The use of Credit Ratings in Structured Finance has enhanced the role of credit rating agencies, which are endowed with the responsibility of finalizing and executing all structured financial dealings. In case of a 'normal' bond issuance or loan, the borrower is required to pay certain amount of return on a loan. Contrary, with respect to structured financial dealings, there are either a series of loans involved, having diverse characteristic features, or several other smaller loans. In case of structured finance, the credit ratings are mostly determined on the basis of the quality of the loans or other assets present in that particular group. Moreover, the companies involved with the arrangement of structured finance have a tendency to consult with the credit rating agencies, in order to find out the actual structure of individual's share of money. This facilitates the companies to offer the desired credit ratings to these individuals.
Use of Credit Ratings in Structured Finance:
Structured finance credit ratings are recognized more as a “rated” market. There is a great demand among the structured finance instrument issuers to get themselves rated, as per the different available scales. This enables them to become at par with the bond issuers, and the first choice of the foreign financiers, when it comes to investments. With passing time, this has led to the fast growth of structured finance ratings as a significant commercial sector, both in terms of volume and size. It has also proved to the largest earner of revenues for the 3 main credit rating agencies in the world, namely the:- Fitch Ratings
- Moody's
- McGraw-Hill
Disadvantages of structured finance credit ratings:
- Structured finance credit ratings have a tendency to complicate issues involved with the structured financial dealings.
- While stating the ratings of structured finances, the credit rating agencies overlook the unpredictable nature of the debt securities, and emphasize more on the possibility that the available debt securities may fail to render service over a given time period.
