The answer is to attract an independent assessment from a rating agency. They have become an integral part of decision-making in global financial markets and a convenient tool for risk assessment. We have already considered the advantages of rating agencies in a previous publication, but below we will take a closer look at why credit ratings are so important — from solving the problem of information asymmetry to the impact on the value of capital, the work of banks and the international reputation of countries.

Overcoming information asymmetry

Agree, the company always knows its financial condition better than a potential investor. But what, how exactly because of this investor Afraid to invest? Who is helping to overcome this knowledge gap? Credit ratings!It was the need to overcome this information inequality that became the historical basis for the emergence of rating agencies.

Providing an open rating reduces uncertainty for the investor. Now it sees the specific rating of the company and can easily compare it with others. The rating, in fact, is a brief description of the debtor's difficult financial condition. Even a foreign investor who is not familiar with the local market can receive in a short period of time a comprehensive and understandable risk assessment. This increases the transparency of the market and the trust between all its participants.

Impact of rating on cost of capital

From the rating directly dependsunder what conditions the borrower will be able to attract money. Logically: where higher risk of default, there should be highest premium. It is unlikely that an investor will want to invest in a risky asset on the same terms as, say, a bank deposit or domestic government loan bonds (government bonds). So naturally: the higher the rating, the lower the rate. And vice versa: low rating— this is a signal of increased risks, and therefore More expensive loans.

Different classes of credit ratings attract certain categories of institutional investors in different ways. Pension funds and insurance companies, for example, tend to invest only in highly rated issuers because of conservative mandates. Instead, hedge funds or private lenders may provide funds to lower-rated companies, but expect a corresponding risk premium. Thus, the rating directly affects which investors the company can work with and determines the structure and cost of available financing.

Why Investors Need Independent Risk Assessment

For institutional investors, an independent rating is basic risk assessment tool. A large investor operates hundreds of possible investments around the world and simply does not have the ability to analyze in detail the financial stability of each company. Therefore, it relies on the conclusions of rating agencies.

Firstly, ratings are significant save time and resources. A ready-made assessment from a rating agency allows you to quickly filter investments by risk.

Secondly, many investors simply do not work with companies without rating. The decisive factor here is that institutional investors — such as pension funds, insurance companies, banks — operate within clear limits. Some of them are regulatory: for example, pension funds are only allowed to invest in instruments investment grade. The other part — Domestic Policiesrelated to liability to creditors or shareholders. It is critical for such investors to have up-to-date, independent information about the risks of your portfolio, to effectively diversify and hedge it. Without an external rating assessment, this becomes almost impossible.

Thirdly— this Trust and Reputation. A large investor trusts an independent valuation much more than the internal statements of the borrower himself. The rating agency is not interested in embellishing the situation, so its conclusion is perceived as unbiased assessment. This is especially important for foreign investorsthat are often not oriented in local conditions. If there is no independent risk assessment, a large investor simply will not risk investing “in the dark”.

As a result Independent ratings become the basis of investment infrastructurefor global players. Without them, capital flows would be much more limited — because every investor would be wary of unknown risks.

The role of ratings in long-term planning

And how else can a company use its rating? Credit Rating— this is not only about current borrowings, it is also about strategic financial planning. He speaks indicator of financial stabilityon which the company can be guided in its long-term decisions: how much to attract debt, what the capital structure should be, how quickly it is worth expanding the business.

Large corporations try to maintain a certain level of rating, because their ability to attract capital for development directly depends on it. When developing long-term business plans, management often takes into account, how planned loans or bond issuance will affect rating metrics— for example, the ratio of debt to adjusted EBITDA or coverage of interest payments. Rating agencies, in turn, provide feedback: they indicate the strengths and weaknesses of the company, potential risks and directions for improvement.

Such feedback, together with benchmarking (comparison with competitors or with market standards), allows the company to track its progressin dynamics and to adjust the strategy in a timely manner.

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