Shadow Rating
What Is a Shadow Rating?
A shadow rating in an unofficial rating given to a bond or a responsible party by a credit agency, however with next to no public announcement of the rating. The shadow rating can fill two needs. To start with, it very well might be useful to a company that is mulling over giving rated debt in the market yet is uncertain about how it would be received. Second, it can act as an unpleasant aide for issues or issuers that poor person been officially rated by a credit agency.
Investors who might be interested in purchasing debt (sovereign bonds, for instance) that has no official credit rating can coordinate the shadow rating in its investment decision process.
Figuring out Shadow Ratings
An issuer that has never been officially rated by a credit agency might approach S&P, Moody's or one more agency to get shadow ratings for itself and a debt issue to try things out or get a harsh indication of how it could be seen in the public markets. The credit agency would go through its means as it would in a conventional rating cycle to assign a credit rating. This shadow rating would give accommodating data to the prospective issuer about the pricing of the debt instrument (i.e., rough interest expense) in the current market and potential demand given known sets of debt investors.
Assuming that the shadow rating is positive, the issuer might be urged to continue with the offering and secure an official rating from the credit agency. On the off chance that the shadow rating doesn't measure up to the issuer's assumptions, it can hold off on a proper rating and giving debt into the market. The option value of a shadow rating is clear, and after a credit agency vets the issuer or potential debt issue, the issuer will have a better comprehension of what is important to accomplish a certain ideal rating, whether in how the company creates cash flows or how to structure a debt offering.
Different Considerations
Assuming investors are interested in traded debt issues that carry no credit ratings from an agency, they might hope to shadow ratings in their evaluation of the creditworthiness of the targeted investment. Investors might draw in with a credit agency to perform an analysis, yet they likewise may conduct the actual exercise utilizing comparable analysis methods. An unrated sovereign, for instance, having comparable qualities of a rated country could receive a similar rating assignment as this comp. The shadow rating, then, would aid the determination by an investor of whether a debt issue is an acceptable investment.
Features
- A shadow rating is issued by a credit rating agency to an issuer, however in an unofficial way and without public announcement.
- The shadow rating can be gotten by an issuer temporarily while it awaits its full credit rating to be guaranteed.
- The shadow rating can likewise be utilized by an issuer to try things out before choosing to issue bonds without making investors respond. In the event that the shadow rating is unfavorable, the company may basically do without the bond issue.
