FitchResearch is a financial research firm. Among other services, Fitch generates credit ratings - called "Issuer Default Ratings" - for a range of business sectors. An "issuer" may be a financial or nonfinancial corporation, a sovereign company or an insurance company. A "Default Rating" is the measure of an agency's credit risk. Risk is defined by a company's threat of becoming defunct or entering into bankruptcy filings, administration, receivership, liquidation or other formal winding-up procedures. The ratings are calculated on a scale of 11 predictors, but the IDR model has inherent limitations.
How is the IDR Calculated?
Fitch relies on independent auditors, attorneys and other experts to produce IDRs. IDRs are calculated through applied mathematics based on public information and/or non-public documents provided by the issuer. The calculations form assumptions and predictions about an agency's future. Fitch notes that these ratings are "predictions about future events that by their nature cannot be verified as facts."
Fitch can issue the rating without input from the issuer or the issuer can provide supporting documents to aid Fitch's rating investigation.
IDR Rating Scale
The Fitch Ratings credit scale offers an opinion on the relative ability of an agency to meet its financial commitments. The ratings are marked by a series of symbols that range between "AAA" and "D":
AAA: Highest credit quality AA: Very high credit quality A: High credit quality BBB: Good credit quality BB: Speculative B: Highly speculative CCC: Substantial credit risk CC: Very high levels of credit risk C: Exceptionally high levels of credit risk RD: Restricted default D: Default
Issuer Participation in Fitch Rating
If a Fitch rating is not beneficial to the issuer, then a nonparticipatory issuer can have the opportunity to comment on the rating opinion and supporting research before it is published. Ultimately, the issuer is responsible for the accuracy of the information provided to Fitch.
IDR Limitations
Among the limitations of an IDR is that no time range is indicated. The ratings do not predict market value of an issuer's securities or stock. In addition, IDRs do not evaluate the likelihood that an issuer's securities or stock values may change.
Also, The liquidity of the issuer's securities or stock is not predicted. And if an issuer defaults, the ratings do not indicate the severity of possible loss on an obligation.