Tag Archive | business

What is Credit Rating: meaning and why it’s so important

rating a+

Rating (def.) is a synthetic evalutation made by an external independent subject, on the ability and will of a borrower, to face the payment of the capital and interests, related to an emission of debt securities, placed or to be placed, as stated in the contractual obligation.

To be more simple it consists of an alphanumerical symbol that can be easily understood and interpreted by anyone, and it’s useful because with just a letter or a number you can compare different emission with ease.

But probably you are wondering why rating and rating agencies wear such an important role in markets, and why their decision can influence investors so much.

That’s simple.. Rating is a very important cognitive element in determination of  the interest rate payed by the borrower. The interest rate is in fact composed by 2 elements:

  • the benchmark (fixed): that is the distinctive rate for securities with the same duration and structure, and express the needs of units in deficit (borrowers).
  • spread (variable): that express the needs of units in surplus (investors), and changes based on the perception of risk of the issuer.
So, the lower the rating is the higher is the spread the issuer must pay to the investors.
Rating is also useful because it determines if a security is of investment grade or non investment grade (speculative), and this distinction is important too because some subjects, for example pension funds, cannot invest in a financial instrument that’s not of investment grade.
For a slightly clear view of this distinction check the table below.
"Rating Score Table"

Italy and innovation

In the last times I am wondering what is the situation of Italian companies and which is the future of their economy, taking in consideration the steps that are being taken in innovation, research and development from both the government and the companies themselves.

From my point of view they are really awful, I mean, there’s no doubt that we are in an difficult phase for our economy and this bad economic conjuncture effects are lasting for more than expected, but, when I say awful I’m saying that we are navigating in bad waters more than we notice or think.

Of course there are big multinationals that are investing a lot in R&D or online customer relationship or whatever strategy that uses the power of IT [there’s one in particular near where I live (Brembo), that has even created a park for scientific development and it’s going to be huge], but most of the small and mid firms don’t even know the potential of some simple yet cheap instruments that internet offers to them.  For example, few of them has a simple facebook page and updates it regularly, or use a twitter account for interating with their customers, very few industrial companies use a voip client to keep in contact with their supply chain, and even fewer take advantage the virtualization to empower the production line and their control system.

Problem is that those small companies are the real engine of the Italian economy, and if they don’t wake up , they will be literally eaten by the asian competitors.

Besides this, let’s assume that a company has the ideas to implement an “online” strategy, which are the investments of the government for creating a solid infrastructure to sustain those business? None.

The possibilities to have a really high speed connection, like in fiber, are remote or the costs are prohibitive. Italians copper lines are too old and the pairs are always overloaded. There are no economic district where to do some joint venture. We are now (now!) investing in the high speed trains, and there’s still someone that does not understand the importance of them. We are years back.

We keep sustaining old big companies just to not lose our face internationally (it’s too late Italians!), and keep giving subsidies to the banks. Gosh.. If they cannot stand up with their own legs or they don’t  fall within the european requirement, it means that there’s something that doesn’t work!! We have people to the power that only look to their interests, and I’m not biasing saying this.

Even a lot of  young students are blind in front of this disastrous country, and most of them are even contributing to it by wasting their relatives’ money enrolling to university just because they don’t want to go to work.

Maybe, fortunately, not everything is lost, we have some young talented people that are creating some great startups, don’t make them escape abroad.