What Is Fitch Ratings And What Are Its Functions?
What Are Fitch Ratings
Fitch Ratings is an international credit and risk rating agency with headquarters in New York and London. International investors use company ratings as a guide to which economies will not default and which will subsequently be able to deliver solid returns. Fitch bases its ratings on factors such as the type of debt a company has and how sensitive the company is to systemic changes like interest rates.
The Three Major Credit-Rating Agencies
Along with Moody’s and Standard & Poor’s (S&P’s), Fitch is one of the three most credible credit rating agencies in the world. Fitch’s credit rating system is very similar to S&P’s in that both agencies use a letter system to create a range of positive and negative ratings.
Fitch Ratings Rating System
Fitch’s credit rating system is as follows:
They Have Investment Grade:
AAA: Exceptionally high-quality companies (with consistent and established cash flows).
AA: They still have a high degree of quality, slightly riskier than AAA.
A: Low risk of default; slightly more vulnerable to economic or business factors.
BBB: Low default expectations; economic or business factors could adversely affect the company.
They Are Not Investment Grade:
BB: They have a high vulnerability to default risk, they are more susceptible to changes and adverse conditions in the economy and business, but they still have financial flexibility.
B: With a degraded financial situation; highly speculative to invest in firms that have this rating.
CCC: There is a real possibility of default.
CC: Default is a strong probability.
C: The non-payment or default process is about to start or has started.
RD: The user has already stopped fulfilling a payment.
D: The economy or company is in default.
Fitch Ratings And Sovereign Nations
Fitch offers sovereign debt ratings that describe each nation’s ability to meet its credit obligations. Sovereign debt ratings are available to help investors gain insight into the level of risk associated with a particular country. Countries invite Fitch and other rating agencies to assess their political and economic environments and financial situations that determine a nation’s market rating. Obtaining the best possible credit rating is very important, particularly for developing nations, because positive ratings help them more easily obtain credit and access bond markets.
In 2018 Fitch gave the United States the highest AAA rating in its sovereign credit rating range. At the bottom of the ranks in the Americas was Brazil with a BB- rating.
Fitch And Individual Credit Ratings
While ratings from Fitch, Moody’s, and S&P often relate to companies, institutions, and nations, many credit rating agencies also offer individual credit ratings. These qualifications play a fundamental role when evaluating the extension of credit by banks.
For example, those with marks below 640 are generally considered subprime borrowers, so lenders often charge higher interest rates than they would on a conventional mortgage. This is what lenders do to offset the additional risks of a potential default. For subprime borrowers, lenders can often require a shorter-term on their debt or a co-signer for borrowers with even lower credit scores.
Ratings In Latin America And Spain
In November 2018, Fitch gave Colombia a BBB rating, maintaining a stable outlook, but keeping an eye on factors such as low taxation and slow economic growth.
In early 2019, Fitch Ratings reduced Mexico’s credit rating from BBB+ to BBB but changed its outlook from negative to stable. Mexico faces prospects for slow economic growth, especially due to recent threats of trade tariffs by the US government.
On June 27, 2019, Fitch gave Venezuela a DR rating, considering the country’s weak economic situation and the extreme humanitarian crisis it is currently experiencing.
On May 14, 2019, Fitch gave the Argentine sovereign debt a B rating, taking into account the high inflation data in the country and the slow economic growth, as well as the country’s exposure to external factors such as a global economic slowdown.
On June 21, 2019, Spain received a rating of A-, maintaining this rating since January 2019. Spain has been slowly recovering from the economic crisis of 2008 but has been exposed to risk factors such as the economic slowdown in China and the perspectives of the costs that an eventual commercial war of tariffs between the United States and Europe may entail.
Received Criticism
Major credit rating agencies, including Fitch, were accused of misrepresenting the risks associated with mortgage-related securities during the 2008 financial crisis, which included the CDO market. There were big losses in the collateralized debt obligation (CDO) market that occurred despite CRAs assigning top ratings to them.
For example, losses on $340.7 million worth of collateralized debt obligations (CDOs) issued by Credit Suisse Group totaled approximately $125 million, despite Fitch rating the debt AAA. Unlike the other agencies, however, Fitch has been warning the market about constant ratio debt obligations (CPDOs) with an early, pre-crisis report highlighting the dangers of CPDOs.
Fitch Ratings
Fitch Ratings is present in many countries, constantly evaluating the country’s sovereign debt, (it is also found in most Latin American countries) evaluating the performance of companies and the various financial institutions that make up the country’s corporate and financial sector.
The offices of Fitch Ratings are located at Calle 69 A No. 9-85
Bogotá and the analysts of this entity can be contacted by calling (571) 484 6770.
With information from Investopedia.
