Credit Rating Agency Interview Questions & Answers

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Credit Rating Agency Interview Questions

    1. Question 1. What Is A Credit Rating?

      Answer :

      A credit rating represents the rating agency's opinion on the likelihood of a rated debt obligation being repaid in full and on time. A simple alphanumeric symbol is normally used to convey a credit rating.

    2. Question 2. What Is The Full Form Of Cra?

      Answer :

      The full form of CRA is Credit Rating Agency.

    3. Question 3. How Does A Credit Rating Agency Differ From A Credit Bureau?

      Answer :

      A credit rating agency provides an opinion relating to future debt repayments by borrower's. A credit bureau provides information on past debt  repayments by borrower's.

    4. Question 4. What Is A Credit Rating Agency?

      Answer :

      A credit rating agency is an entity which assesses the ability and willingness of the issuer company for timely payment of interest and principal on a debt instrument.

    5. Question 5. Is A Credit Rating A Recommendation To Invest In A Debt Instrument ?

      Answer :

      A credit rating is not a recommendation to buy, hold, or sell a debt instrument. A credit rating is one of the inputs used by investors to make an  investment decision.

    6. Question 6. How Is A Rating Denoted ?

      Answer :

      Rating is denoted by a simple alphanumeric symbol, for e.g. AA+, A-, etc.

    7. Question 7. What Is The Difference Between Credit Rating And Equity Research ?

      Answer :

      Credit ratings are assigned to debt instruments, while equity research relates to equity shares. A credit rating is focused on the risk of non-payment,  the primary variable in debt instruments. Equity research is focused on growth possibilities, for that is what drives equity valuations.

    8. Question 8. Whether The Issuer Company Is Rated Or The Instrument ?

      Answer :

      The rating is assigned to a security or an instrument.

    9. Question 9. How Does A Credit Rating Differ From An Audit ?

      Answer :

      A credit rating agency relies on a variety of information sources, including published annual reports. An audit process is designed to detect fraud or  misrepresentation of information, whereas the credit rating process is not.

    10. Question 10. What Does Credit Rating Convey?

      Answer :

      Credit rating is an assessment of the probability of default on payment of interest and principal on a debt instrument. It is not a recommendation to buy, sell or hold a debt instrument. Rating only provides an additional input to the investor and the investor is required to make his own independent and objective analysis before arriving at an investment decision.

    11. Question 11. How Does A Rating Agency Operate When Issuers' Disclosure Levels Are Low ?

      Answer :

      An accurate assessment of the credit rating of an entity depends on the availability of adequate and reliable information on the rated entity. Moreover,  CRISIL ratings are under continuous surveillance over the life of the instrument which necessitates that CRISIL has continuous access to adequate  and reliable information on the rated entity to ensure that its rating reflects the most recent credit opinion. Absence of information significantly  affects the ability to make accurate assessment of business, financial and management risk of an entity which drives the credit rating. 'Information Availability - a key risk factor in credit ratings'.

      In case the rated entity does not provide i  information and/or does not facilitate meetings with key personnel required for rating, that entity may be classified as non-cooperative. For entities  classified as non-cooperative, CRISIL Ratings will continue to review the ratings on an ongoing basis throughout the instrument/facility’s lifetime, on  the basis of best available information.

    12. Question 12. How Is Credit Rating Done ?

      Answer :

      Ratings are based on a comprehensive evaluation of the strengths and weaknesses of the company fundamentals including financials along with an in depth study of the industry as well as macro-economic , regulatory and political environment.

    13. Question 13. Does A Credit Rating Assure Repayment?

      Answer :

      A credit rating is not an assurance of repayment of the rated instrument. Rather, it is an opinion on the relative degree of risk associated with such  repayment. This opinion represents a probabilistic estimate of the likelihood of default.

    14. Question 14. What Do The Various Rating Symbols Mean ?

      Answer :

      Each rating symbol is an alphanumeric representation of the probability of degree of repayment risk associated with debt instruments.

    15. Question 15. Who Pays For A Credit Rating?

      Answer :

      Most credit rating agencies across the world use a revenue model where the issuer pays for the credit rating. Alternative revenue models (such as the  one based on investor fees) pose numerous challenges in terms of ease and practicality of implementation that have not yet been overcome.

    16. Question 16. Are Rating Symbols The Same Across All Types Of Debt Instruments ?

      Answer :

      No. Rating symbols may vary depending on the type of debt instrument, as for example long term or short term

    17. Question 17. If The Issuer Pays For The Rating, How Does A Credit Rating Agency Maintain Its Independence?

      Answer :

      Although the issuer pays for the rating, the investor uses it. Like any other product or service, the 'value' of the rating depends entirely on the  perceptions of the investor. Investor perceptions are based on the credibility of the past ratings assigned by each rating agency. (Please also refer to  section - How CRISIL manages Conflict).

    18. Question 18. What Do The “+” And “-”sign Indicate In A Rating ?

      Answer :

      Plus and minus symbols are used to indicate finer distinctions within a rating category. The minus symbol associated with ratings has no negative connotations. In fact, ratings in a higher rating category such as ‘AA-‘ are stronger than ratings in a lower rating category such as ‘A+‘.

    19. Question 19. Who Regulates A Rating Agency ?

      Answer :

      The capital market regulator regulates rating agencies in most regions. In India, the capital markets regulator, the Securities and Exchange Board of  India (SEBI), regulates the rating agencies in the country.

    20. Question 20. What Are Investment And Speculative Grade Ratings ?

      Answer :

      An invest ment grade rating signifies th e rating agency’s belief that the rated instrument is like ly to meet its payment obligations. In the Indian context, debt instruments rated 'BBB' and a bove are cl assified a s investment grade ratings. Instruments that are rat ed ‘BB‘ and below are classi fied as speculative grade category ratings in which cas e the abilit y to meet the paym ent obligatio ns is considered to be “speculative”. Instru ments rated in the speculative grade are considered to carry materially higher risk and a higher probability of default compared to instruments rated in the investment  grade.

    21. Question 21. Is Competition Desirable In The Credit Rating Industry ?

      Answer :

      Competition in the credit rating industry is desirable to meet the 'better service at a cheaper price' objective on an ongoing basis. However, it is  essential to guard against some undesirable effects of competition, such as lax ratings or sub-optimal quality of research and analysis.

    22. Question 22. Who Pays For The Credit Rating ?

      Answer :

      In India, the issuer company pays for the credit rating.

    23. Question 23. How Do Investors Benefit From A Credit Rating?

      Answer :

      Credit ratings help investors facilitate comparative assessment of investment options, complement the investors' own credit analysis, and allow asset  monitoring.

    24. Question 24. Who Regulates Rating Agencies ?

      Answer :

      Credit rating agencies are regulated by SEBI. The SEBI (Credit Rating Agencies) Regulations, 1999 govern the credit rating agencies and provide for eligibility criteria for registration of credit rating agencies, monitoring and review of ratings,requirements for a proper rating process, avoidance of conflict of interest and inspection of rating agencies by SEBI, amongst other things.

    25. Question 25. What Do The Various Credit Rating Symbols Mean?

      Answer :

      CRISIL uses simple alphanumeric symbols to convey credit ratings. CRISIL assigns credit ratings to debt obligations on three basic scales: the long- term scale, the short-term scale, and the fixed deposit scale. Please refer to the section on Rating/Grading scale for more details.

    26. Question 26. Does Sebi Have A Role In The Rating Exercise ?

      Answer :

      No. SEBI does not play any role in the assessment made by the rating agency.The rating is intended to be an independent, unbiased and professional opinion of the rating agency.

    27. Question 27. Does The Minus Sign In A Rating Symbol Have Negative Connotations Relating To The Issuer's Performance Or Its Debt-servicing Capability ?

      Answer :

      Plus and minus symbols are used to indicate finer distinctions within a rating category. The minus symbol associated with ratings has no negative  connotations whatsoever.

    28. Question 28. Is Rating A One Time Exercise ?

      Answer :

      No. To protect the interest of investors, SEBI has mandated that every credit rating agency shall, during the life time of the securities rated by it, continuously monitor the rating of such securities and carry out periodic reviews of all published ratings.

    29. Question 29. What Are Structured Obligation (so) Ratings? Are They Different From Other Credit Ratings ?

      Answer :

      Structured Obligation (so)  ratings are ratings that are based on a 'credit enhancement' mechanism and/or a structured payment mechanism. A suffix  in the form of '(so)' indicates that the obligation being rated is a “structured obligation” that is different and distinct from the “general obligations” of  the issuer.

    30. Question 30. Why Do Ratings Change?

      Answer :

      Rating is an opinion based on information available at a point in time with the rating agency and expectations made on the basis of such information by the agency. However, inf ormation can change significantly over time causing the rated instruments performance to deviate from the earlier expectations thereby affecting the future repayment abilities and thus, requiring the rating to be altered.

    31. Question 31. What Is The Validity Period Of A Credit Rating?

      Answer :

      Credit ratings are assigned either to specific instruments or to the general debt obligations of issuers. CRISIL assigns credit ratings to debt  obligations. A rating is valid until it is withdrawn which is usually when the rated debt obligation is fully paid.

    32. Question 32. What Does A Rating Downgrade Indicate?

      Answer :

      Rating is monitored throughout the life of the instrument. A downgrade in therating indicates that the risk of default of the instrument is higher than what was earlier predicted.

    33. Question 33. How Are Credit Rating Changes Communicated?

      Answer :

      Once a credit rating is assigned and published, CRISIL keeps the credit rating under surveillance until the instrument is fully repaid. The surveillance  process may result in credit rating changes from time to time. All changes in CRISIL credit ratings are communicated publicly through CRISIL  and media releases.

    34. Question 34. What Kind Of Responsibility Or Accountability Will Attach To A Rating Agency If An Investor, Who Makes His Investment Decision On The Basis Of Its Rating, Incurs A Loss On The Investment?

      Answer :

      A credit rating is a professional opinion given after studying all available information at a particular point of time. Nevertheless, such opinions may prove wrong in the context of subsequent event s. There is no contract between an investor and a rating agency and the investor is free to accept or reject the opinion of the agency.

    35. Question 35. Why Do Credit Ratings Change?

      Answer :

      Credit ratings are assigned based on certain expectations and assumptions about variables that impact the issuer's performance. However, these  variables can change, causing the rated entities' performance to deviate materially from expectations. This is reflected in their changed credit ratings.

    36. Question 36. Do Agencies Rating Small And Medium Enterprises, Mutual Funds, Banks, Non-banking Financial Institutions, Insurance Providers, Infrastructure Entities, Etc. Also Fall Under The Regulatory Purview Of Sebi?

      Answer :

      No, SEBI regulates only the agencies which are engaged in the business of rating securities offered by way of public or rights issue.

    37. Question 37. If A Credit Rating Is Downgraded, Does It Mean That A Default Is Imminent ?

      Answer :

      Not necessarily. In most cases, a downgrade does not mean that a default is anticipated. All it indicates is that the risk associated with the debt  obligation is relatively higher than what it was before the downgrade.

    38. Question 38. Does The Size Of The Rated Debt Obligation Affect Its Credit Rating? What Are 'provisional' Ratings?

      Answer :

      No. What matters is the size of the total debt in the company, and not the amount that is sought to be rated.

    39. Question 39. What Are 'provisional' Ratings?

      Answer :

      In case completion of certain critical steps/documentation is pending at the time of rating assignment, CRISIL will assign provisional ratings to such  instruments which will be characterised by a prefix 'Provisional' to the rating symbol. To elaborate, a prefix of 'Provisional' to a CRISIL-assigned rating  indicates that the rating centrally factors in the completion of certain critical steps/documentation by the issuer for the instrument; without this, the  rating would either have been different or not assigned. The provisional nature of such ratings will be disclosed by CRISIL in its communications,  including rating letter and rating rationale. Once the relevant steps/documents (as per expectations when the provisional ratings were assigned) are in  place, the provisional ratings will be converted into final ratings. Please refer to CRISIL's release - "Policy on provisional ratings" for further deta

    40. Question 40. From Where Can The Credit Ratings Of Instruments Be Obtained ?

      Answer :

      Credit ratings assigned by the credit rating agencies to various instruments are made available by the agencies through press releases and on their respective websites. The same are also available in the prospectus or the offer document of the issuer company and in media advertisements.

    41. Question 41. What Are The Common Factors That Are Taken Into Account While Awarding The Credit Rating ?

      Answer :

      Each credit rating agency may have its own se t of criteria and different weight age for each component for assigning the ratings. Some of the common factors that may be taken into consideration for credit rating are Issuer Company’s operational efficiency, level of technological development, financials, competence and effectiveness of management, past record of debt servicing, etc. 

    42. Question 42. How Can An Investor Know If A Credit Rating Agency Has Changed Its Rating ?

      Answer :

      The credit rating agencies are required to continuously monitor the ratings assigned by them to a particular instrument. In case of any changes in the ratings so assigned, the agencies are required to disclose t he same through press releases and on their respective websites. 

    43. Question 43. What Are The Measures Taken By Sebi In Strengthening Credit Rating ?

      Answer :

      SEBI has, from time to time, taken several steps to strength the process of credit rating. SEBI directives require the credit rating agencies to be transparent and disclose to the public the information which may have a material bearing on the ratings, any sources of conflicts of interest while undertaking the rating exercise, rating methodology, rationale of the ratings, etc.

    44. Question 44. Why There Are Not Common Symbols For Credit Ratings Of All Agencies ?

      Answer :

      The credit rating agencies do not have common symbols because they use different rating methodologies and have different factors bearing different weightage.

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