DP Credit Rating is a statistical risk model based on the concept of probability of default. Audited financial statements are a pre-requisite for a rating to be generated.
A credit rating is an opinion on the relative degree of credit risk associated with timely payment of interest and principal obligation. Rating grades are denoted by DP1 to DP8 (Please see Q10 for more information).
A credit rating agency provides an opinion relating to future debt repayments by borrowers whereas a credit bureau provides information on historical and current debt repayment records of debtors.
No. A credit rating is not an assurance of repayment of the debt obligation. It is an opinion on the relative degree of risk associated with such repayment by the borrower. This opinion reflects a probabilistic estimate of the likelihood of default. It is possible that some highly rated companies could default. However, such defaults would be less frequent amongst stronger rated companies than amongst companies with weaker ratings.
An independent and professional rating agency provides credible and ongoing information on credit risk, a key component of all borrowing decisions. This service is particularly useful to investors / creditors when they are faced with an array of investment or financing decisions that is much larger than what their own credit assessment resources can reliably support. Moreover, published ratings enhance the efficiency of the financial system by reducing the cost of obtaining quality credit information on players in the system.
Being rated means being transparent, and this will benefit SME companies in Singapore.
Currently, companies entering the local market may understand the importance of credit rating, but do not see how it may reward them in terms of cheaper financing.
Larger companies that raise the funds internationally have ratings from the major rating agencies. For them international rating is important because it improves their reputation and standing, along with the financing structure.
However, today?s situation is changed for our SMEs. Many domestic investors today demand appropriate investment returns and request adequate risk measurement and assessment. Doing business with any company without first ascertaining its credit risk could result in substantial losses that could even lead to insolvency of the company. Hence it is important for a company to not only understand its own credit risk profile but the credit risk profiles of its customers as well.
The implementation of Basel II to Singapore Banks by 2008 would force banks to adopt risk-based lending (i.e. where a potential borrower, which has a weak credit risk, would now be charged with higher costs of borrowing vis-à-vis a company with strong credit fundamentals).
In addition, the sophistication and quality of the market starts to play a more important role with investors demanding increased transparency and better risks assessment than ever before.
So long as we able to obtain the latest audited financials, DP Credit Rating can be applied to private companies as well.
In support of the SME community and their growing call for the use of credit ratings to assist them in securing financing, being more transparent and faciliting overseas business, DP Info has taken the first step in a nationwide SME credit ratings initiative. It is DP Info's intention to help SMEs, banks, potential financiers and business partners connect by gaining rapid access to a globally recognised credit rating of SMEs.
A company with a good credit rating would enable it to secure external funding with greater ease and possibly at a lower cost. The favourable ratings could also enhance its profile and facilitate in attracting greater trading and investment opportunities.
Domestic credit ratings assigned by DP Information are no different from the ratings of international rating agencies; it measures the probability of default of a borrower on its debt obligations.
Each rating is an alphanumeric representation of the relative degree of risk associated with company based on the expected likelihood of their timely payment. Each rating agency uses different rating scales for different kinds of ratings.
DP credit ratings range from a grade of DP1 to DP8; the latter grade implying the highest probability of default.
| Grading | DP Credit Rating (DP-CR) | Range of Probability of Default |
|---|---|---|
| Investment Grade | DP1 | <= 0.1% |
| DP2 | > 0.1% - 0.2% | |
| DP3+ | > 0.2% - 0.3% | |
| DP3 | > 0.3% - 0.4% | |
| DP4+ | > 0.4% - 0.6% | |
| DP4 | > 0.6% - 0.85% | |
| DP4- | > 0.85% - 1.0% | |
| High Yield | DP5+ | > 1.0% - 1.55% |
| DP5 | > 1.55% - 2.15% | |
| DP5- | > 2.15% - 3.0% | |
| DP6+ | > 3.0% - 4.0% | |
| DP6 | > 4.0% - 5.45% | |
| DP6- | > 5.45% - 8.0% | |
| High Risk | DP7+ | > 8.0% - 10.15% |
| DP7 | > 10.15% - 11.85% | |
| DP7- | > 11.85% - 14.0% | |
| DP8+ | > 14.0% - 16.15% | |
| DP8 | > 16.15% |
Companies rated 'DP4' and above are classified as investment grade ratings. Companies that are rated between ?DP5 ? DP6? are classified as high yield grade ratings whilst Companies rated ?DP7? and below are classified as high-risk grade ratings. Companies rated in the high-risk grade carry materially higher risk compared to those rated in the investment grade.
No, a high-risk grade rating on a company does not mean that it is certainly going to default. All it indicates is that the company has risks associated with it that makes it significantly more vulnerable to default than those in the investment grade.
Every rating assigned by DP Info is current and reflects the available information that may impact the credit quality of the companies based on the date of the financial statement. The rating is good for one year typically.
Ratings are assigned based on certain variables, assumptions and expectations about variables that impact the company?s performance. These variables are either company-specific factors or factors relating to the business environment. Rating agencies use their best professional judgment on these factors while assigning the rating. However, these variables can change significantly over a relatively short time frame, causing the rated entities? performance to deviate materially from expectations. This changes their future debt repayment capabilities and is reflected in their changed ratings.
In most cases, unless the rating is deep into the high-risk category, a downgrade does not mean that a default is anticipated. It merely indicates is that the risk associated with the company is relatively higher than what it was before the downgrade.