Friday, September 18, 2009

Factors Affecting Assigned Ratings

each rating assigned to a security issue is a reflection of at least three factors:(1) the character and terms of the particular security being issued;(2) the probability that the issuer will default on the security and the ability and willingness of the issuer to make timely payments as specified in the indenture (contract) accompanying the security; and (3) the degree of protection afforded investors if the security issuer is liquidated, reorganized, and\or declares bankruptcy. As a matter of practice, the investment agencies focus principally upon: (1) the past and probable future cash flows of the security issuer as an indication of the institution‘s ability to service its debt; (2) the volume and composition of outstanding debt; and (3) the stability of the issuer‘s cash flows over time. Other factors influencing quality ratings are the value of assets pledged as controlled for a security and the Security‘s priority of claim against the issuing firm‘s assets. Quality analysts also place heavy emphasis upon interest-coverage ratios and liquidity of the issuing firm.
The rating agencies stress that their evaluations of individual security issues are not recommendations to buy or sell or an indication of the suitability of any particular security for the investor. The agencies do not act as financial advisers to the businesses or units of government whose securities they rate, which helps to promote objectivity in assigning quality ratings. Both domestic and foreign securities are rated using the same criteria

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