Both types of reports and analysis are useful for credit risk decisions and management but they differ in depth and focus. Whereas a D&B report will focus on publicly available credit history to convey credit information and financial health, a 74 G.A. credit rating probability estimation (CPRE) report analyzes and estimates the firm's creditworthiness emanating from a broad swath of industry, market position, operating efficiency, financial and management risk factors - past, present and future.
S&P, Moody's and Fitch small business credit ratings cost between US $5,000 to US $50,000, depending on the size and complexity of rated instruments. D&B reports typically range from US $87 to US $266. D&B reports are historical repayment analysis while S&P, Moody's and Fitch give broader creditworthiness indication. 74 G.A.'s CRPEs and report are an assessment of over 130 credit factors, including repayment history and projections. The report identifies key creditworthiness strengths and weaknesses as well as high impact areas for improvement. It includes full presentation of financial performance (past, current and projected), as well as ratios. 74 G.A. leads the way on affordability and value!
No, the CRPEs are obtained by regression equations from expert-created models or universes of industry-specific credit performances. AI is not currently used in the process but can be of assistance in identifying observable patterns or non-traditional sources of credit information. 74 G.A. believes that ultimately, human created models will be superior at credit analysis because of (i) gaps in the available data along the entirety of the credit spectrum (especially at various industries’ level) to train the AI with, (ii) historical patterns and predictors of credit risks can be mercurial, especially in response to current and expected economics and politics, thus AI may not be a better tool for analysis of issues with behavioral economics elements, and (iii) as firms and economies are ultimately made up of people, AI is a useful tool but probably a less-sharp instrument of analysis.
Models are selected based on user’s indication of their industry and on the current availability and appropriateness of 74 G.A.’s models to match. 74 G.A. is constantly building and updating models to most accurately match users’ industries and industry dynamics.
Big 3 (S&P, Moody’s and Fitch) rated entities in various industries are selected and their credit characteristics are assessed along similar factors as a 74 G.A. rated entity. The assessment is, of course, right-sized to fit the entity, so, for example, we will assume a large corporation has a sufficient management structure, therefore instead of using that to evaluate management and governance issues, we will focus more heavily on the presence and effectiveness of risk management systems, policies and procedures.
74 G.A. assesses the firm as if it were in a risk-free sovereign. However, it is impossible to completely delink from sovereign factors which would impinge on industry and firm growth, among other things. Lenders who are assessing credit opportunities across various countries would find a risk-free sovereign analysis particularly useful as they may have strategic intention to diversify their portfolios or are willing to accept higher sovereign risk for greater rewards but would like to compare core company performance across jurisdictions.
Credit ratings are an opinion on the probability of default on debt obligations. As the size of the borrowing of a firm will typically match the firm’s size, the proportionality in-built into the credit risk assessment is appropriate. However, larger firms do tend to have more diversity across markets and products and greater access to credit. 74 G.A.’s credit assessment factors in such considerations for smaller firms as well.
As 74 G.A. CRPEs are derived from user-responses to our survey questions, it is important for users of the CRPEs and the report to know the responses given. All responses and the survey instrument are available in our report. However, 74 G.A. does not store nor train our models using user responses.
You may have seen S&P and Fitch ratings like A+, A and A- or Moody’s ratings like A1, A2 and A3. Within most of their rating buckets, there are strength gradations and even outlooks like “Positive”, “Stable” and “Negative”. Such nuances are unnecessary for CRPEs as the probabilities themselves suggest the stability within each rating bucket. The higher the probability, the greater the strength.
There are several factors that could account for differences in assigned Big 3 and 74 G.A.’s CRPEs: (i) sovereign cap – the sovereign’s credit rating tends to act as a cap on the credit rating that could be received by most domestic entities, (ii) management interviews – 74 G.A. CRPEs are done without interviews with management, while Big 3 ratings have the benefit of these which means that their assessment of the firm may differ from the self-responses of the 74 G.A. survey, (iii) model calibrations’ margin of error – 74 G.A. models are calibrated to be accurate on average within one rating category, and (iv) CRPEs are probabilities not rating assignments – 74 G.A. gives the probability that a credit rating will be assigned by a Big 3 looking at our subset of factors and under certain assumptions. The strength of those probabilities may approach but never fully reach 100 percent for any rating category.
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