What is credit quality?

The meaning of credit quality is properly the ability of an entity that issues debt to meet its future commitments. When evaluating credit quality, therefore, the probability of default of the obligations financial statements of the entity regarding the debt issued.

This implies that the higher the credit quality, the lower the risk of default is associated and vice versa.

How is credit quality determined?

First, it should be noted that there is in fact an order of priority between the various debts on the basis of the solvency of the issuing bodies. Thus, the lowest risk is attributed to sovereign public debt, followed by interbank debt; and, subsequently, the debt issued by physical or legal entities outside the public administration. In addition, within private debt there is also an order of priority. From lower to higher risk, the following are distinguished: senior secured debt, then senior debt, subordinated debt and hybrid debt.

We must clarify that all this debt has the right to collection before the right to recover the capital by the shareholders. However, it is important to note that there is no global or standard credit rating code. The rating is carried out by so-called rating agencies, each using its own nomenclature.

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The function of these agencies and of credit quality in general, is to facilitate the perception of the degree of risk or solvency of the issuer, by potential investors or economic agents that intervene in the market, including information from a regulatory point of view.

The process ofrating or evaluation, is carried out by each agency based on the compilation of existing information on the issuing entity and on the mercado. In addition, interviews are usually carried out with the management of the issuing entities.

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