INTRODUCTION:

Credit rating is to measure the ability of any organization to pay off its debts within an agreed period
with the debt financer. S&P’s credit rating agency measured that BHP Bilton is now less able to finance
its debts which were caused by previous dealings with debt financers because BHP Bilton has upgraded
its dividend policy for the investors of their securities. Since credit rating can also be measured by the
corporations themselves but rating agencies manage the credit ratings of corporations in order to
provide precise current financial information on the basis of publically available information to the
investors who want to buy securities/invest of the particular corporations for the sake of return (RR).
Rate of return is basically the profit which an investor receives on his/her investment over a certain
period of time on the securities of any corporation which can be cash flows, dividends or may be
interest. Discussing about credit risk we must keep in mind liquidity risk and market risk and while
making investment decision we must think about these both side by side. Basically liquidity is to convert
an asset into cash within a lesser time period and when we add risk to it, it means that either a business
is able or less able or unable to convert its assets into cash. If we talk about Market risk, it means the
fluctuations in the investor’s investment because of some specific market factors that can lead to
investor’s decision making about his investment in any securities.

EXPLANATION:

Corporations have to face increment in the rate which they have to pay to the investors because of
negative credit ratings and in the same way the investor’s rate of return would also be increased
because corporations tends to compensate by offering a higher rate of return to the investors to retain
them and to decrease their insecurity by risk of negative credit ratings by rating agencies.

The credit which companies acquire through financial institutions can affect the credit ratings of a
corporation in a negative way. Corporations must take their debts in account and prefer paying off debts
before paying off any other obligations. Long-term debts are more favorable than short-term debt when
corporations needs financing, so corporations must make debtors agree upon a longer period of time to
pay off loans in smaller proportions that will help them to pay off loan in time and corporations should
not expand their debt when they’re not in a favorable condition to pay off their loan, this will help them
retain favorable credit ratings. All in all, corporation must fulfill its social responsibilities to benefit
society without any direct profit which affect credit rating positively.

Since credit rating agencies provides information about the corporations and helps investors to make a
decision either to invest or not and how risky it is to invest in a particular corporation and investors
themselves pay them for their services. When we talk about reliability we must take controversies in
account and research for the fact. A controversy began in 2013 that S&P’s was sued for allotting
unrealistic grading to some corporation with favorable grades. Although it happens rarely and agencies
does this in order to retain their customers and eliminating conflicts of interest with corporations. It’s an
investor’s own decision to believe or not on credit rating agency’s work and depends on an investor how
he manages his risk. But still only the credit rating is not sufficient for the investor to make his final
decision he must have a look on market and liquidity risk.
Corporation’s social responsibility is to take care of the effects of business on society, its people and
mainly on environment as corporation’s direct expenditures doesn’t lead to a direct benefit to the
corporation but to the environment. Corporation’s social responsibility has a very positive effect on
credit ratings and can lead to favorable credit ratings because rating agencies keep account of the
company’s performance in respect of financial conditions and social responsibility as well.

Rating agencies evaluate companies on the basis of information which is publically available and it
mainly facilitates public/investors in terms of investment. Stock prices are affected by credit ratings
because if credit rating is downgraded investor’s are on credit risk and losing confidence and if it is
upgraded investor’s insecurity will increase in terms of credit risk. In this cast of BHP Bilton his value per
share will be decreased because of a twice degradation in credit ratings and its investors are having a
greater risk and BHP Bilton has to propose a greater return to the investors than other corporations
holding favorable credit ratings. Credit rating is the creditworthiness of a corporation so corporation’s
rate of return they offer to the investors will also get low and it will in turn affect investor’s preferences
because investors prefer higher rate of return. So, corporations will decrease the value per share
increase return to attract investment.

At this point the market value of BHP Bilton’s stock is decreased because of downgraded credit ratings.
Risk takers would invest in this situation on a lower values stock with a higher return since credit risk is
more in this situation but they’ll see if business is having monopoly in any of its product that will
progress in future and generate enough profit to make its credit rating favorable but people who are risk
conscious would prefer selling the stock in the fear of lesser return in future.

CONCLUSION:

While making a decision about investment an investor shouldn’t only rely on credit rating of credit rating
agencies which is collected through publically available information. Investor must think about the
corporation’s liquidity ratio and market risk side by side. It’s not mandatory that if a corporation’s credit
rating is downgraded it’s having poor performance in terms of liquidity and market risk. Corporation
may have a better performance in respect of market risk and liquidity risk. A business’s overall
performance must be considered while making any investment decision.