Does a credit rating assure repayment?
A credit rating is not an assurance of repayment of the rated instrument. Rather, it is an opinion on the relative degree of risk associated with such repayment. This opinion represents a probabilistic estimate of the likelihood of default. It is possible that some highly rated issuers could default. In the US, some instruments rated at even ‘AAA’ levels have defaulted. However, such defaults would be less frequent amongst highly rated instruments than amongst instruments with lower ratings. The performance of credit ratings assigned by any rating agency against these expectations can be tested by studying the default behavior of its rated instruments over a long period of time. These default studies published by most large rating agencies in the world, including CRISIL, reveal that credit ratings are able to make statistically robust distinctions between debt instruments based on their default likelihood.
