What is a rating?

Credit rating agencies independently assess the credit quality of issuers, that is to say their ability to repay their financial debts in the short, medium or long term. A wide range of issuers can use ratings: companies, states, funds, communities, etc. By assigning ratings, credit rating agencies allow greater transparency in financial markets and therefore allow them to work more efficiently. Investors thus use the ratings assigned by credit rating agencies to compare the degrees of risk associated with the companies in which they wish to invest. As for issuers, they request a rating in order to provide an indication to the market of their credit quality. The interest rate charged by an investor is based on the level of risk. By publishing their rating, issuers hope to be able to issue debt at the fairest and most advantageous rate for them. Investors hope to be best paid for the risk they are willing to take.

Under the Basel III and Solvency II agreements, financial institutions such as banks and insurance companies, among others, are subject to capital requirements which depend directly on the measurement of the risks of their assets. External ratings thus allow these institutions to calculate, using comparable methods, the levels of capital required by their respective regulators. At EthiFinance, long-term ratings range from AAA (best rating) to D (default). AAA to BBB- ratings are referred to as “investment grade” while lower ratings are referred to as “speculative grade”.

EthiFinance's short-term ratings range from SR0 to SRD and measure the short-term (12 month) credit quality of an issuer. Ratings are assigned at the end of a process spanning a few weeks, during which a qualitative and quantitative fundamental analysis of the issuer is carried out, with the purpose of highlighting the main determinants of the credit, in particular credit ratios. Adjustments to credit ratios are also made by the credit rating agency on the basis of the financial statements of the issuers and other information in order to reflect economic reality and to better understand the financial and extra-financial risks. EthiFinance is an External Credit Assessment Institution (ECAI) and has operated as a credit rating agency registered with and regulated by the European Securities and Markets Authority (ESMA) since 2013 (before 2020, the registered credit rating agency was named Spread Research).

Bertrand Potier

Head of business development – Credit services