Credit Rating Agency : A Credit Rating Agency (CRA) is a company that rates a debtor’s ability to pay back debt by making timely payment of principal and profit accrued thereon and the likelihood of default. A CRA may rate creditworthiness of an entity’s debt obligations and a debt instruments. The debt instruments rated by CRAs include Government Bonds, Corporate Bonds, Municipal Bonds, Preference Shares and Asset Backed Securities. The Issuers of debt instruments may be the companies; body corporates; special purpose vehicles; organizations not-for-profit; federal, provincial or local governments. CRAs are paid by the entity that is seeking credit rating for itself or for its debt issues.

Globally, credit rating is a highly concentrated industry. Currently, there are two CRAs in Pakistan. These are Pakistan Credit Rating Agency (PACRA) and VIS Credit Rating Company Ltd.

Credit Rating: A credit rating is an assessment of the creditworthiness of a borrower in general terms or with respect to a particular debt or financial obligation. Credit rating is an opinion about the credit worthiness only and is not a recommendation to buy, hold or sell any security. Credit rating can be assigned to any entity that seeks to borrow money, the debt instrument and a sovereign government.

Credit rating determines the likelihood that the borrower will pay back a loan as per the terms and conditions of the loan agreement. A high credit rating indicates a high possibility of paying back the loan in its entirety without any delay, whereas a poor credit rating indicates that the borrower has had trouble paying back loans in the past, and might follow the same pattern in the future. The credit rating affects the entity’s chances of being approved for a given loan or receiving favorable terms for the said loan.

Credit rating agencies typically assign letter grades to indicate ratings. PACRA, for instance, has a credit rating scale ranging from AAA (excellent) and AA+ to C and D(obligations are currently in default). A debt instrument with a rating below BBB- is considered to be speculative grade which means it is more likely to default on loans.

Importance of Credit Ratings: Credit ratings for borrowers are based on substantial due diligence conducted by CRAs. While a borrowing entity will strive to have the highest possible credit rating since it has a major impact on interest rates charged by lenders, the rating agencies must take a balanced and objective view of the borrower’s financial situation and capacity to service/repay the debt.

Credit ratings also play a role in a potential investor’s determining whether or not to purchase a bond. A poor credit rating is a risky investment; it indicates a larger probability that the company will be unable to make its loans repayments.

It is important for a borrower to remain diligent in maintaining a high credit rating. Credit ratings are never static, in fact, they change all the time based on the newest data. Debtors want to know a borrower can maintain good credit consistently over time. Credit rating changes can have a significant impact on financial markets.

Sector Studies: Sectors specific studies are conducted by CRAs to determine how a particular sector/industry is behaving and what can be expected in future by giving consideration to its macro-economic view, regulatory requirements, competition, energy situation and other factors that can impact sector’s performance.

Disclosure: Pursuant to the requirements of the Credit Rating Companies Regulations, 2016, the domestic CRAs (dCRAs) disseminate and maintain the following information on their website for investors’ awareness:

  • press releases relating to the ratings assigned by dCRAs; and
  • sector specific studies conducted by dCRAs.

The credit ratings and sector studies may also be accessed through the following links:

  • http://vis.com.pk/
  • http://vis.com.pk/ratingSect.aspx
  • http://vis.com.pk/kc-sect.aspx
  • http://vis.com.pk/Economyupdates.aspx