credit watch

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Credit watch

A warning by a bond rating firm indicating that a company's credit rating may change after the current review is concluded.

Credit Watch

Notice from a credit rating agency to a bond issuer that a negative factor has arisen in the agency's review of the issuer's credit rating. If the issuer does not take steps to explain or alleviate the factor, the credit watch may be the first step toward a reduction in the issuer's rating. For example, a credit rating agency may discover a dramatic drop in an issuer's liquidity ratio, which increases the likelihood of default on a debt. It would then send a credit watch to the issuer.

credit watch

The reevaluation of the credit quality of a firm's debt obligations by a rating agency. Being the object of a credit watch generally indicates the credit quality of a firm's debt has deteriorated and may be downgraded.

References in periodicals archive ?

For positive and negative Credit Watches and upgrades, the signs of the CAR results did not show a pattern.

The impact of credit rating changes in Latin American stock markets

We analyze credit watch and rating actions to better understand the role of credit watches in the credit rating process.

Credit rating agencies (CRAs) issue credit watches to indicate the potential direction of a rating change that might follow the resolution of specific events or trends.

Our analysis of credit watches is motivated by their importance in the credit rating process, and many issues on the value of credit ratings resulting from apparent failures in the credit rating process.

We investigate whether credit watches are used in a manner consistent with the dual role of CRAs as both providers of information and suppliers of ratings that are sufficiently stable and reliable to be used in contracting.

(2006), we find that credit watches occur more often in response to a deterioration in credit quality.

(2006) view that credit watches can be viewed as an implicit contracts between the issuer and the CRA where the issuer agrees to take the actions necessary to avoid the reduction of its credit rating.

This qualitative information, along with quantitative data (as used in most prior research), allows us to conduct more powerful analyses of watch actions and the information content of credit watches.

Section I discusses the role of credit watches. Section II presents data and descriptive statistics.

(9) CRAs state that credit watches are triggered by: 1) discrete events such as mergers, acquisitions, restructuring, and company announcements of plans expected to affect credit quality and/or 2) trends in the issuer's operations or financial strength, in its industry or regulatory environment, or in the macroeconomic climate of its country or region of operations (Keenan, Fons, and Carty, 1998; FitchRatings, 2007).

As discussed below, we hypothesize that credit watches, like credit ratings, support CRAs' roles of supplying value-relevant information and facilitating contracting (through promoting ratings stability) in the capital markets.

Holthausen and Leftwich (1986) and Hand, Holthausen, and Leftwich (1992) provide early evidence on the information-supplying role of credit watches. The sample period in both studies is the first 26 months that Standard and Poor's (S&P) issued credit watches.