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April 2013 Q3

G

giulianog

Member
Unfortunately another question that looks poorly crafted, misleading candidates away from the solution proposed

1) Rating agencies do not rate a company "per se", they rate a financial instrument such as a bond issued by the company. The rating represents the probability of that bond defaulting. The same company can have both a BB and an A-rated bond outstanding at the same time. One maybe is subordinated debt, the other is senior debt.
2) A finance company would not require a rating agency assessment on a small company. If the small company could afford the cost of a rating, at least £50k on top of the other funding costs, they would issue their own bond!
3) A finance company may use their own internal assessment based on rating agency criteria, but this is not what is being described in the question
4) If a finance company uses a rating agency it is because it has itself issued a rated bond and need to preserve its rating. So the question would steer, particularly in part ii) eg the rating agency would tighten its rating criteria and iii) on how M-LOAN should behave which includes raising itself more capital, or maybe merging with another finance provider.

Or am I off track here?
 
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