The human factor, the key to credit rating
A credit rating is defined as an assessment of an organisation’s ability to meet its payment obligations, carried out by a rating agency’s expert analysts using a proven methodology. The human factor is therefore key in the issuance of a credit rating, as opposed to credit ratings, which are automatically performed by reporting companies and are sometimes referred to as “ratings” for commercial purposes.
Rating agency analysts study the qualitative and quantitative factors involved in a company’s credit quality until they have a thorough understanding of its history and projection. Once their analysis has been carried out and supervised, they issue their opinion on an alphabetical scale recognised by all players in the financial market. They then monitor the situation of the companies in order to be able to modify their rating if necessary.
Credit scores, on the other hand, are automatic numerical scores, based on complex algorithms that select, collect and classify information from credit bureaus and other public and private information sources. They provide a fixed snapshot of a company’s ability to pay at a given point in time and, while they are valid for assessing the risk of a given transaction, they are not consistent over time.
In Europe, only credit rating agencies registered and supervised by the European Securities and Markets Authority (ESMA) can issue ratings.