What are the benefits of Credit Rating to Corporate Borrowers?
The issuer company benefits in several ways by getting its security rated by an independent credit rating agency.
1. Cheap cost of funds
Credit rating lends credence to the financial competence and the strength of the company. It also enhances the image of the company among the public. Through highly rated securities, the corporate borrower can quote lesser rate of interest on fixed deposits or debentures or bonds. Risk aviators who avoid taking risks, come forward to invest their money safely in low-risk securities. Ultimately, the company is able to raise funds at cheap cost by issuing securities.
2. Increased source of borrowing
A company can have increased share in the security market by advertising its highly rated securities through television and press media. As investors are assured of prompt payment of interest and principal on rated instruments, the borrowing companies find resource mobilization easy. People from all walks of life always prefer highly rated securities.
3. An effective marketing tool
The ratings are so designed that they provide an investor with a clear indication about the credit worthiness of the instrument. Having projected a good corporate image, the rated company can build good customer relations for the products manufactured by them. Thus, credit rating acts as a marketing tool in creating a wise market for the products.
4. Reduced cost in public issues
Rated companies can approach the investors easily for mobilization of resources. As ratings instill confidence in the investor, the rated companies can attract them with least efforts. Without involving in any publicity stunts and gimmicks, they can economize and minimize the cost of their public issue. Rated companies benefit from best pricing and timing of issues.
5. Increased scope for expansion and growth of the business
Rating motivates the growth of the company as the promoters feel quite confident in their endeavors. By mobilizing increased funds from the investors, expansion programmes and new projects undertaken by the company are easily financed. Increased profitability and improved financial strength attained through credit rating enables the company to be healthy and avoid industrial sickness.
6. Increased support of brokers and financial intermediaries
Highly rated securities place the brokers and intermediaries in an advantageous position. They take minimum efforts in convincing their clients about an investment proposal. As the job of financial intermediaries is made easy, they tend to give an increased support to the issuer company.
7. Encourages financial discipline
Credit rating represents the relative capability and willingness of an issuer of a debt instrument to serve the debt obligations as per the terms of the contract between him and the investor. In order to fulfill their commitments towards the investors, the rated companies strive to improve their financial performance.