How do risk rating agencies work?
Each firm has its own methodology for conducting the evaluation. The rating agencies assess the risk and solvency conditions of each company they analyze through different economic variables.
To do this, they take into account financial variables such as income, profits, debt, available cash, but also qualitative variables such as target market and operating risks.
Once they evaluate each company, they issue a rating with their respective perspective. This qualification is not eternal, it is reviewed periodically to have an updated vision of the risks of each company or country.
How do rating agencies rate?
Each rating agency has its own nomenclature, but in general the rating is measured with letters, the more ‘A’ it has, the safer it is and the riskier the alphabet progresses.
The letters C and D indicate the lowest rating, these issuers are considered non-investment grade or junk, since the risk of defaulting on their obligations is very high. Some countries that are in this situation are Argentina, Republic of the Congo, Pakistan and Russia.
On the other hand, the AAA rating is the highest grade awarded by these firms. This evaluation is held by countries such as Germany, the United States and Switzerland.
Along with the rating, the agencies give their perspective, which can be positive, negative, or neutral. This indicates how they see the future outlook for issuers.