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Considerations for rating agencies

»Ê¹ÚÌåÓýapp independent ratings agencies arrive at their ratings by analysing relevant information about an issuer and the industry it is in. When looking at creditworthiness the agencies examine:

• the past performance of the business.
• its market position, for example, its market share, product dominance, pricing power, cost control.
• projections relating to future profitability and cash flow of the business. »Ê¹ÚÌåÓýappy will focus in particular on future cash generation, since it is this that will enable the borrower to repay interest and ultimately the principal.
• the gearing of the business (the proportion of the overall funding represented by debt as compared to equity); this is known as leverage in the US. Generally speaking, the more highly geared a company, the greater the risk that it will be unable to service its debts in a timely manner, and the lower the credit rating will be.

In addition to these so-called quantitative aspects, ratings agencies consider qualitative factors, such as

• the quality of management of a particular business.
• the industry in which the subject is engaged: competition, capital intensity required, factors such as volatility and seasonal/cyclical variations.
• the long-term business environment for the particular sector and more widely.
• any guarantees or other forms of credit enhancement.
• the currency of the debt instrument.

Generally, ratings decisions are finalised by a committee, so that a consensus view is achieved, and all conceivable risks are considered.

For a more detailed description of the way in which rating agencies operate, see their websites, for example at , or .