Fitch definition

View the related practice notes about Fitch

Credit ratings

Role The role of credit rating agents (CRAs) is to provide an objective and analytical opinion on the risk of payment defaults by looking at various factors that help investors decide whether to invest in particular securities. Investors in capital markets are very sensitive to risk and some investors are prevented by their internal constitutional documents from investing in low grade securities. Generally, the higher the investment risk, the greater the return (interest/coupon) the investor will seek.Both (i) the company issuing the security instruments and (ii) the security instruments themselves can be rated. An issuer’s debt securities may be rated separately from the issuer where the issuer is a company specially set up for the issuance (a special purpose vehicle or where the debt securities benefit from credit enhancements (eg a guarantee) to make them stronger than the standing rating of their issuer.By way of example, the following may be rated:•the issuer•senior debt/syndicated loans•medium term notes (MTNs)•commercial paper (CP)•fixed income securities•sovereign debt•residential mortgage backed securities (RMBS)•commercial mortgage backed securities (CMBS)CRAs typically look...

EU regulation of credit rating agency methodologies

EU regulation of credit rating agency methodologies What is a credit rating agency methodology? A credit rating agency (CRA) methodology is the body of practices, procedures and rules applied by a CRA when issuing or revising a credit rating. CRAs issue three main types of ratings: • ratings of corporates • ratings of sovereigns, and • ratings of securities issued in a securitisation or similar transaction (structured securities) in which a special purpose vehicle (SPV) holds a pool of underlying assets, and payments to holders of the structured securities are dependent on payments (cash flows) generated by the underlying assets A credit rating of a corporate or sovereign is typically based on an analysis of: • the creditworthiness of the entity being rated before external support • any external support that might be available to the entity being rated if it finds itself in financial difficulties, and • the specific financial instruments that are being rated A credit rating of structured securities is typically based on an analysis of: •...