Investor Says:Trust The Market Over The Credit Rating Agencies

Here is an article written by value investor and professor Sanjay Bakshi.  The article explores the inefficiencies of the Indian credit rating agencies.  (Click Here To Skip The Introduction and Read The Full Article On Credit Agencies And The Indian Market)

Article Introduction (Via Sanjay Bakshi)

Clearly, as far as stocks are concerned, [the stock market] is often stupid. However, in the last couple of years, I have noticed that even though [the stock market] may be frequently stupid as far as stocks are concerned, [it] is not so stupid as far as fixed income securities such as bonds, debentures and fixed deposits are concerned. In fact, I think often he is a lot smarter than the credit rating agencies.

It is the job of any credit rating agency to evaluate the risk of default in a credit instrument. The assessment of this risk involves studying the economics of the borrower’s business, the past record of it’s profitability, it’s capital structure, the terms of the credit instrument being evaluated, the future outlook of the industry and the company, the management factors, and many other factors. Once a rating is assigned to a bond or a fixed deposit, it is subject to change. Therefore, if the industry prospects turn for the worse, the rating agency might downgrade the bond or fixed deposit. Conversely, a bond or a fixed deposit may be up-graded because of some favorable developments which, in the opinion of the rating agency, reduce the probability of a default. The decisions to assign ratings, as well as decisions to downgrade or upgrade credit instruments are not taken by individuals but by committees

Click Here To Read Full Article On Credit Agencies And The Indian Market