Fitch Ratings

What Is Fitch Ratings?

Fitch Ratings is a prominent credit rating agency that assesses and reports the creditworthiness of borrowers, including companies, individuals, governments, and legal entities. It is recognized as one of the world's leading credit rating agencies, alongside Standard & Poor's (S&P) and Moody's.

In addition to assigning credit ratings, it conducts extensive research on market conditions and analyzes the types of debts borrowers hold, assessing their impact on systemic changes like interest rates. The agency's comprehensive evaluations provide valuable insights for banks and financial institutions when evaluating loan applications and assessing the financial history of borrowers.

• Fitch Ratings is a globally recognized credit rating agency that provides credit scores and ratings to borrowers worldwide, evaluating their creditworthiness.
• It is located in New York and London and is a part of the list of the world's top three credit rating agencies.
• The Fitch rating agency used a letter-based rating system categorizing the borrower into two types: investment and non-investment grade.
• Fitch ratings gather critical information for in-depth analysis and understanding of the borrower's credibility.

Fitch Ratings Explained

Fitch Ratings is a globally recognized credit rating agency established in 1913 and headquartered in New York and London. It assesses and assigns credit ratings to various entities, including companies, individuals, governments, and legal entities. These ratings serve as an assessment of their ability to meet financial obligations and other debts.

Beyond offering credit ratings and scores, it engages in various operations. It includes studying capital markets, conducting critical analysis on future investments to assess the likelihood of default, providing credit opinions, conducting in-depth research, and supplying insightful data on bank reports. It demonstrates the agency's comprehensive approach to evaluating creditworthiness and supporting informed decision-making.

The Fitch ratings scale classifies credit rating into two main categories:

#1- Investment grade

• AAA: Represents entities with high quality, reliability, and stable cash flows.
• AA: Indicates well-established entities with low default risk.
• A: Signifies entities with low default risk, although they may be vulnerable to economic and business factors.
• BBB: Reflects entities with a low expectation of default but a higher probability of being influenced by economic and business factors.

#2- Non-Investment grade

• BB: Indicates increased vulnerability to default risk but with the financial flexibility to operate under economic and business conditions
• B: Represents highly speculative entities due to declining financial stability
• CCC: Indicates a high and real possibility of default
• CC: Signifies a strong probability of default
• C: Indicates that the entity is in the process of defaulting
• RD: Reflects that the entity has already defaulted on a payment
• D: Indicates that the entity has defaulted

Fitch ratings for banks primarily assess a borrower's ability to apply for loans or mortgages based on their past credit and financial history. These ratings solely indicate credit risk and are not publicly disclosed. Instead, they are provided to the issuer or their designated agent.

Process Steps

The process steps of Fitch ratings are as follows -

1. The first step is to initiate the rating process, which begins when a sponsor, underwriter, or issuer requests Fitch's BRM group to provide a credit rating. The primary analyst is assigned to the concerned party.
2. The analyst collects publicly available information, and the analyst checks the information with different applicable criteria. The issuer or other third party also provides direct input to the agency, like industry and economic reports, financial statistics, data insights, etc. The analyst also considers macroeconomic factors and market events.
3. A pre-analysis is performed, and if required, non-public information is gathered, including background data and other forecasts; the analytical team suggests whether the information available is sufficient for a credit rating; if not, no rating is given.
4. The analytical team prepares a questionnaire for discussions and critical questions.
5. A meeting is arranged with the stakeholders and entity management to express initial Fitch thoughts.
6. The Fitch ratings team performs a detailed and critical in-depth analysis. It includes each aspect and uses every minute of information available.
7. The Fitch rating draft reports in which the primary and secondary analyst forms a rating recommendation and creates a package that includes criteria variations, rating drivers, and sensitivity analysis.
8. A rating committee is held to assess the package offered in the report, including the rating recommendations; voting members are chosen based on experience, and the process to arrive at a credit rating is done.
9. The credit rating is assigned, and a public commentary is published.
10. The last step is conducting ongoing surveillance, which refers to regularly monitoring and reviewing the credit ratings.

Examples

Here are two examples of Fitch ratings, one hypothetical and the other from real-world news -

Example #1

Suppose Jeremy lives in New York; he has a company that manufactures batteries; Jeremy needs to pay the company loans on time, and the firm loses its reputation in the market, develops a bad credit history, overdue bills, and defaults on many unsecured loans. Somehow, Jeremy took help from his family to settle all the company debt and cleared every liability and financial obligation.

Jeremy is looking to start afresh, but now his company requires a new loan; since the company's Fitch rating is RD which signifies that it has defaulted earlier on loan payments, no bank is interested in sanctioning the loan. In contrast, if the company had paid every single loan on time, they would have rated AA, indicating high quality and low default risk, and banks would have easily provided the loan. It is a simple Fitch rating example, but in the real world, a poor credit rating can have long-term consequences on an individual's credit history.

Example #2

Fitch rating also checks and monitors the growth of nations. The Fitch ratings have recently been revised for India after the credit rating agency observed India's economic growth. The revision hiked the earlier ratings by 30 basis points which is 6.3% for the financial year 2024. But still, there is a potential downward risk for a global trade slowdown.

Earlier in March, the Fitch rating agency had decreased its growth prediction for India to 6% from 6.2% due to increasing interest rates and rising inflation coupled with subdued global demand. The agency estimated that the Indian economy would grow 6.5% for the financial year of 2025 and 2026 compared to the 7.2% GDP expansion in 2023 and 9.1% in 2022.

Benefits

The benefits of Fitch ratings are -

1. It offers credit ratings to worldwide borrowers based on their creditworthiness.
2. It provides market research, credit opinions, and financial reports.
3. Investors, banks, and other financial institutions monitor Fitch ratings to understand the default likelihood of a borrower.
4. It is not limited to individual borrowers; it offers information about companies, governments, and other legal entities.
5. It uses a distinct rating system that categorizes borrowers in different grades based on their credibility of debt repayment and assurance.

Fitch Ratings vs Moody's vs S&P

The credit rating agencies - Fitch Ratings, Moody's, and S&P (Standard & Poor's) - are recognized as leading entities in the industry, each employing their distinct methodologies and criteria to assess the creditworthiness of borrowers. Let us understand the differences between them.

• Fitch Ratings, Moody's, and S&P are three different credit rating agencies operating with different methodologies, operations, and rating systems.
• Fitch Ratings is not a publicly traded company. However, Moody's and S&P are publicly traded and listed on the NYSE.
• The Fitch rating scale uses symbols AAA, AA, A, BBB, BB, B, CCC, CC, C, RD, and D, but Moody's rating uses Aaa, Aa, A, Baa, Ba, B, Caa, Ca, C. In comparison, S&P gives ratings in AAA+, BBB+, CCC+, and D symbols.
• Fitch Ratings has two headquarters in London, England and New York, but Moody's and S&P are based out of the US only.

Frequently Asked Questions (FAQs)

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