Explain the benefits of Credit Rating to Investors and Issuers Company.
The rating of debt instruments offer benefits to the interested parties like investors, issuers and intermediary agencies like brokers, etc. The benefits to each are as follows:
Benefits to Investors.
- Safeguard against Bankruptcy: Credit rating gives assurance to the investors against any bankruptcy and provide safety of their investment.
- Recognition of Risk: The various symbols help the investors to carry the information in easily recognizable manner.
- Credibility of Issuer: Rating symbols also give an idea about the credibility of the issuer.
- Rating Facilities Quick Investment Decisions: This includes that the investors can take up quick decisions about the investments to be made in various instruments.
- No need to depend on Investment Advisors or Professionals: This includes no dependence on investment advisors as the rating symbol suggest the credit worthiness of the instruments.
- Choice of Investment: This includes making choice from various instruments depending upon the risk profile and the diversification plan.
- Benefits of Rating Surveillance: This includes benefit of credit rating agencies of on going rating surveillance of different companies.
Benefits of Credit Rating to Issuer Company.
Lowers Cost of Borrowing: Companies that have high credit rating for their debt instruments will get funds at lower costs from the market. High rating will enable the company, to offer low interest rates on fixed deposits, debentures and other debt securities. The investors will accept low interest rates because they prefer low risk instruments. A company with high rating for its instruments can reduce the cost of public issue to raise funds, because it need not spend heavily on advertising for attracting investors.
Wider Audience for Borrowing: A company with high rating for its instruments can get a wider audience for borrowing. It can approach financial institutions, banks, investing companies. This is because the credit ratings are easily understood not only by the financial institutions and banks, but also by the general public.
Self Discipline by Companies: Credit rating is beneficial to the non-popular companies, such as closely-held companies. If the credit rating is good, the public will invest in these companies, even if they do not know these companies.
Rating as a Marketing Tool: Credit rating not only helps to develop a good image of the company among the investors, but also among the customers, dealers, suppliers, etc. High credit rating can act as a marketing tool to develop confidence in the minds of customers, dealer, suppliers, etc.
Reduction of Cost in Public Issues: The company whose debt instrument is highly rated is able to attract more investors and raise funds.
Motivation for Growth: Credit rating enables a company to grow and expand. This is because better credit rating will enable a company to get finance easily for growth and expansion.
Benefits to financial Intermediaries.
The rated instruments speak themselves about the financial soundness and strength of a company. Because of this the financial intermediaries and the brokers are able to save their time, cost and energy in convincing the client to invest in that company.
Identification of Strength and Weakness of the Issuer Company: With the rating, a company understands its strength and weakness and take corrective actions to improve in the required area.
Liquidity and Marketability of Debt Securities: The debt securities with good rating become easily marketable and attain a status of more liquid instruments. Easy marketability and more liquidity of the instrument make it more popular with the investors and the issuer company.
Positive Impact on Capital Market: Rated securities also reflect effective functioning which make trading smooth and easy which indirectly improves the primary market for such debt instruments having higher credit rating.