The rating used in financial transactions

Inviato il 7 December 2010 da Rod

The rating agencies can play a key role in the structure of financial transactions. Unlike a “typical” loan or debt issues, in which a borrower offers to pay a certain amount in return on a loan, financial transactions can be seen both as a series of loans with different characteristics or different groups of small loans, each of which features all the same. Credit ratings often determine the interest rate or price assigned to a segment in particular, on the basis of credit quality or the quality of the activities that took place within that grouping.
The companies involved in the financing arrangements often consult credit rating agencies to make a better decisions, so that everyone receives the desired rating. For example, a company might want to borrow a large sum of money by issuing debt securities. However, the amount is so great that investors may ask questions of such securities if they were put on the market on a single issue, since the costs would be prohibitive. That same company decides to issue three separate bonds, each of which has a separate credit rating: A (low-medium risk), BBB (medium risk) and BB (speculative).
The company expects the effective interest rate that will pay on bonds with high ratings will be much lower than the rate to be paid in securities rated BB. Overall, the amount you must pay for the capital it can obtain is less than if you pay the entire amount was put on the market with a unique condition.
This is how the company may see a credit rating agency to see how each part should be structured, what types of goods are to be used to guarantee the debt of each installment and how the tranches receive the desired rating.