What is a credit rating?

A credit rating provides an objective, independent evaluation of the creditworthiness of an obligor or its ability to satisfy its financial obligations, expressed through simple rating symbols that conveniently compare debt issues. Ratings can be assigned to issuers (Financial Institutions and Corporates) and issues (bonds, asset backed securitizations, commercial bills).

What is a financial institution rating?

A financial institution's (FI) credit rating is an independent assessment of the financial strength of an FI and its ability to repay its obligations in a timely manner.

What is corporate rating? Issue ratings?

Credit ratings can be assigned to a corporate entity (issuer) and/or specific debt issues.

- Company or issuer ratings are opinions of an obligor's overall creditworthiness and its ability to pay specific obligations.

- Issue ratings are assessments of an obligor's ability to repay specific debt issues or transactions within the agreed period.

What does the rating assigned mean?

Most rating agencies have nine rating buckets with the following meanings.

Aaa - Impeccable financial condition and overwhelming capacity to meet obligations in a timely manner.
Aa - Very good financial condition and very strong capacity to meet obligations in a timely manner.
A - Good financial condition and strong capacity to meet obligations in a timely manner.
Bbb - Satisfactory financial condition and adequate capacity to meet obligations in a timely manner.
Bb - Satisfactory financial condition but has one major weakness.
B -Weak financial condition and ability to repay is contingent upon refinancing
Ccc - Weak financial condition and high likelihood of default.
Cc- Very weak financial condition and very high likelihood of default
C -Technically bankrupt and will require external support in order to meet obligations in a timely manner.

Obligors in the first four rating categories are regarded as Investment Grade Borrowers while those in the last five are regarded as Speculative Grade Borrowers.

How can I get to know a company/financial institution/issue's rating?

By watching out for ratings published in the newspapers by Rating Agencies, or by visiting the websites of these agencies. For example Agusto & Co. publishes its ratings on its website www.agusto.com.

How do rating agencies conduct their ratings?

Each agency conducts its ratings in accordance with its methodology. For example, Agusto & Co. adopts a macro to micro approach. This means that in assigning a rating to a bank, we first review the Nigerian economy and the banking industry before reviewing the bank and the quality of its management. We believe that this approach enables us to take the "Big Picture" issues into consideration in assigning credit ratings. Agusto & Co. Limited also segregate the Credit Analysis from the approval of ratings. This means that those who analyze the credit do not approve a rating. They only recommend a rating to a committee of three people who must all agree on the rating to be assigned. Thereafter, Agusto & Co. conducts surveillance work to monitor the validity of ratings assigned.

What roles can rating agencies play in the development of the Nigerian economy?

By rating financial institutions, corporates, pressure is put on the management of these companies to manage the affairs of their companies in a prudent manner and help ensure safety and soundness of the investors/shareholders' funds.

Rating Agencies also help to protect investments by providing investors with sound credible opinion of the abilities of these rated entities to meet their financial obligations in a timely manner. In various economies, pension funds and insurance companies are obliged to invest their funds in companies/financial institutions rated in the first four rating buckets. This is because these are the companies/financial institutions are believed to have adequate capacity to meet their obligations in a timely manner.

The rating agency promotes a sound capital market by helping investors to have a portfolio diversification through careful selection of investment in various risk buckets. In addition, it assists asset management companies in monitoring risk exposures on behalf of their clients. In other developed economies, ratings have been used for pricing of debt instruments and serves as a marketing tool for selling bonds and short term instruments to the retail investors.

How long does it take to complete a credit rating?

It depends on the responsiveness of the company being rated. On average it takes 4 to 6 weeks to complete a credit rating from the time the company submits the required initial information.