Introduction to Fitch Ratings
Fitch Ratings is a multinational credit rating agency with offices in New York and London. Investors use the ratings of this company to refer to investments that are not going default and yield a good return.
Fitch arrives at the ratings based on factors, such as what kind of debt a company carries and how sensitive it is to structural shifts, such as interest rates.
Decoding Fitch Rating Process
Fitch, along with Moody's and Standard & Poor's (S&P's), is one of the world's top three credit rating agencies. The Fitch rating system is somewhat similar to S&P's since they both use a letter scheme. For instance, a company which is rated AAA is of the highest quality and has reliable cash flows. Whereas, a company that has been rated, D, has defaulted.
The steps taken by Fitch for credit rating is as follows:
Step 1: Rating process initiates when an issuer/underwriter approaches the rating agency. A primary and back-up analyst is then assigned.
*Step 2: *Agency collects the publicly available information, such as financials and data reports.
*Step 3: *Analyst performs a pre-analysis and requests non-public information if suitable.
*Step 4: *The analytical team prepares a detailed questionnaire.
*Step 5: *Face-to-face meetings or site visits are conducted with the management and stakeholders of the entity being rated.
*Step 6: *In-depth analysis is performed, involving an application of sector-specific rating criteria and methodologies.
*Step 7: *The primary and secondary analysts draft a report of rating recommendation and rationale in a committee package.
*Step 8: *The rating committee reviews the rating information after considering several qualitative and quantitative factors, keeping in mind the current and prospective performance of the company.
*Step 9: *Assigning the ratings and publishing of commentary.
*Step 10: *Conducting ongoing surveillance.
What are the Class of Grades under Fitch Rating?
Fitch's rating system can be classified as follows:
Investment class
- AAA: Exceptionally high-quality company (established with stable cash flows)
- AA: Company with high quality, yet with a risk slightly greater than AAA
- A: Company where the risk of default is low but slightly more vulnerable to the economic or business factors
- BBB: Company having low default expectations. However, it can adversely be impacted by economic or business factors
Non-investment class
- BB: Increased susceptibility to default risk and more prone to unfavourable market or economic shifts
- B: Financial condition is deteriorating and highly speculative
- CCC: Default is a real possibility
- CC: The defaulting probability is very strong
- C: Started with default or default-like process
- RD: Payment default by the issuer has been recorded
- D: Company has defaulted
