Through regular discussions with the senior management of companies, rating agencies gain an insight into the strategy and planning of the companies that they rate. Using this information as a base, supplemented by quantitative analysis, rating agencies evaluate the creditworthiness of the issuer companies through a system of rating classifications. Companies which want to raise money in the capital markets in the form of bonds, commercial paper and other debt instruments normally need a minimum of one or better two ratings.
The higher the rating classification, the smaller is the potential risk that a company cannot meet its debt obligations (interest and principal). The debt investor charges a higher rate of interest for financing a higher risk. Thus a company with a strong rating can raise capital more advantageously than a company which has a less favourable rating. Additionally, the outlook given by a rating agency provides a supplementary reference point for the investor in assessing the probable development of the rating.