Understanding Fitch Ratings - Meaning, Significance & Other Important Facts

Fitch Ratings releases credit ratings, providing forward-looking assessments of the entity or obligation's relative capability to fulfill financial commitments. Issuer default ratings (IDRs) are assigned to various entities, including corporations, sovereign entities, financial institutions (such as banks, leasing companies, and insurers), and public finance entities (local and regional governments). Issue level ratings, which often incorporate recovery expectations, may be notched above or below the issuer level rating. These ratings are assigned to secured and unsecured debt securities, loans, preferred stock, and other financial instruments. Additionally, structured finance ratings are issue ratings applied to securities backed by receivables or other financial assets, taking into account the relative vulnerability to default of the underlying obligations.

This article delves into the details of Fitch Ratings, providing important information for those preparing for the UPSC exam .

What are Fitch Ratings?

Fitch Ratings is recognized as one of the top three global credit rating agencies, alongside Moody’s and Standard & Poor’s (S&P’s). The company has its headquarters in two of the world's major financial hubs - New York and London. Fitch Ratings has a rich history dating back to its establishment in 1914. When it comes to credit ratings and pertinent research, Fitch Ratings is a name that stands out. This company's ratings often make headlines, making it crucial to understand what these ratings represent, especially for government entities. 

Understanding the Fitch Rating System

• The Fitch Rating system employs a letter-based system, similar to the one used by S&P’s.

Defining Credit Rating

• At its core, a credit rating is an evaluation of a borrower's creditworthiness. Borrowers can be individuals, corporations, or governments.
• While 'credit scores' are assigned to individuals, 'credit ratings' are given to governments and corporations.
• It's crucial to remember that credit ratings are assigned to governments, not countries.
• The term for a country or a sovereign entity's creditworthiness is a sovereign rating.

The Significance of Credit Ratings

• Essentially, a government's credit rating indicates its capacity to repay borrowed money.
• Governments require these ratings to secure loans.
• Credit ratings also reflect a country’s potential as an investment destination.
• A country requests a credit rating agency to evaluate its economic and political environment and provide a rating.
• This is done to attract FDI to the country.

A Closer Look at the Fitch Rating System

• Broadly, there are two grades – investment and non-investment grades.
• Entities marked as Investment grade are highly rated, while non-investment grade entities indicate a risky investment proposition.
• Investment Grade
  • AAA: Reliable and stable; highest quality, consistent cash flow demonstrated
  • AA: Quality entities with a slightly higher risk than AAA entities
  • A: Low default risk; however, slightly more susceptible to economic or business factors
  • BBB: Medium-class entities that are currently satisfactory

• Non-investment Grade
  • BB: Increased vulnerability to default risk; more susceptible to economic fluctuations
  • B: Deteriorating financial situation; highly speculative
  • CCC: Real possibility of default
  • CC: Strong possibility of default
  • C: Default or default-like process has begun
  • RD: Issuer has defaulted on a payment
  • D: Defaulted and likely to default again on obligations
  • NR: Not publicly rated

Understand process costing concept.

India's Relationship with Fitch Ratings

• In 2006, Fitch upgraded India’s sovereign rating for the first time to BBB- from BB+.
• BBB- is the lowest investment grade.
• As recently as April 2019, Fitch assigned India the grade of BBB- with a stable outlook for the 13th consecutive time.

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