Credit rating reflect various levels of credit risk, and
helps a company attract a wide variety of investors. It helps negotiate
favorable terms with banks and other creditors and suppliers. Ratings are also
a function of economic or financial health.
On the website of S &P Global ratings,
understanding ratings, it provides examples of credit ratings and their
definitions. For example, a AAA rating indicates that a company has a strong
potential to meet its financial obligations. An A rating indicates that the
company has a strong probability to meet its financial obligations, but is
susceptible to risky economic conditions. A CC rating indicates that the
company is highly vulnerable and close to default, while a D rating, on the
other side of the spectrum, indicates that the entity has defaulted on its
financial commitments, and is also used when bankruptcy has been filed.
An example of a credit downgrade is Exxon
Mobil where its credit rating was reduced by S&P from AAA to AA+. The
reason was the company's announcement in Q1 2016 profits down by 63% and of
continuing decline in oil prices.
The downgrade or upgrade in credit ratings
is a function of borrowing costs, especially during times of market
volatilities. A case in point is the recent Sovereign debt crisis where a
country's increased volatility to further borrowing, may have a substantial
impact on its current outstanding debt obligations. Another case in point is
that it is common of debt issuers to borrow large sums. On February 3, 2015,
Apple borrowed $6.5 billion by issuing bonds (Forbes / Economics and Finance
Feb 3, 2015) despite its cash reserves of $178 billion. S&P assigned a
credit rating of AA+ for Apple (StreetInsider
.com July 29, 2015).
