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Using Bond Ratings to Monitor and Manage Credit Risk
Bond ratings are a tool or method to evaluate the possibility of payment default by a corporate bond issuer on interest or principal payments. In the same way that bond holders monitor a corporation's bond rating to monitor its financial health, trade creditors can use the same information to make better informed decisions about the risks associated with extending open account credit terms to a company that has issued and outstanding corporate bonds.
Bond ratings are not the only credit risk management tool, but they are useful in monitoring the financial health of many publicly traded companies. A downgrade in a company's bond rating will be made by a bond rating agency based on its evaluation of the financial health of the company under review. A downgrade should be a trigger for credit professionals using bond ratings as a form or early warning to pay closer attention to the financial condition of the company or customer being monitored in this way.
Copyright 2009 by Michael C. Dennis, author of "1001 Collection Tools and Tips."