A credit watch is a type of notice that indicates some factors have occurred or are highly likely to occur which will have an impact on the credit rating of an individual, business, or other type of organization. The watch is often issued by a credit rating agency, and may appear on the credit report for the entity. A credit watch may serve as the means of alerting the entity to an impending change, as well as serving as a warning to anyone who is thinking of doing business with the entity.
One application of the credit watch has to do with the rating of bonds issued by various entities. In this scenario, a firm that is in the business of rating bond issues may find that issues surrounding the financial stability of the entity have the potential to have an adverse effect on the ability of the entity to honor the terms of the bond. Usually, the watch is activated when these factors are identified, and continues on until the rating agency determines if there is truly a need to downgrade the credit rating of the entity, or that the factors are not likely to create any serious risk to investors.
Another situation in which a credit watch is sometimes issued has to do with businesses that issue shares of stock. As with the bond issues, the watch is usually initiated when some factors come to light that indicate the issuing company may or may not be able to honor the terms associated with the bonds. If those factors are deemed to be serious and highly likely to result in a loss for investors, then the credit rating of the business will be downgraded, effectively creating a warning for anyone who is considering the purchase of any outstanding shares.
It is important to note that the issuance of a credit watch does not necessarily mean there is any illegal or unethical activity taking place within the financial sector of the entity. At times, a watch is issued due to situations outside the organization that cannot be controlled. For example, the credit rating of a company that operates primarily in an area that was recently leveled by a natural disaster may be downgraded as a means of warning investors of the increased risk of getting involved with the entity, simply because the disaster may have made it impossible for the entity to continue operating at an optimum level, at least for a time.
Other factors can lead to the release of a credit watch. Individuals who are victims of identify theft may be the subject of a credit watch. Businesses that are losing customers and revenue to competitors may be placed on a credit watch, depending on the overall financial stability of the organization. In many cases, the watch can serve as a means of not only alerting potential investors or creditors, but also of alerting the organization itself to situations that require immediate attention in order to protect the current FICO score or credit rating from further deterioration.