FAQs on DP Credit Ratings

  1. How does a credit rating agency differ from a credit bureau?

    2. A credit rating agency provides an opinion relating to future debt repayments by borrowers whereas a credit bureau provides information on historical and current debt repayment records of debtors.

  2. Does a credit rating provides assurance of repayment?

    3. No. A credit rating is not an assurance of repayment of the debt obligation. It is an opinion on the relative degree of risk associated with such repayment by the borrower. This opinion reflects a probabilistic estimate of the likelihood of default. It is possible that some highly rated companies could default. However, such defaults would be less frequent amongst stronger rated companies than amongst companies with weaker ratings.

  3. How do investors benefit from a credit rating?

    4. An independent and professional rating agency provides credible and ongoing information on credit risk, a key component of all borrowing decisions. This service is particularly useful to investors / creditors when they are faced with an array of investment or financing decisions that is much larger than what their own credit assessment resources can reliably support. Moreover, published ratings enhance the efficiency of the financial system by reducing the cost of obtaining quality credit information on players in the system.

  4. Why is there a need for local companies to get a credit rating?

    5. Larger companies who raise funds internationally have ratings from major rating agencies, which is important for improving reputation and financing structures. Local companies such as SMEs can also benefit from giving more transparency to potential customers, investors or financiers by getting a credit rating. This is because investors today demand appropriate risk measurement and assessment in order to avoid substantial losses that may occur in time to come. Hence, it is important for a company to not only understand its own credit risk profile but the credit risk profiles of its customers as well.

  5. Can DP Credit Rating apply to private companies as well?

    6. Yes, DP Credit Rating can be applied to private companies as well if we are able to obtain the latest audited financials.

  6. What does it mean by investment and speculative grades?

    7. Companies that are rated between “DP1” and “DP4”-' are classified as investment grade. Companies that are rated between ”DP5+”and “DP6-” are classified as high yield grade whilst companies that are rated between “DP7+” and “DP8” are classified as high risk grade. Companies rated in the high risk grade carry materially higher risk compared to those rated in the investment grade.

  7. Does a high risk grade mean that the Companies will default?

    8. No, a high risk grade rating on a company does not mean that it is certainly going to default. All it indicates is that the company has risks associated with it that makes it significantly more vulnerable to default than those in the investment grade.

  8. What is the validity period of a rating? How are rating changes communicated?

    9. Every rating assigned by Experian is current and reflects the available information that may impact the credit quality of the companies based on the date of the financial statement. Hence, the rating is typically valid for one year.

  9. Why must ratings be updated?

    10. Ratings are assigned based on certain variables, assumptions and expectations about variables that impact the company’s performance. These variables are either company-specific factors or factors relating to the business environment. Rating agencies use their best professional judgment on these factors while assigning the rating. However, these variables can change significantly over a relatively short time frame, causing the rated entities’ performance to deviate materially from expectations. This changes their future debt repayment capabilities and is reflected in their changed ratings.

  10. If a rating is downgraded, does it mean that a default is certain?

    11. In most cases, unless the rating is deep into the high risk category, a downgrade does not mean that a default is anticipated. It merely indicates that the risk associated with the company is relatively higher than what it was before the downgrade.

  11. Why did Experian create the DP Credit Rating?

    12. In support of the SME community and their growing call for the use of credit ratings to assist them in securing financing, providing more transparency and facilitating overseas business, Experian had taken the first step in a nationwide SME credit ratings initiative. It is Experian's intention to help SMEs, banks, potential financiers and business partners connect by gaining rapid access to a globally recognised credit rating of SMEs.

    A company with a good credit rating would enable it to secure external funding with greater ease and possibly at a lower cost. The favourable ratings could also enhance its profile and facilitate in attracting greater trading and investment opportunities.