Thursday, April 25, 2024

Credit Rating

Credit Rating Agencies are independent organisations that give a score to debtors based on their ability to pay back loans on time. A high rating means a company has a good track record of paying its debts on time and managing its cash flow. A low score indicates a company has shaky financials and / or has a history of late payments on interest payments for a debt.

The Big Three

The big three credit rating agencies (CRAs) are Moody's Investor Service, Fitch Group and Standard and Poor's. These three have done due diligence on such extensive projects as rating the credit worthiness of Greece. They were unfortunately involved in giving high credit ratings to  subprime mortgage products in the USA


Dodd-Frank is the name of the case brought against CRAs in the USA. It was successfully argued in court that because companies were bound by law to get credit ratings for securities and that this creates a conflict of interest. Companies began to veer to rating agencies with the best track record for handing out AAA and AA credit ratings.The consequences of the Dodd-Frank case is that companies in the USA are no longer required by law to use a credit rating agency. If a CRA gets their rating wrong they can be held liable for faulty ratings. The law also mandated more transparency in the methodology of CRAs.European government bodies have not been slow to implement similar legal changes regarding CRAs.

Credit Ratings and Invoice Finance

Credit rating agencies are vital part of the financial sector. For factoring companies offering to make prepayments on unpaid invoices it is essential that they know the credit rating of the debtor. Armed with this knowledge a invoice financier can make evidence-based decisions about offering factoring and reverse factoring services for a specific transaction.Moreover, before bundles of unpaid invoices can be turned into securities they must first achieve a high credit rating. It is good credit ratings that underpin the attractiveness of certain securities.
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