Report On Credit Rating

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Chapter: 01

1.1 Background of the

In the present world most of the economic activities are largely depended
on credit. Investment in productive sectors and other business activities needs
to be financed from a variety of sources. Of course, before granting the credit
facility the lender will try to be ensured that the borrower is capable to
repay the loan. For this the rating service is designed to provide both the
parties with reliable information. In modern economy the government has to
raise fund from both domestic and international institutions to finance its
operations. For this reason the need for sovereign credit rating is increasing
day by day.

As a developing country Bangladesh government took the initiative to rate
itself in 2006. The Bangladesh Bank requested two credit rating agencies, Standard &poor’s and Moody’s
which assigned ratings BB- and Ba3 as on 06 April And 12 April of this
year respectively. Both of the ratings reflects the better creditworthiness as
same as some emerging economic countries such as Vietnam and Indonesia. These
rating also unveil the opportunities of foreign direct investment and access to
international finance for Bangladesh.

In this circumstances, as part of
my academic program to obtain the degree of BBA, my Faculty Supervisor, Ranjan
Kumar Mitra, asked me to prepare a report on Credit Rating focusing Sovereign
Rating to Bangladesh. This report helped me to acquire knowledge on the very
new topic as a business student from Bangladesh. So,
I want to give my heartiest thanks to my supervisor to give such opportunity to
show my capability and aptitude in this relevant area.

1.2 Scope of the

This report gives an overview of
the credit rating system, its scenario in Bangladesh and describes its
classification. It explains the sovereign rating and its methodologies mainly
focusing the Standard &poor’s and Moody’s Investors Services. This report
finally shows the sovereign Rating to Bangladesh and its impact on the economy.

1.3 Objectives of the

The broad objective of the report is to explicate the Sovereign Credit Rating Methodology
and rating of Bangladesh by Standard &poor’s and Moody’s.

The specific objectives of this
study are as follows:

  • To
    give an overview of credit rating and its classification.
  • To illustrate the present
    scenario of credit rating industry in Bangladesh.
  • To
    illustrate the sovereign credit rating methodologies used by S&P’s and
  • To
    describe the impacts of sovereign rating to Bangladesh economy.
  • To find out the variables that are considered
    to rate Bangladesh.

  • ability to
    pay a loan
  • interest
  • amount of
    credit used
  • saving
  • spending
  • debt
  • Credit
    Ratings – based on analysis performed by experienced professionals who
    evaluate and interpret information from a multitude of sources, credit
    ratings provide a detailed opinion about a corporation’s credit risk.
  • Counterparty
    Credit Ratings –these types of ratings are useful for clients who are
    seeking asset or custodial management services or joint ventures. They are
    also useful for comparing a company’s creditworthiness to that of its
  • Rating
    Evaluation Services – an analytical tool for corporations that are
    considering strategic or financial initiatives that could impact its
    creditworthiness. More specifically, this service allows corporations to
    assess the potential ratings impact of different types of debt.
  • Private
    Client Services – an independent and objective tool developed for senior
    credit, financial, risk and investment managers to evaluate and manage
    risk with the help and insight of a Standard & Poor’s credit specialist.
  • Bank
    Loan and Recovery Ratings – developed for senior lenders, these types of
    ratings go beyond the overall corporate creditworthiness of the borrower
    to capture the impact of covenants, collateral and other repayment

3.1.3 Financial
Institutions Rating:

3.1.4 Insurance:

  • Insurance
    Financial Strength Ratings – useful for buyers of insurance, risk managers
    and employee benefit administrators, this type of rating provides details
    on an insurance organization’s ability to pay its policies and contracts.
    Insurance brokers and agents may also use these ratings to meet due
    diligence and disclosure requirements.
  • Insurance
    Financial Enhancement Ratings – provides investors with an assessment of
    an insurer’s willingness to pay financial guarantees on a timely basis.
  • Insurance
    Security Circle Icon – assigned only to rated insurers who have completed
    Standard & Poor’s interactive rating process and have obtained a BBB
    rating or above, this tool can help insurers easily promote their good
    financial standing to existing and prospective policyholders.
  • Bond
    Insurance – Standard & Poor’s offers the most comprehensive coverage
    of bond insurance in the marketplace. Our bond insurance ratings are
    supported by a diverse and global network of sector professionals in
    structured finance, project finance, public finance, and corporate and
    financial institutions. Learn more about Bond Insurance below.
  • 3.1.5
    International Public Finance:

  • Asset-Backed Securities
  • Commercial Mortgage-Backed Securities
  • Residential Mortgage-Backed Securities
  • Collateralized Debt Obligations
  • Servicer Evaluations
  • CRAB


    Entity Ratings

    Financial Institution Ratings

    Corporate Debt Ratings

    Equity Ratings (Initial public Offerings and Right

    Structured Finance Ratings

    Insurance Companies Rating/Claims Paying Ability

    Mutual Funds Schemes Rating

    Corporate Governance & Stakeholder Value
    Addition Rating

    Clientele Rating for Banks/Financial Institutions

    Other Rating Services

    • Corporate/
      entity rating for direct listing or for IPO at premium
    • Bank/
      financial institution rating
    • Insurance
      claim paying ability rating
    • Bank
      counter party rating
    • Bank
      loan exposure/ Facility rating
    • Rating
      of the structured products such as Zero Coupon Bonds. Mortgage backed or
      asset backed securities, debentures, preference share financings,
      subordinated debt products
    • Securitized
    • Project
      financing ratings
    • Micro
      Finance rating
    • MFI-
      social impact rating
    • Educational
      Institution Rating
    • Corporate
      Governance Rating

    Growth of the Sovereign Ratings Business

    Year Rating Was First Assigned
    by S&P or Moody’s

    Number of Newly Rated

    Median Rating Assigned
    (S&P/ Moody’s)
















    1. Per
      Capita Income,
    1. GDP
    1. Fiscal
    1. External
    1. External
    1. Economic
    1. Inflation,
    1. Default
    1. Per
      capita income
      : The greater the potential
      tax bases of the borrowing country, the greater the ability of a
      government to repay debt. This variable can also serve as a proxy for the
      level of political stability and other important factors.
    1. GDP
      :  A relatively high rate of economic
      growth suggests that a country’s existing debt burden will become easier
      to service over time.
    1. Fiscal
      : A large federal deficit
      absorbs private domestic savings and suggests that a government lacks the
      ability or will to tax its citizenry to cover current expenses or to
      service its debt.
    1. External
      : A large current account
      deficit indicates that the public and private sectors together rely
      heavily on funds from abroad. Current account deficits persists result in
      growth in foreign indebtedness which may become unsustainable over time.
    1. External
      : A higher debt burden should
      correspond to a higher risk of default. The weight of the burden increases
      as a country’s foreign currency debt rises relative to its foreign
      currency earnings (exports).
    1. Economic
      Although level of development is already measured by our per capita income
      variable, the rating agencies appear to factor a threshold effect into the
      relationship between economic development and risk. That is, once
      countries reach a certain income or level of development, they may be less
      likely to default. We proxy for this minimum income or development level
      with a simple indicator variable noting whether or not a country is
      classified as industrialized by the International Monetary Fund.
    1. Inflation: A high rate of inflation
      points to structural problems in the government’s finances. When a
      government appears unable or unwilling to pay for current budgetary
      expenses through taxes or debt issuance, it must resort to inflationary
      money finance. Public dissatisfaction with inflation may in turn lead to
      political instability.
    1. Default
      Other things being equal, a country that has defaulted on debt in the
      recent past is widely perceived as a high credit risk. Both theoretical
      considerations of the role of reputation in sovereign debt and related
      empirical evidence indicate that defaulting sovereigns suffer a severe
      decline in their standing with creditors. We factor in credit reputation
      by using an indicator variable that notes whether or not a country has
      defaulted on its international bank debt.




    Extremely strong
    capacity to meet financial commitments. Highest Rating.


    Very strong
    capacity to meet financial commitments.


    Strong capacity
    to meet financial commitments, but somewhat susceptible to adverse economic
    conditions and changes in circumstances.


    capacity to meet financial commitments, but more subject to adverse economic


    lowest investment grade by market participants.


    highest speculative grade by market participants.


    Less vulnerable
    in the near-term but faces major ongoing uncertainties to adverse business,
    financial and economic conditions.


    More vulnerable
    to adverse business, financial and economic conditions but currently has the
    capacity to meet financial commitments.


    vulnerable and dependent on favorable business, financial and economic
    conditions to meet financial commitments.


    Currently highly


    Currently highly
    vulnerable obligations and other defined circumstances.


    Payment default
    on financial commitments.

    ‘AAA’ Rated Sovereigns:

    • Stable,
      transparent, and accountable political institutions.
    • The
      flexibility to respond to changing economic and political circumstances
      relatively quickly and without major disruption.
    • Openness
      to trade and integration into the global financial system.
    • A
      prosperous, diverse, and resilient economy, with high per capita income.
    • An
      efficient public sector with countercyclical fiscal policies, low
      deficits, and largely local currency government debt.
    • An
      independent central bank pursuing sustainable monetary and exchange rate
      policies; an international currency; low inflation.
    • Strong,
      diversified, well-regulated financial sector and capital markets.
    • Ample
      external liquidity and low external debt.
    ‘AA’ Rated Sovereigns:
    • Stable,
      transparent, and accountable political institutions.
    • The
      flexibility to respond to changing economic and political circumstances
      quickly and without major disruption.
    • Openness to
      trade and integration into the global financial systems.
    • A
      prosperous economy, but slightly more vulnerable than ‘AAA’ sovereigns to
      adverse external influences.
    • An
      efficient public sector with countercyclical fiscal policies, variable
      deficits, and largely local currency government debt.
    • An
      independent central bank pursuing sustainable monetary and exchange rate
      policies; low inflation.
    • Diversified,
      well-regulated financial sector and capital markets.
    • A low
      public and private sector external financing requirement relative to
      usable reserves; modest external debt.
    ‘A’ Rated Sovereigns:
    • Political
      institutions evolving toward greater accountability and more stable,
      transparent forms of governance; possibly some geopolitical risk.
    • Openness
      to trade and integration into the global financial system.
    • A
      less diversified economy than for ‘AA’ rated sovereigns, but economic
      policies are generally cautious, flexible, and market oriented.
    • Rapid
      trend growth in output and GDP per capita, reflecting progress in economic
    • A
      fairly efficient public sector with moderate fiscal deficits; a less
      developed local debt market may necessitate offshore borrowing.
    • A
      fairly independent central bank pursuing sustainable monetary and exchange
      rate policies, but flexibility is more limited than at higher rated
      sovereigns; moderate inflation.
    • A
      well-regulated financial sector, possibly with some ongoing challenges,
      and developing capital markets.
    • A
      public and private sector external financing requirement that is modest
      relative to usable reserves; moderate external debt.
    5.3.4 ‘BBB’ Rated Sovereigns:
    • Less
      transparent political institutions; system may be in transition or
      succession process may be divisive; some geopolitical risk and social
      stress possible.
    • Openness
      to trade and growing integration in global financial system.
    • A
      less prosperous economy than in higher rated sovereigns, with more
      vulnerability to political and external shocks.
    • A
      record of satisfactory economic performance under adverse external
      conditions and well-established support for market-oriented economic
      programs; reform to enhance competitiveness, transparency, and flexibility
      is under way.
    • Government
      revenue and expenditure flexibility limited by already-high taxes/fees,
      collection difficulties, and spending pressures; greater need to borrow
      externally than in a higher rated sovereign.
    • A
      fairly independent central bank pursuing sustainable monetary and exchange
      rate policies, but market orientation of tools is limited by less
      developed financial markets.
    • An
      evolving financial sector, with possible problems creating a significant
      contingent liability for the government.
    • Public
      and private sector external financing requirement significant relative to
      usable reserves; moderate to high external debt.
    ‘BB’ Rated Sovereigns:
    • Political
      factors are a source of some uncertainty, with less transparent
      institutions and less open process than at higher ratings; possibly some
      geopolitical risk and social stress.
    • Openness to
      trade and a growing integration into the global financial system, though
      possibly with more restrictions than at higher rating levels.
    • A low- to
      moderate-income economy, with variable economic performance and
      vulnerability to adverse political and external influences.
    • An economy
      that is not well diversified or suffers from structural impediments to
      growth; wide income disparities.
    • Government
      revenue and expenditure flexibility limited by already-high taxes/fees,
      collection difficulties, and spending pressures; absent capital controls,
      nonofficial debt tends to be short term and denominated in, or linked to,
      a foreign currency.
    • A central
      bank pursuing sustainable monetary and exchange rate policies, but relying
      more heavily upon direct means than at higher rating levels; variable
    • The
      financial sector comes under stress when economic growth slows, with
      possible problems creating a significant contingent liability for the
    • A large
      public and private sector external financing requirement relative to
      usable reserves; moderate to high external debt.
    5.3.6 ‘B’ Rated Sovereigns:
    • Political
      factors are a source of uncertainty, with change in government sometimes
      leading to economic policy disarray; institutions are less open and
      effective than at higher rating levels; possibly some geopolitical risk
      and social stress.
    • Openness to
      trade, but integration into the global financial system is weak and
      subject to changing circumstances
    • A low- to
      moderate-income economy, with a variable economic performance and
      vulnerability to adverse political and external influences.
    • The economy
      is either not well diversified or suffers from structural impediments to
      growth; the private sector is less developed and sometimes dependent upon
      government protection/support; wide income disparities.
    • Macroeconomic
      stabilization efforts may be untested; government revenue and expenditure
      flexibility limited by already-high taxes/fees, collection difficulties,
      and spending pressures; absent capital controls, nonofficial debt tends to
      be short term and denominated in, or linked to, a foreign currency.
    • A central
      bank constrained by structural problems or fiscal imbalances and debt
      markets that are shallow; variable and sometimes high inflation.
    • The
      financial sector is undeveloped, possibly creating a significant
      contingent liability for the government.
    • A very
      large public and private sector external financing requirement relative to
      usable reserves; moderate to high external debt.
    ‘CCC’ and Lower Rated Sovereigns:
    • A
      clear and present danger of default.
    • May
      be in default on bilateral debt (and other classes of debt, in the case of
    • Relatively
      weak political institutions and an uncertain political environment, with
      potentially difficult internal divisions and geopolitical risk.
    • Sharp
      currency depreciation and high inflation, possibly hyperinflation.
    • High
      fiscal and external debt, with a significant near-term debt-servicing
    • A
      weak financial sector and an acute shortage of credit.

    Local Currency

    Foreign Currency



    Local Currency
    Government Bond Rating

    Foreign Currency
    Government Bond Rating



    Local Currency

    Foreign Currency
    Ceiling for Bonds and Notes


    Local Currency
    Deposit Ceiling

    Foreign Currency
    Ceiling for Bank Deposits

    Local Currency

    Foreign Currency

    Bond Rating

    Local Currency Government Bond Ratings reflect Moody’s
    opinion of the capacity and willingness of a government to generate revenues
    in its own currency to repay its debt to bond holders on a timely basis.

    Foreign Currency Government Bond Ratings reflect Moody’s
    opinion of the capacity and willingness of a government to mobilize foreign
    exchange to repay foreign currency-denominated bonds on a timely basis.


    The Local Currency Ceiling
    summarizes the general country level risk (excluding foreign currency
    transfer risk) that should be taken into account in assigning local currency
    ratings to locally-domiciled obligors or locally-originated structured

    The Country Ceilings for Bonds and Notes
    and for Bank Deposits
    reflect the risk of governmental interference
    at times of external payments crisis, i.e. foreign currency transfer risk.
    The ceiling for bonds and notes is defined by the probability that a
    government would resort to a moratorium should it default. It is determined
    by multiplying the implied default risk associated with existing
    foreign-currency government bond ratings by the risk that a moratorium would
    be used as a public policy tool. The foreign currency ceiling for bank
    deposits in most emerging market countries is typically lower than the
    ceiling for bonds to reflect the fact that the risk of a bond moratorium is
    often lower than the risk of a foreign currency deposit freeze.

    The Local
    Currency Deposit Ceiling is the highest rating that can be assigned to the
    local currency deposits of a bank domiciled within the rated jurisdiction.

    Local Currency

    Foreign Currency

    Bonds and Notes

    Local Currency Ceiling

    Foreign Currency Country

    Bank Deposits

    Local Currency Deposit

    Ceiling Foreign Currency
    Deposit Ceiling

    Determining the



    Foreign Currency

    Bond Rating

    Risk of

    Foreign Currency


    The lower the

    moratorium risk
    is, the

    higher the

    Currency Ceiling as

    compared to the

    Foreign Currency
    rating of the government.




    Foreign Currency Ceiling



    Government Foreign Currency

    Bond Rating


    Piercing the



    For any issuer
    whose Local Currency Rating is lower or equal to the Ceiling: Foreign
    Currency Rating = Local Currency Rating

    If the Local
    Currency Rating of an Issuer > Ceiling, a security may pierce
    depending on the risk of being caught up in a hypothetical moratorium.


    The higher the

    risk of being

    the closer a


    Currency Rating

    the Foreign

    Currency Ceiling.



    Local Currency Issuer Rating



    Foreign Currency Rating of

    the security


    Issuer Rating

    Foreign Currency Ceiling

    Foreign Currency Ceiling


    Range of
    possibilities with Foreign

    Currency Rating =
    Local Currency




    countries Comparison

    Country Name

    Standard & Poor’s








    Sri Lanka






    • Credit
      rating agencies do not downgrade
      companies promptly enough. For example, Enron’s rating remained at
      investment grade four days before the company went bankrupt, despite the
      fact that credit rating agencies had been aware of the company’s problems
      for months.
    • It
      has found that the credit agencies are conflicted in assigning sovereign
      credit ratings since they have a political incentive to show they do not
      need stricter regulation by being overly critical in their assessment of
      governments they regulate.
    • The
      lowering of a credit score by a CRA can create a vicious cycle, as not only interest
      rates for that sovereign would go up, but other contracts with financial
      institutions may be affected adversely, causing an increase in expenses
      and ensuing decrease in credit worthiness.
    • Agencies
      are sometimes accused of being oligopolists, because barriers to market
      entry are high and rating agency business is itself reputation-based.
    • Credit
      Rating Agencies have made errors of
      judgment in rating.
    • The
      international credit rating agencies rates Bangladesh slightly in higher
      position. For recent few years Bangladesh drew a lesser amount of foreign
      loan namely form World Bank and IMF. They are trying to persuade
      Bangladesh to take more loans.
    • Ratings
      agencies, in particular Fitch, Moody’s and Standard and Poor’s have been
      implicitly allowed by the government to fill a quasi-regulatory role, but
      because they are for-profit entities their incentives may be misaligned.
    • The
      challenge the rating agency mentioned for Bangladesh is low revenue
    • Despite
      its medium-size economy and evidence of recent economic dynamism,
      Bangladesh’s relatively high industrial and export dependence on the
      ready-made garments (RMG) sector is a ratings constraint.
    • Despite
      the generally positive trends in the government’s debt trajectory, debt
      affordability and fiscal flexibility face more pressure than do most of
      Bangladesh’s rating peers.
    • There
      is lack of fiscal flexibility reflected in a high government
      debt-to-revenue ratio of 350 per cent.
    • The
      Rating agencies also pointed to the high public and external debt as a
    • The
      credit rating agencies must give prompt update to the rating issues so
      that the lender or investor can be aware of the real fact.
    • The
      rating agencies should provide their services irrespective of the
      political incentives.
    • They
      should not provide lower or unfair score to any entity though there may be
      some pressure by the powerful institutions or sovereigns.
    • The
      entry barrier to the Credit Rating Agency industry should be removed.
    •  The credit rating agencies should develop
      their operational efficiency and expertise.
    • The
      growth of the export of dynamic readymade garment sector must be ensured.
    • Robustness
      in the remittance flow.
    • Procurement
      of minimum foreign commercial loan and extremely well debt servicing are
      the other reasons behind the good score.
    • Bangladesh’s
      reasonable degree of financial and balance-of-payments robustness coupled
      with prospects for continued macroeconomic stability reduces the likelihood
      of severe stress on the country’s creditworthiness
    • Political
      stability must be ensured.
    • The
      growth stability on the back of prudent macro-economic policy and
      microeconomic reforms and growing role of microfinance institutions can
      ensure better rating in future.
    • Prudent
      macroeconomic management and sound policies should have been ensured for
      price stability as well as a stable exchange rate.
    • The
      strong growth in the country’s foreign exchange reserve has also been
      rated favorably.

    1.4 Methodology of
    the Report:
    This report is mainly based on explanatory research and secondary data.
    As a theoretical study this report is prepared by gathering the data from
    secondary sources.
    I have tried my level best to collect most relevant data from the two
    rating agencies websites, articles from published journals and daily
    newspapers. I also take the help from many other websites to collect data
    updates and analyze the collected data to reach the objectives of the report.
    In this report I analyze the sovereign rating methodologies separately for the
    two rating agencies and describe the determinants considered by both of them.
    Finally I conclude the findings with recommendations.
    1.5 Limitations:

    Everything has its own limitation. My
    report is not beyond that. Though I try my best to present myself in this
    report as a laborious one, there is some ambiguity for preparing my report
    because of various factors.

    Factors include the followings:

    Six weeks time is not sufficient to gather knowledge on such a
    vast topic.

    Unavailability of information as it is confidential for both the
    rating agencies and the entity rated.

    Credit rating is a newly established criterion in the financial
    sector of Bangladesh.

    The report is prepared based on mainly two leading credit rating
    agencies: Standard & Poor’s and Moody’s Investors Service.

    of Credit Rating
    In the world of credit, an
    organization’s credit rating is of utmost importance. A company’s credit rating
    determines how easy it is for the company to issue debt and the rate investors
    will demand to earn on that debt. An individual, a firm or a government with a
    good credit rating can borrow money from financial institutions more easily and
    cheaply than those who have a bad credit rating.
    What is Credit Rating?
    A credit rating estimates
    credit worthiness
    of an individual,
    corporation, or
    even a country based upon the history of borrowing and repayment, as well as
    the availability of assets and extent of liabilities.
    In other words, it is an estimate
    based on a company or person’s history of borrowing and repayment and/or
    available financial resources that is used by creditors to determine the
    maximum amount of credit it can extend to the company or person without undue

    A credit rating is an opinion on
    the creditworthiness of a debt issue or issuer. The rating does not provide
    guidance on other aspects essential for investment decisions, such as market
    liquidity or price volatility. As a result, bonds with the same rating may have
    very different market prices. Despite this fact, and even though each rating
    agency has its own rating methodologies and scales, market participants have
    often treated similarly rated securities as generally fungible.

    Credit Ratings Are opinions And Not Recommendations:

     According to rating agencies, ratings are
    opinions and not recommendations to purchase, sell, or hold any security. In
    the United States rating agencies assert that they have the same status as
    financial journalists and are therefore protected by the constitutional
    guarantee of freedom of the press. They contend that this protection precludes
    government regulation of the content of a rating opinion or the underlying


    Makes up Credit Score?

    When a person or
    company borrows money, the lender sends information to a credit rating agency
    which details, in the form of a credit report, how well the person or the
    company handled his/ its
    From the information in the credit report, the credit rating agency determines
    a credit score based on five major factors:

    Previous credit performance,
    Current level of indebtedness,
    Time credit has been in use,
    Types of credit available, and
    Pursuit of new credit.

    Although all these
    factors are included in credit score calculations, they are not given equal
    weighting. Here is how the weighting breaks down:


    As we can see by the pie graph,
    the credit rating is most affected by a person or company’s historical
    propensity for paying off his/ its debt. The factor that can boost the credit
    rating the most is having a past that shows the person or company pay off his/
    its debts fairly quickly. Additionally, maintaining low levels of indebtedness
    (or not keeping huge balances on other
    lines of
    ), having a long credit history, and refraining from
    constantly applying for additional credit will help your credit score.

    The Purposes of Credit Rating:

    Credit ratings are aimed at
    reducing information asymmetries by providing information on the rated
    security. They can also help solve some principal-agent problems, such as
    capping the amount of risk that the agent can take on behalf of the principal.
    In addition, ratings can solve collective action problems of dispersed debt
    investors by helping them to monitor performance, with downgrades serving as a
    signal to take action.

    Indeed, a rating from a
    recognized rating agency, while not intended to do so, effectively reduces the
    burden on investors to research the credit- worthiness of a security or issuer.
    Credit ratings are typically among the main tools used by portfolio managers in
    their investment decisions and by lenders in their credit decisions. The
    reliance on ratings also reflects regulatory requirements in most countries.

    Why credit rating is important?
    Credit ratings are
    extensively used by investors, regulators and debt issuers. Most corporate
    bonds are only issued after evaluation by a major rating agency and in the
    majority of cases the rating process is initiated at the issuer’s request.
    Ratings can serve to reduce information asymmetry. Issuers willing to dissolve
    some of the asymmetric information risk with respect to their creditworthiness
    and yet not wishing to disclose private information can use rating agencies as
    certifiers. In such a case, ratings are supposed to convey new information to
    The benefits of
    credit rating to the issuers, investors, creditors and its values to the
    economy and capital market is described below:

    Benefits to the Issuers:

    Rating of an issue would ensure due compliance with the relevant legal
    regulatory provisions of the Securities & Exchange Commission and the
    central bank of the country.
    rating agency’s opinion would help the issuer company to broaden the market for
    their instruments. As ‘name recognition’ is replaced by objective opinions, the
    issuer company may access the securities market more comfortably.
    rating may help in stabilizing issuers’ access to the market even when the
    market price of listed equities is relatively unfavorable in the prevailing
    market conditions.
    ratings of Entities would confer upon the companies a greater confidence of the
    market and enhance a greater access to the financing sources.
    to the Investors & Creditors:
    §  Credit rating gives market
    participants timely access to unbiased, objective, independent, expert,
    professional opinion on the quality of securities in a user friendly manner
    that may be relied upon for investment decisions
    §  Rating opinion would facilitate
    the investors to decide their portfolios by choosing investment options in the
    market according to their profiles and preferences.
    §  Credit rating would affect
    significant contribution towards developing the stock market investor
    confidence and enhancing the quality and perfection of the securities market,
    through provision of credible information for guidance of institutional and
    individual investors.
    to the Economy & the Capital Market:
    §  Credit rating assists the
    regulators in promotion and enhancement of the precision of the financial
    §  Assists in qualitative
    development of the money and capital markets and enhancement of transparency of
    financial information and governance of the corporate sector in Bangladesh.


    2.3 History of Credit Rating:
    ratings provide individual and institutional investors with information that
    assists them in determining whether issuers of debt obligations and
    fixed-income securities will be able to
    meet their obligations with respect to those securities. Credit rating agencies
    provide investors with objective analyses and independent assessments of
    companies and countries that issue such securities.
    in the investment market, coupled with diversification in the types and
    quantities of securities issued, presents a challenge to institutional and
    individual investors who must analyze risks associated with both foreign and
    domestic investments. Historical information and discussion of three companies
    will facilitate a greater understanding of the function and evolution of credit
    rating agencies.
    Varnum Poor first published the “History of Railroads and Canals in the
    United States” in 1860, the forerunner of securities analysis and
    reporting to be developed over the next century. Standard Statistics formed in
    1906, which published
    corporate bond, sovereign debt and municipal bond ratings. Standard Statistics
    merged with Poor’s Publishing in 1941 to form
    and Poor’s Corporation
    , which was acquired by The McGraw-Hill
    Companies, Inc. in 1966. Standard and Poor’s has become best known by indexes
    such as the S&P 500, a stock market index that is both a tool for investor
    analysis and decision making, and a U.S. economic indicator.
    Moody and Company first published
    Moody’s Manual” in 1900.
    The manual published basic statistics and general information about stocks and
    bonds of various industries. From 1903 until the stock market crash of 1907, “Moody’s
    Manual” was a national publication. In 1909 Moody began publishing
    “Moody’s Analyses of Railroad Investments”, which added analytical
    information about the value of securities. Expanding this idea led to the 1914
    creation of
    Moody’s Investors Service which, in the
    following 10 years, would provide ratings for nearly all of the government bond
    markets at the time. By the 1970s Moody’s began rating
    commercial paper and bank deposits,
    becoming the full-scale rating agency that it is today.

    Fitch Ratings:

    Fitch founded the Fitch Publishing Company
    in 1913. Fitch published financial statistics for use in the investment
    industry via “The Fitch Stock and Bond Manual” and “The Fitch
    Bond Book.” In 1924, Fitch introduced the AAA through D rating system that
    has become the basis for ratings throughout the industry. With plans to become
    a full-service global rating agency, in the late 1990s Fitch merged with IBCA
    of London, subsidiary of Fimalac, S.A., a French holding company. Fitch also
    acquired market competitors Thomson BankWatch and Duff & Phelps Credit
    Ratings Co. Beginning in 2004, Fitch began to develop operating subsidiaries
    specializing in enterprise
    risk management, data services and finance
    industry training with the acquisition of Canadian company, Algorithmics, and
    the creation of Fitch Solutions and Fitch Training.
    Credit Rating Industry in Bangladesh:
    Although rating agencies started
    in 1907 (Moody’s to be precise) in USA, in Bangladesh it is a very recently
    developed industry. There are only three credit rating agencies in Bangladesh
    namely Credit Rating Agency of Bangladesh Limited (CRAB), Credit Rating
    Information and Services Limited (CRISL) and Financial Analysis & Rating
    Agency (FARA).
    In Bangladesh, credit
    rating agencies are regulated by Credit Rating Agency Rules – 1996.

    Credit Rating Information and
    Services Limited (CRISL)

    started its operation as a public limited company as the first credit rating
    agency in Bangladesh in 2002. It has the goodwill in the market that it is very
    stringent in its operations and conservative in assigning Credit Rating. 

    Rating Agency of Bangladesh Limited (CRAB) was set up in 2003 by leading
    financial/investment institutions and individuals as an independent and professional
    full service Credit Rating Agency. ICRA Ltd, India subsidiary of international
    Credit Rating Agency Moody’s Investors Service, USA is the technical partner of
    CRAB. CRAB is a Public Limited Company.

    Analysis and Rating Agency (FARA) is yet to start its operation. It has got
    license to operate as a rating agency very recently.

    industry is growing very rapidly to those Basel
    II adopting countries.
    Bangladesh has also adopted Basel
    II and has started to implement it from January 2009.
    That is why the market for rating agencies is increasing in line with growth of
    the private sector. More and more issuers and borrowers are being forced by
    banks to rate them to potentially save capital under the new capital accord.

    the industry is growing and only two companies are operating here meaning a low
    level of competition, this industry is very profitable in Bangladesh now.

    resource being the key resource, this industry does not require intense
    investment in fixed asset meaning a strong threat of new entrants being lured
    by the profitability of the industry. But regulator has the tendency of not
    allowing new firms in this industry fearing this may lead to deterioration in
    credit rating quality which is protecting the monopoly of the existing
    companies helping them generate an extreme revenue and profitability growth.

    of Credit Rating
    The existence of various types of
    credit rating allows the topic to become very complex, but with a little
    assistance it can be easy to understand. The issue of types of credit scores
    can be discussed both with a national and international focus. This credit
    score or rating allows the consumer to understand their financial capabilities,
    as well as, alerts potential lenders of a good or bad risk. When looking at
    types of credit rating, one needs to understand a few essentials. Typically,
    the lower the credit score, the more derogatory is the standing of that
    Categories of Credit Rating:
    Along with Standard & Poor’s’
    and Moody’s Investors Services most of the internationally recognized credit
    rating agencies provide rating services in the following market segments:

    The various major types of credit
    rating are described below in details:

    3.1.1 Personal credit ratings:

    An individual’s credit score,
    along with his or her
    credit report, affects his or her ability
    to borrow money through financial institutions such as

    The factors that
    may influence a person’s credit rating are:

    In different parts
    of the world different personal credit rating systems exist.

    3.1.2 Corporate Credit Rating:

    credit rating is a suite of ratings services that are meant to help demonstrate
    a corporation’s financial strength to its potential business partners or
    investors and to improve access to the global credit market.
    & Poor’s corporate services include:

    To form our
    ratings opinions, our credit analysts review a broad range of business and financial
    attributes that may influence a financial institution’s creditworthiness. Our
    business risk profile analysis incorporates such factors as country risk,
    environment, company position, business and geographic diversification, and
    management strategy. Our financial risk profile analysis incorporates such
    factors as risk management, capitalization, earnings, funding and liquidity,
    accounting, and governance.

    Sovereign and
    international Public Finance Ratings globally rates and provides credit
    assessments of various debt securities issued by state and local governments,
    public authorities, and agencies, and government-owned entities. Standard &
    Poor’s rates 123 sovereigns. In the sub-sovereign market Standard & Poor’s
    began rating local and regional governments (LRGs) outside the United States in
    the late 1980s and has since then expanded its coverage in public finance
    sectors such as housing, healthcare, higher education, non-for-profit entities,
    government related entities (GRE) as well as provide Financial Management
    Assessment (FMA).

    Local and Regional
    Governments ratings (LRGs): Since the 1980s our presence in the sub-sovereign
    market has expanded exponentially, from only a handful of ratings to more then
    315 regional and local governments today in 29 countries. In Europe alone,
    Standard & Poor’s rates 230 public sector entities. Capital-market issuance
    has been one of the key drivers of this growth, although not the only one.
    Regions and municipalities use credit ratings for a variety of purposes, such
    as to facilitate their public companies access to the capital markets and financial
    institutions, improve their own ability to enter into project finance and
    structured transactions, obtain favourable financing terms from financial and
    commercial counterparties, attract private investment, draw events to their
    territory and enhance their external and internal marketing and communications.

    Healthcare, Higher Education: The growth in LRG ratings has enabled Standard
    & Poor’s to consolidate its position as the market leader, and to expand
    its coverage in public finance sectors by providing credit ratings and credit
    assessments to housing associations, healthcare, higher education, and
    non-for-profit entities. Financial Management Assessment (FMA) is an in-depth
    interactive assessment of financial management practices, tools, and policies
    of a public sector entity. Public sector entities include local and regional
    governments (LRGs) and government-related entities/companies (GREs).

    entities/companies (GREs): GREs are enterprises potentially affected by extraordinary
    government intervention during periods of stress. GREs are often partially or
    totally controlled by a government and they contribute to implementing policies
    or delivering key services to the population. Some entities with little or no
    government ownership might also benefit from extraordinary government support
    due to their systemic importance or their critical role as providers of crucial
    goods and services. Standard & poor’s rates approximately 500 GREs

    3.1.6 Public
    Finance U.S:

    3.1.7 Sovereigns:

    In recent years,
    there has been growth in new rating mandates from countries and regions that
    view ratings as a means to attract foreign direct investment. In turn, this has
    highlighted the importance of credit ratings and opinions, as investors seek
    independent expertise in new frontiers.

    Structured Finance:

    Structured Finance
    is one of several financial sectors for which Standard & Poor’s provides
    its credit ratings services. Slightly different, and more complex than the
    ratings it provides for other sectors, analysts who specialize in rating
    structured financial instruments closely evaluate, among other things, the
    potential risks posed by the instrument’s legal structure and the credit
    quality of the assets held by the Special Purpose Entity (SPE). Standard &
    Poor’s analysts also consider the anticipated cash flow of the underlying
    assets and any credit enhancements that could provide protection against

    3.2 Credit Rating Services in
    Bangladesh CRAB and CRISL offer the following Rating Services:

    Entity Ratings:

    Entity ratings are
    a measure of a company’s intrinsic ability and overall capacity for timely
    repayment of its financial obligations. They are mandatory ratings required for
    any regulatory compliance or voluntary ratings that may be sought by companies
    to enhance corporate governance and transparency. These ratings are useful for
    benchmarking a company against its peers, enhancing investors’ confidence,
    market profiling, reducing time for future debt ratings, enhancing a company’s
    standing for counterparty risk purposes and facilitating credit evaluation for
    bank borrowings and bank lines.

    3.2.2 Financial Institution Ratings:

    These ratings will
    assess the creditworthiness of financial institutions, i.e. commercial and
    merchant banks, non- banking finance companies, housing finance companies etc.
    While each of these entities have the same function, i.e. leverage on own funds
    and lend to others on a cost plus basis, there are significant differences in
    terms of scale of operations, products and services offered, product delivery,
    regulatory aspects, and their internal control systems. Ratings of financial
    institutions focus on the risks that can possibly affect the operations of a
    finance company – operating risks, financial risks and management risks. 

    Corporate Debt Ratings:

    Such ratings specifically
    assess the likelihood of timely repayment of principal and payment of interest
    over the term to maturity of such debts as per terms of the contract with
    specific reference to the instrument being rated. A missed or delayed payment
    by an issuer in breach of the agreed terms of the issue is considered as
    default. The rating is based on an objective analysis of the information and
    clarifications obtained from the issuer, as also other sources considered

    3.2.4 Equity Ratings (Initial public Offerings and Right Offerings):

    Equity rating
    makes assessment of the relative inherent quality of equity reflected by the
    earnings prospects, risk and financial strength associated with the specific
    company. The rating is not intended to predict the future market price of the
    stock of a company, but to evaluate the fundamentals of a company, which
    ultimately act as important inputs in the price behavior of the stock of such a
    company over the medium term and long term. In the short term, the rating helps
    in reconciling the market sentiment with respect to the stock of a company to
    the long term fundamentals as reflected by the equity grade.

    3.2.5 Structured Finance Ratings:

    (Included under
    this category will be asset backed securitization, mortgage backed
    securitization, future flow transactions etc) Structured Finance Ratings are
    opinion on the likelihood of the rated structured instrument servicing its debt
    obligations in accordance with the terms. An SFR is generally different from
    the corporate Credit Rating of the originator and is based on the risk
    assessment of the individual components of the structured instrument. These
    components include legal risk, credit quality of the underlying asset, and the
    various features of the structure.

    Insurance Companies
    Rating/Claims Paying Ability Rating:

    Such ratings
    assess the ability of the insurers concerned to honor policy-holder claims and
    obligations on time. Rating provides an opinion on the financial strength of
    the insurer, from a policy-holder’s perspective which may act as an important
    input influencing the consumer’s choice of insurance companies and products.
    The rating process involves analysis of business fundamentals, competitive
    position, franchise value, management, organizational structure/ownership, and
    underwriting and investment strategies. The analysis also includes an
    assessment of company’s profitability, liquidity, operational and financial
    leverage, capital adequacy, and asset/liability management method.

    Mutual Funds Schemes Rating:

    Mutual Funds
    Schemes rating is designed to provide Investors, Intermediaries and Fund
    Sponsors/Asset Management Companies with an independent opinion on the
    performance and risks associated with various Mutual Fund Schemes. Funds
    ratings incorporate various qualitative and quantitative factors affecting a
    fund’s portfolio. Such analyses focus on the resilience to economic changes,
    assessing asset quality, portfolio diversification and performance, and
    liquidity management.

    Such rating
    assesses the level to which an organization accepts and follows the codes and
    guidelines of corporate governance practices, reflected into the distribution
    of rights and responsibilities among different participants in the organization
    such as the Board, management, shareholders and other financial stakeholders
    and the rules and procedures laid down and followed for making decisions on
    corporate affairs.

    3.2.9Clientele Rating for Banks/Financial Institutions:

    Clientele rating
    service has been designed to assist the management of the loan portfolios of
    banks/financial institutions by bringing in the present and prospective clients
    under continuous evaluation and monitoring of CRAB’s rating unit. Clientele
    rating provides banks/financial institutions on a continuous basis with
    opinions on the relative credit risks (or default risks) associated with the
    existing and/or proposed loans of the clients. 

    3.2.10 Other Rating Services:

    CRAB performs
    other rating assignments as requested by clients or required by regulatory


    Introduction to Sovereign Credit Rating

    In recent years, the demand for
    sovereign credit ratings – the risk assessments assigned by the credit rating
    agencies to the obligations of central governments— has increased dramatically.
    By reducing investor uncertainty about risk exposures, sovereign ratings have
    enabled many governments, some with prior histories of debt defaults, to gain
    access to international bond markets.

    4.1 What
    is Sovereign Credit Rating?

    Simply a sovereign credit
    is the credit rating of a sovereign entity, i.e. a national
    government. The sovereign credit rating indicates the risk level of the
    investing environment of a country and is used by investors looking to invest
    abroad. It takes political risk into account.

    In a broader sense, sovereign
    credit ratings give investors insight into the level of risk associated with
    investing in a particular country and also include political risks. At the
    request of the country, a credit rating agency will evaluate the country’s
    economic and political environment to determine a representative credit rating.

    The Development of Sovereign Ratings Business:

    Although the rating agencies’
    current practice of assigning overall ratings for sovereign risk began only a
    few decades ago, Moody’s has been rating bonds issued by foreign governments
    since 1919. International bond markets were very active in the early part of
    the twentieth century: by 1929, Moody’s was rating bonds issued by roughly
    fifty central governments.

    The demand for sovereign ratings,
    however, abated with the onset of the Great Depression, and after World War II,
    the international bond markets came to a standstill. In the 1970s,
    international bond markets revived, but demand for sovereign ratings was slow
    to materialize. As recently as ten years ago, only fifteen foreign governments
    borrowed in U.S. capital markets and felt the need to obtain credit agency
    ratings. Because these governments were almost all pristine credits, their
    sovereign risk assessments were quite straightforward and noncontroversial.
    Other governments were able to obtain credit through other means. A few financially
    strong governments gained access to international capital through the
    Euromarkets without ratings. Less creditworthy sovereigns generally obtained
    international credit from banks, and a few issued privately placed bonds
    without credit ratings.

    The sovereign ratings business
    took off in the late 1980s and early 1990s when weaker credits found market
    conditions sufficiently favorable to issue debt in international credit
    markets. These governments increasingly tapped the Yankee bond market, where credit
    ratings are a de facto requirement. Consequently, the growth in demand for
    rating services has coincided with a trend toward assignment of lower quality
    sovereign credit ratings. Before 1985, most initial ratings were AAA/Aaa; in
    the 1990s, the median rating assigned has been the lowest possible investment
    grade rating, BBB-/Baa3.

    With the increase in demand for
    ratings, agency sovereign rating activity has returned to pre-Depression
    levels. Today Moody’s and Standard and Poor’s each rate about fifty sovereigns.
    In the last few years, three additional rating agencies—Duff and Phelps, IBCA,
    and Thomson BankWatch—have ventured into the sovereign rating business as well.

    The growth of sovereign rating
    business is shown in the following table:

    Sources: Standard and Poor’s;
    Moody’s Investors Service.

    4.3 Reasons for Sovereign Credit

    other credit ratings, sovereign ratings are assessments of the relative
    likelihood a borrower will default on its obligations. Governments generally
    seek credit ratings in order to ease their access to international capital
    a good sovereign credit rating is usually essential for developing
    countries in order to access funding in international bond markets.
    common reason for obtaining sovereign credit ratings, other than issuing bonds
    in external debt markets, is to attract foreign direct investment.
    To give investors
    confidence in investing in their country, many countries seek
    ratings from credit rating agencies like Standard and Poor’s, Moody’s, and
    Fitch to provide financial transparency and demonstrate their credit

    4.4 Determinants of Sovereign

    The two leading
    credit rating agencies, Moody’s and Standard and Poor’s, use large number
    variables to determine the ratings for different sovereigns. The major eight
    variables appear to be the most relevant to determining a sovereign’s credit

    The above
    determinants are described below:

    Sovereign ratings are gaining importance as more governments with
    greater default risk borrow in international bond markets. But while the
    ratings have proved useful to governments seeking market access, the difficulty
    of assessing sovereign risk has led to agency disagreements and public
    controversy over specific rating assignments. Recognizing this difficulty, the
    financial markets have shown some skepticism toward sovereign ratings when
    pricing issues.
    Chapter: 05
    Sovereign Rating Methodologies

    Sovereign credit ratings receive
    considerable attention in financial markets and the press. Sovereign ratings
    effectively summarize and supplement the information contained in macroeconomic
    indicators and are therefore strongly correlated with market-determined credit
    spreads. Moody’s and Standard and Poor’s each currently rate more than fifty sovereigns.
    Although the agencies use different symbols in assessing credit risk, every
    Moody’s symbol has its counterpart in Standard and Poor’s rating scale.

    Standard & Poor’s Sovereign Rating Methodologies:

    Standard & Poor’s is the
    global leader in providing ratings and credit-related services for sovereign,
    sovereign-supported entities and supranational issuers. Its public sector
    coverage extends to local and regional governments. In recent years, there has
    been growth in new rating mandates from countries and regions that view ratings
    as a means to attract foreign direct investment. In turn, this has highlighted
    the importance of credit ratings and opinions, as investors seek independent
    expertise in new frontiers.

    To assign
    sovereign rating opinions Standard & Poor’s use rating letters from ‘AAA’
    to ‘D’ considering following definitions:

    In the above table ratings from
    ‘AA’ to ‘CCC’ may be modified by the addition of a plus (+) or minus (-) sign
    to show relative standing within the major rating categories.

    Sovereign Characteristics by Rating Category:

    sovereign rating reflects Standard & Poor’s opinion on a central
    government’s willingness and ability to service commercial financial
    obligations on a timely basis. In its sovereign analysis, Standard & Poor’s
    looks at trends and vulnerabilities to potential shocks in a wide variety of
    political and economic factors, analyzing developments with both quantitative
    and qualitative measures. Sovereign profiles by rating category illustrate how
    the various components of Standard & Poor’s Ratings Services’ sovereign
    ratings criteria are combined to produce ratings.
    sovereign ratings criteria for the above rating categories are described below:

    assigned Standard & Poor’s highest rating, ‘AAA’, typically have strong
    political institutions (including well-established property rights and an
    effective judicial framework) and adaptable political systems. Sovereigns rated
    ‘AAA’ are open to trade and finance, which facilitates competition and
    specialization and permits the efficient use of resources. The macroeconomic
    stability of these sovereigns precludes the development of destabilizing
    imbalances and provides an environment conducive to investment.

    Most of the
    world’s largest industrialized countries have ‘AAA’ rated sovereigns (the U.S.,
    U.K., Federal Republic of Germany, and Republic of France), as do a handful of
    smaller countries with specific attributes underlying their strength (e.g., the
    Grand Duchy of Luxembourg, the State of The Netherlands, the Kingdom of Norway,
    the Republic of Singapore, and the Swiss Confederation).

    Characteristics of
    ‘AAA’ rated sovereigns include:

    ‘AA’ rated
    sovereigns have a very strong capacity to service debt on a timely basis, and
    their characteristics are similar to those of ‘AAA’ rated sovereigns, differing
    only in degree. Thus, their economies are a little more vulnerable to adverse
    external influences, fiscal deficits tend to be more variable, and government
    and external debt burdens are generally higher. Among the most challenging
    issues are pension reforms and labor market flexibility.

    Characteristics of
    ‘AA’ rated sovereigns include:

    For ‘A’ rated
    sovereigns, ratings tend to be constrained by vulnerabilities associated with a
    sovereign’s stage of development, narrowly based economy, need to restructure,
    and/or political situation. This diverse group of countries has, for the most
    part, enjoyed fairly rapid economic development and diversification in recent
    years; a result of their success in economic liberalization. For many of these
    sovereigns, some macroeconomic, fiscal, and external indicators may be as
    strong as or even stronger than those of ‘AA’ rated sovereigns. However, their
    vulnerabilities keep the ratings below what a solely quantitative approach
    would suggest.

    Characteristics of
    ‘A’ rated sovereigns include:

    The ‘BBB’ range is
    the lowest within what the investment community commonly refers to as the
    investment-grade category. In Standard & Poor’s opinion, the cushion
    supporting timely debt service is not as large as at higher rating levels.
    Political factors play a larger role here than at higher levels, but orthodox market-oriented
    economic programs are generally well established. ‘BBB’ rated sovereigns tend
    to be the most heavily immersed in economic reform and liberalization (as are
    many lower rated sovereigns), and are at an earlier stage in the reform process
    than their more highly rated peers. Median per capita GDP is about US$5,000,
    far below the ‘A’ median’s US$11,000. Debt may be high, and there is likely to
    be greater reliance upon short-term debt and debt indexed to, or denominated
    in, a foreign currency than at higher rating levels. Capital markets are less
    developed, and the financial sector may be small and/or encumbered by weak
    economic performance and supervisory shortcomings.

    Characteristics of
    ‘BBB’ rated sovereigns include:

    The ‘BB’ range,
    the highest in what is commonly referred to as the speculative-grade category,
    reflects significantly more political risk, with political factors possibly
    disrupting economic policy. Income is low to moderate, and lack of diversity
    and structural impediments may restrain economic growth. As at higher levels,
    the central bank pursues sustainable monetary and exchange rate policies, but
    market-oriented tools are not well developed. The financial sector is likely to
    come under stress when economic growth slows, and capital markets have a short
    track record. Debt and debt service are usually high and variable.

    Characteristics of
    ‘BB’ rated sovereigns include:

    In the ‘B’ range,
    political factors tend to be a source of uncertainty when the economic
    environment deteriorates. Orthodox economic policies are usually not well
    established. Much of the private sector may be dependent upon government
    protection. Financial sectors tend to be weak. Absent capital controls,
    nonofficial debt tends to be short term and denominated in or linked to a
    foreign currency. The narrowness of the economic base, fiscal imbalances and
    shallow debt markets constrain central bank flexibility. Timely debt service is
    vulnerable to adverse external influences while income is low to moderate, and
    fiscal deficits, inflation, and external debt tend to be high.

    Characteristics of
    ‘B’ rated sovereigns include:

    Below the ‘B’
    category, at ‘CCC’ or ‘CC’, there is a clear and present danger of default.
    Governments may have already missed payments to official bilateral creditors,
    with Paris Club rescheduling under way. There is considerable economic, and
    perhaps political, turmoil. The currency is weakening, inflation is rising, and
    the short-term debt service burden is a huge challenge. At the selective
    default (‘SD’) level, there have already been some missed payments or a
    coercive exchange offer on debt to commercial banks and/or bondholders.

    Characteristics of
    ‘CCC’ or lower rated sovereign include:

    The listed characteristics are a
    summary, not any sort of checklist, and sovereigns in any given rating category
    may have some traits more commonly found in higher or lower rated sovereigns.

    5.4 Moody’s Sovereign Rating Methodologies:

    There are two major approaches to
    Moody’s sovereign ratings:

    1. Local currency vs. foreign

    2. Creditworthiness of the
    government vs. the risk of sovereign interference


    5.4.1 DEFINITIONS:
    definition of local and foreign currency bond ratings and local currency and
    country ceilings are given in the following chart:


    Moody’s bond ratings are opinions
    about creditworthiness. When applied to a given government, they reflect the
    credit risk facing an investor who holds debt securities issued by that
    government. While Moody’s sovereign bond ratings process takes into
    consideration a number of economic, financial, social and political parameters
    that may affect a government’s creditworthiness, the outcome – the rating – is
    strictly construed as assessing credit risk. Therefore, one cannot directly
    infer general assessments about a country’s economic prosperity, dynamism,
    competitiveness or governance from Moody’s government bond ratings.


    currency bond ratings:

    Local currency government bond
    ratings reflect Moody’s opinion of the ability and willingness of a government
    to raise resources in its own currency to repay its debt to bond holders on a
    timely basis. The key question is the extent to which a government is able and
    willing to alter – if and when necessary – domestic income distribution in
    order to generate enough resources to repay its debt on time.

    Two implications can be drawn
    from this: assessing default risk first relies on a cost-benefit analysis to
    repay the debt, and, second, requires an evaluation of the government’s
    resources (solvency risk), as well as its ability to mobilize resources in a
    timely fashion (liquidity risk).

    To determine whether a government
    will punctually face debt payment streams, it is necessary to assess the
    possibility and associated costs of:

    (1) Raising additional taxes or
    cutting spending which both expose the sovereign to the risk of dampening
    growth and fueling social discontent.

    (2) Liquidating assets, risking
    depletion of productive national resources; or


    (3) Obtaining monetary financing
    from the central bank, with the risk of undermining the monetary authority’s
    credibility and fueling inflation.

    currency bond ratings:

    Foreign currency sovereign bond
    ratings reflect the capacity of a government to mobilize foreign currency to
    repay its debt on a timely basis. There is one important analytical difference
    between local and foreign currency government ratings. While local currency
    creditworthiness depends exclusively on the government’s capacity and
    willingness to raise finance in its own currency to repay its debt, a
    government’s default in foreign currency can also be precipitated by strains in
    the capacity of a non-sovereign to service its foreign currency debts.

    Until the late 1980’s, emerging
    market governments were very often the main or exclusive borrowers of foreign
    currencies. This created a direct link between a balance of payment crisis –
    triggered by a current account deficit difficult to finance – and a
    government’s default in foreign currency. This link has weakened with financial
    liberalization and the move towards currency convertibility.

    In a country in which a high
    current account deficit would be associated with a high level of private sector
    foreign debt, a confidence crisis – fueling further capital outflows – might
    well lead to a currency crisis. A currency crisis would impact the government’s
    creditworthiness in two possible ways: the Government’s own foreign currency
    denominated debt burden will mechanically increase, and the foreign currency
    resources it could mobilize – for instance the foreign exchange reserves – may
    have already been depleted. It follows that in the assessment of a government’s
    foreign currency credit risk, the strength of the whole country’s external
    position must be taken into account.

    5.4.4 Foreign and Local Currency

    To capture the risk of
    governmental interference in private agents’ creditworthiness – the best
    example being the imposition by a government of a moratorium on foreign
    currency debt – Moody’s has devised various analytically based rating
    practices. These practices, based on historical evidence and economic and
    financial analysis, serve either as an absolute constraint (the foreign
    currency bank deposit ceiling) or as a sometimes permeable constraint (the
    foreign currency country ceiling for bonds and notes) or simply as a prime
    reference (the local currency country ceiling) for the determination of
    non-sovereign ratings in local or foreign currency.


    The “country ceiling”
    generally indicates the highest ratings that can be assigned to the
    foreign-currency issuer rating of an entity subject to the monetary sovereignty
    of that country or area. This is a critical parameter for assigning foreign
    currency ratings to securities in a particular country.

    It reflects the degree of
    interference that sovereign action can impose on the capacity of a
    non-sovereign to meet contractual obligations. The lower the ceiling, the
    larger the potential gap between a company’s local currency rating – which
    reflects its intrinsic economic and financial strength – and its foreign
    currency issuer rating. The higher the ceiling, the lower its potential
    influence on private sector foreign currency securities’ ratings, with the
    extreme case of an Aaa ceiling effectively indicating there is no ceiling.

    The nature of Moody’s foreign
    currency ceiling has changed over time, reflecting changes in the world economy
    and the structure of financial markets. The analytic rationale for the
    existence of a ceiling was that all domestic issuers are potentially subject to
    foreign currency “transfer” risk – i.e., the inability to convert
    local currency into foreign currency in order to meet external payment
    obligations in a timely manner. In other words, the ceiling accounts for the
    fact that a government confronted by an external payments crisis has the power
    to limit foreign currency outflows, including debt payments, of all issuers
    domiciled within a country, be they public sector or private sector.

    However, the broadening and
    deepening of international capital markets since the 1990s and the avoidance of
    a generalized moratorium by most governments facing external payments
    difficulties in recent years have led us to be more flexible in the application
    of country ceilings. Since June 2001, we have looked at each situation
    individually to determine if certain securities are eligible to pierce the
    country ceiling. The ceiling is now defined by the probability that a
    government would resort to a moratorium should it default.

    To determine the foreign currency
    country ceiling, we therefore multiply the implied default risk associated with
    existing foreign-currency government bond ratings by the risk that a moratorium
    would be used as a public policy tool for each country.

    Note that although issuer ratings
    cannot pierce the ceiling, bonds sold under foreign law may be rated higher
    than the risk of a general moratorium. The likelihood that an obligation may
    pierce the country ceiling depends on two factors: the fundamental credit
    strength of the issuer (as indicated by its local currency bond rating), and
    the risk of sovereign interference in times of stress. In turn, we can
    characterize the risk of sovereign interference as a function of three

    (1) The government’s probability
    of default in foreign currency (i.e. its foreign currency bond rating);

    (2) The probability that, confronted
    with a crisis, the government will impose a moratorium; and,

    (3) The probability that, given a
    moratorium, an issuer’s foreign currency debt service may be included in such a

     Note that the combination of above (1) and (2)
    provides the foreign currency ceiling.


    The foreign currency ceiling on
    bank deposits specifies the highest rating that can be assigned to
    foreign-currency denominated deposit obligations of (1) domestic and foreign
    branches of banks headquartered in that domicile (even if subsidiaries of
    foreign banks), and (2) domestic branches of foreign banks.

    Moody’s maintains foreign
    currency bank deposit ceilings that are distinct from foreign currency country
    ceilings for bonds and notes. While foreign currency deposit ceilings reflect
    the same kind of governmental interference as the Foreign Currency Ceiling for
    Bonds and Notes – i.e. foreign currency risk transfer – for emerging market
    countries, these two ceilings have been typically placed at different levels on
    the rating spectrum. The reason is that our experience since 1998, the year we
    saw our first rated foreign currency bond default, shows that when sovereigns
    have defaulted on any of their foreign currency obligations, in nearly 40% of
    the cases, there was a simultaneous default on foreign currency bank deposits
    (three out of eight rated defaults). At the same time, we have two instances
    where foreign currency bank deposits have been frozen or where there was a
    forced exchange absent a government default. Since slightly less than half the
    time FC deposit defaults were cotemporaneous with a government default, and in
    some cases, such deposit defaults occurred even without a government default,
    it is clear that FC deposit ceilings are either nearly as risky as or perhaps even
    riskier than a FC government bond. On the other hand, out of 8 rated government
    bond defaults, in only one instance, Argentina, did we see an across-the-board
    FC payments moratorium?

    Therefore, we can conclude that,
    in general, the risk of a payments moratorium on non-sovereign FC bonds is
    significantly less than the risk of a government bond default. In addition,
    unlike FC bank deposits, we have no examples of a payments moratorium on bonds
    absent a government default. In about two-thirds of rated countries, the FC
    bank deposit ceiling is at least equal to the FC government bond rating. In
    about one-third of the countries, the FC deposit ceiling is one notch lower
    than the government bond rating.

    This notching practice attempts
    to take into account the fact that it is often legally, logistically and
    politically easier for governments to impose FC bank deposit restrictions than
    it is for those same government to default on their own foreign currency debt.
    Although there are numerous exceptions, these factors have been given greater
    weight for countries where the government is rated Baa3 or lower, where the
    risk of a sovereign credit event is by definition higher. Because, in Moody’s
    view, in an external payments crisis, foreign currency bank deposits are the
    most likely instruments to be affected by a payments freeze (or
    “voluntary” rescheduling or forced exchange) foreign currency
    deposits cannot pierce the deposit ceiling.


    Moody’s local currency deposit
    ceiling is the highest rating that can be assigned to the local currency
    deposits of a bank domiciled within the rated jurisdiction. It reflects the
    risk that an important bank would be allowed to default upon local currency
    deposits either due to limited local currency resources or to the imposition of
    a domestic deposit freeze. As such, it reflects:

    (1) The degree to which the
    authorities’ ability to support an important bank may be limited due to a
    monetary regime that does not permit the creation of unlimited quantities of
    local currency; and

    The risk of a local currency deposit freeze.

    The rationale is that in
    countries where the central bank can issue emergency liquidity – i.e. fiat
    currency countries– the deposits in local currency at systemically important banks
    will be assigned the highest possible rating, which is determined by the local
    currency ceiling. Indeed, cases of too important to fail banks that have
    defaulted on local currency deposits are exceedingly rare. In countries whose
    central bank, for institutional or, more rarely, operational reasons, may not
    be able to extend emergency liquidity assistance on time – this is in
    particular the case of currency boards – the local currency deposit ceiling
    will be placed below the local currency ceiling.


    The local currency ceiling
    summarizes the general country-level risk (excluding foreign-currency transfer
    risk) that should be taken into account in assigning local currency ratings to
    locally-domiciled obligors or locally-originated structured transactions. It
    indicates the rating level that will generally be assigned to the financially
    strongest obligations in the country with the proviso that obligations
    benefiting from support mechanisms based outside the country (or area) may on
    occasion be rated higher.

    As a result, local currency
    ceilings are typically high, and sometimes much higher than the government’s
    local currency bond rating. For instance, as indicated above, local currency
    deposits at a bank deemed too big to fail by monetary and financial authorities
    in a country may be less risky than claims on the government itself. The reason
    is that if the central bank is not prevented in practice or by statute
    (currency board), to offer emergency liquidity, it may well be easier for it to
    help a bank honor its obligations in local currency vis-à-vis depositors than
    for the government to mobilize the resources it needs to remain current on its
    own debt.

    In establishing this type of
    “country risk ceiling”, both quantifiable and non-quantifiable
    criteria are relevant:

    (1) Is there a substantial risk
    of political regime change that could lead to a general repudiation of debt?

    (2) Does the country have a
    well-established system of contract law, which allows for successful suits for
    collection of unpaid debts, seizure of collateral etc.?

    (3) Does the country have a deep
    financial system which is effective in making payments and avoiding technical

    (4) Is the regulatory/legal
    environment malleable, corrupt, or unpredictable?

    (5) Is there a tendency towards

    In sum, although the agencies’
    ratings have a largely predictable component, they also appear to provide the
    market with information about non-investment-grade sovereigns that goes beyond
    that available in public data. The difficulty in measuring sovereign risk,
    especially for below-investment-grade borrowers, is well known. Despite this
    difficulty—and perhaps because of it—sovereign credit ratings appear to be
    valued by the market in pricing issues.

    Rating to Bangladesh
    Bangladesh is a developing
    country which economy is growing at a steady upbeat in spite of its political
    unrest, lack of financing and investment capacity. That’s why; to improve the
    country image and to attract the foreign direct investment the government
    started the process to appoint international credit rating agencies four years
    ago to assess the economic performance of the country. Eventually the central
    bank had appointed S&P and Moody’s to conduct the rating.
    Rating of Bangladesh by Standard & Poor’s:
    leading U.S credit rating agency Standard & Poor’s after analyzing the
    macro and micro economic conditions of the country has issued it the rating:
    ‘BB-‘ for long term
    ‘B’ for short term  
    says the country’s outlook is stable. This year S&P has rated 123
    governments. The organization has a total of 17 rating categories ranging from
    AAA to CCC+ and Bangladesh was placed in number 13 category.
    6.2 Evaluation of Bangladesh by
    Standard & Poor’s:
    & Poor’s highlighted that the tax-GDP ratio is less than 10 per cent and
    domestic and external debts are relatively high, but the negative factor has
    been offset by strong economic growth, robust remittance, support of external
    donors and prudent macro-economic policies. Increased investment and revenue
    will help the country get better rating in future, but slow tax earning and
    reduced external aid flow may hamper the rating prospect.
     The S&P said in a press release, “We
    believe that Bangladesh’s economy is largely free of macroeconomic imbalances
    in spite of its low income level, relatively narrow economic profile, and
    significant fiscal constraints.” Policy continuity and generally sound
    macroeconomic management have supported relatively strong growth, with per
    capita GDP rising at an average of 4.2 per cent annually in the past decade.
    The Standard& Poor’s in the
    report said resilient garment export sector and a high and rising remittance
    flow both play a crucial role in supporting increasingly strong external
    liquidity. “These sectors have evolved over the time as two key engines of
    economic growth. Garment exports and remittances combined account for about 80
    per cent of current account receipts and 25 per cent of GDP,” it said.
    Remittances and garment exports continued to expand during the 2008-2009 global
    economic recession and it is expected that the trend will continue in the
    coming months. “These strengths, combined with significant ongoing donor
    support, balance the vulnerabilities posed by the sovereign’s relatively high
    public and external debt, significant fiscal constraints, and the low income
    It said Bangladesh’s tax-to-GDP
    ratio, at 8.5 per cent, and total revenue to GDP of 11.8 per cent, are very low
    due to a combination of low tax compliance, administrative weaknesses, an
    agricultural sector that is largely free from taxation and, more broadly, the
    prevalence of tax exemptions and holidays.
    The international agency said
    comprehensive revenue reforms that yield a durable rise in revenue generation
    will be needed to reduce the vulnerability of debt service burden and reliance
    on external donor support, and to finance higher public investment. Public
    investment grew by just 2.9 per cent annually on average in the past decade, compared
    with nominal GDP growth of 13.2 per cent annually and hence, economic
    performance is increasingly constrained by the lack of adequate infrastructure.
    The stable rating outlook
    reflects the expectations that a prudent macroeconomic policy-setting will prevail
    and microeconomic reforms to gradually address growth constraints will
    continue. The ratings could improve if the government implements measures to
    expand the low revenue base and improve administrative and collection
    efficiency, leading to a material rise in its revenue.
    The ratings could also be raised
    if rising investment leads to a sustainable increase in
    real GDP growth. It, however, said the ratings could be lowered if fiscal
    slippages push the trajectory of government debt upward and if external donor
    support declines materially.
    Rating of Bangladesh by Moody’s Investors Service:

    Investors Service, announced for the first time its sovereign credit rating for
    Bangladesh as
    Ba3 to foreign and local
    currency bond rating
    just after a week of Standard & Poor’s credit
    rating announcement of BB- on April 6, 2010. This is for the first time the
    Government of People’s Republic of Bangladesh obtained sovereign credit ratings
    from the two internationally reputed credit rating agencies after withstanding
    external shocks and political unrest to achieve economic stability.

    Moody’s also
    assigned Bangladesh:

    Ba2 to the
    country’s foreign currency bond ceiling,
    B1 to
    foreign currency bank deposit ceiling, and
    Baa3 to long
    term local currency bond and deposit ceilings.
    6.4 Evaluation of Bangladesh by
    Moody’s Investors Service:

    In a statement,
    the US-based Moody’s said the rating reflected Bangladesh’s reasonable level of
    robustness in finance and balance of payments, and the prospects for continued microeconomic
    stability. Bangladesh’s relatively robust external position and its strong
    foreign currency reserve were reasons behind getting the rating. It added that
    these reflect Bangladesh’s recent dynamic apparel exports, large remittance
    inflows, minimal foreign commercial borrowing and advantageous external debt
    servicing profile.

    Aninda Mitra, a vice president
    and sovereign analyst for Moody’s  said
    “The combination of a conservative institutional framework for managing the
    economy, supported by capital controls, has ensured better external balance and
    price stability than at many other emerging markets at a similar stage of
    Moody’s has assigned Bangladesh
    long-term local currency bond and deposit ceilings of Baa3, reflecting the
    broader financial, political and legal country risks faced by locally funded or
    domiciled credit transactions.

    However, Moody’s
    found Bangladesh’s relatively high industrial and export dependence on the
    ready-made garments sector as a rating constraint, suggesting broader sustained
    industrial diversification, supply side and financial sector reforms, and
    regional economic integration.

    6.5 Rating of Bangladesh in Comparison with Other

    Although Bangladesh economy
    experienced five military coups since its independence in 1971 and recent two
    years of military- backed emergency rule, it is growing upward in comparison to
    the neighboring SARC countries and some other internationally emerging economic
    Country Name
    Standard & Poor’s
    In the global financial arena the
    BB- and Ba3 sovereign credit ratings put Bangladesh at a position in the same
    category of countries like Vietnam, the Philippines, Indonesia and Turkey. But
    Vietnam has negative outlook. It’s a very important that our economy is almost
    at par with Indonesia  Bangladesh has also
    been categorized by Goldman Sachs as one of the Next 11 fast growing emerging
    countries after Brazil, Russia, India and China, which are referred to as BRIC


    Impact of Sovereign Rating on Bangladesh Economy:
    ratings by Standard & Poor’s and Moody’s reflect the economic parameters of
    the country. The ratings will help bring Bangladesh to the attention of
    It is expected that the sovereign
    rating by Standard & Poor’s and Moody’s will have following impacts on
    Bangladesh economy:
    credit rating has given Bangladesh much needed access to foreign financial
    markets and made it a lucrative destination for foreign investors.
    private sector will now get advantage in getting foreign loans and it will
    reduce import and export costs.
    will be benefited as letter of credit confirmation and guarantee costs will be
    lower as the whole world now knows the economic condition of the country.
    rating provides a strong vote of confidence in the future economic prospect.
    rating would help reduce costs of international trades.
    rating will help the private sector float bonds in the international market.
    cost of country risk for unrated Bangladesh is about two to three per cent and
    it is expected that the rate will reduce by 0.5 to 1.0 percentage points.
    rating also enables the government to raise low-cost capital in the overseas
    financial markets and further diversify its funding sources.
    international agencies time to time release different reports on Bangladesh and
    it will eliminate any confusion about the country.
    brief, we can say that now Bangladesh is appearing on the investor radar simply
    because of its fundamental appeal. The ratings discussed above prove the
    positive sign of Bangladesh as it has positive demographics, rising
    consumption, and stable growth.
    Recommendations and Conclusion
    Following are some of the
    findings of the report regarding Credit Rating focusing the Sovereign Rating to
    To assign the accurate ratings by
    the rating agencies following recommendations should be implemented:
    And to keep the rating score up
    growing Bangladesh government should implement following recommendations:
    In order to reach a conclude the
    report it can be infer that credit rating services are of great importance it
    today’s crucial world where every entity is highly concern about their own
    interest. Credit Rating Agencies help the investor to have check on the entity
    or sovereignty in which he is willing to invest. On the other hand they also
    help the entity or sovereignty to attract the investment from both the local
    and foreign investors by assigning the rating scores reflecting its
    creditworthiness and economic prospects. Bangladesh got the sovereign rating
    for the first time from Standard & Poor’s and Moody’s. Despite of political
    unrest, lower revenue collection, huge burden of external debt and recent world
    economic recession, its economy continued a stable growth. The Standard &
    Poor’s and Moody’s assigned the score mentioning positive and stable growth
    outlook. This Rating will help Bangladesh to explore new opportunities Such as
    Foreign Direct Investment, access to international financial markets and to
    accelerate the further economic growth.
    Newspapers and Magazines:
    : S&P gives good rating to Bangladesh.
    · April 12, 2010, Bangladesh Gets First Sovereign Rating from Moody’s
    · : April 12,
    2010, Bangladesh gets Moody’s rating, outlook stable.
    Bangladesh scores high on sovereign rating.
    Website of Credit
    Rating Agencies:
    Other websites: