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CREDIT RATING
-----------------------------------------------------------------------------------------UNDER THE GUIDANCE OF DIPTI PERIWAL SUBMITTED BY (NAME OF THE CANDIDATE) (ROLL NO: B3) (NAME OF THE DEGREE) (BATCH) _______________________________________________________
CREDIT RATING
TO THE UNIVERSITY OF MUMBAI IN PARTIAL FULFILMENT OF TWO YEAR FULL TIME DEGREE OF ( MASTERS IN MANAGEMENT STUDIES) GURU NANAK INSTITUTE OF MANAGEMENT STUDIES MATUNGA, MUMBAI 400 019.
CREDIT RATING
CREDIT RATING
Table of Contents
EXECUTIVE SUMMARY...............................................................................................6 INTRODUCTION..............................................................................................................7 EVOLUTION...................................................................................................................11 TYPES OF RATING.......................................................................................................13 BENEFITS OF CREDIT RATING................................................................................14
BENEFITS TO INVESTORS................................................................................................14 BENEFITS OF RATING TO THE COMPANY..................................................................17 BENEFITS TO BROKERS AND FINANCIAL INTERMEDIARIES...............................18
CONCLUSION................................................................................................................73 BIBLIOGRAPHY............................................................................................................74
CREDIT RATING
EXECUTIVE SUMMARY
The project entitled Credit Rating gives you an insight to the most important concept in any industry, be it service oriented or a manufacturing firm i.e. working capital. Credit rating is a qualified assessment and formal evaluation of companys credit history and capability of repaying obligations. It measures the default probability of the borrower, and its ability to repay fully and timely its financial debt obligations. The main purpose of credit rating is to provide investors with comparable information on credit risk based on standard rating scale, regardless of specifics of companies, separate sector of the economy and country as a whole. Credit rating has proven itself to be effective instrument of risk assessment in countries with advanced economy since it demonstrates transparency of an enterprise. Credit rating reflects financial, sectoral, operational, legal and organizational sides of companies, which characterize ability and willingness duly and in full amount to repay obligations. In world practice, credit rating can be assigned to sovereign governments, regional and local executive bodies, corporations, financial organizations and etc. Different Types of Credit Rating are explained in this project. Functions of Credit Rating are highlighted. Various advantages and limitation to Credit Rating are highlighted. This project has also covered the Rating Process, Rating Symbols for short term debentures n long term bonds, Rating Methodology, of various rating agencies like CRISIL, ICRA, SMERA, ONICRA, CARE and International Rating Agency. IPO Grading has also been included in this project.
CREDIT RATING
INTRODUCTION Definition
CREDIT RATING The evaluation of a people or businesses' ability and past performance in paying debts. A credit rating is generally established by a credit bureau and used by merchants, suppliers, and bankers to determine whether a loan should be granted or credit extended. A rating is an opinion on the future ability and legal obligation of the issuer to make timely payments of principal and interest on a specific fixed income security. The rating measures the probability that the issuer will default on the security over its life, which depending on the instrument may be a matter of days to 30 years or more. In addition, long term ratings incorporate an assessment of the expected monetary loss should a default occur."
"Credit ratings help investors by providing an easily recognizable, simple tool that couples a possibly unknown issuer with an informative and meaningful symbol of credit quality." Standard and Poors Ratings, usually expressed in alphabetical or alphanumeric symbols, are a simple and easily understood tool enabling the investor to differentiate between debt instruments based on their underlying credit quality. The credit rating is thus a symbolic indicator of the current opinion of the relative capability of the issuer to service its debt obligation in a timely fashion, with specific reference to the instrument being rated. It is focused on communicating to the investors, the relative ranking of the default loss probability for a given fixed income investment, in comparison with other rated instruments.
CREDIT RATING
In fact, the rating is an opinion on the future ability and legal obligation of the issuer to make timely payments of principal and interest on a specific fixed income security. The rating measures the probability that the issuer will default on the security over its life, which depending on the instrument may be a matter of days to 30 years or more. In addition, longterm rating incorporates an assessment of the expected monetary loss should a default occur. Credit rating helps investors by providing an easily recognizable, simple tool that couples a possible unknown issuer with an informative and meaningful symbol of credit quality. Credit rating can be defined as an expression, through use of symbols, of the opinion about credit quality of the issuer of security/instrument. Credit rating does not amount to any recommendation to purchase, sell or hold that security. It is concerned with an act of assigning values by estimating worth or reputation of solvency, and honesty to repose trust in a person's ability and intention to repay. The ratings assigned are generally regarded in the investment community as an objective evaluation of the probability that a borrower will default on a given security issue. Default occurs whenever a security issuer is late in making one or more payments that it is legally obligated to make. In the case of a bond, when any interest or principal payment falls due and is not made on time, the bond is legally in default. While many defaulted bonds ultimately resume the payment of principal and interest, others never do, and the issuing company winds up in bankruptcy proceedings. In most instances, holders of bonds issued by a bankrupt company receive only a part amount on his investments, invested, once the company's assets are sold at auction. Thus, the investor who holds title to bankrupt bonds typically loses both principal and interest. It is no wonder, then, that security ratings are so closely followed by investors. In fact, many investors accept the ratings assigned by credit agencies as a substitute for their own investigation of a security's investment quality.
CREDIT RATING
1) Credit rating plays an important role in developed and developing capital markets throughout the world. 2) The use of ratings fosters growth in local and international markets, and streamlines their functioning. 3) Capital markets currently include bonds and other bond-like instruments guaranteeing a fixed income amounting to an aggregate total of over $80 trillion. 4) Ratings serve a wide array of players in the capital market. 5) The service is designed first and foremost to provide reliable ratings to fulfill the needs of investors interested in obtaining a reliable, independent estimate of a companys credit risk, of issuers and borrowers seeking flexible sources of financing on the capital market and brokering entities enjoying this service namely: savers, governments, economists, the financial media and other observers.
CREDIT RATING
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CREDIT RATING Moody had now entered the business of analyzing the stocks and bonds of Americas railroads, and with this endeavor, he became the first to rate public market securities. In 1909, Moodys Analyses of Railroad Investments described for readers the analytic principles that Moody used to assess a railroads operations, management, and finance. The new manual quickly found a place in investors hands. In 1913, he expanded his base of analyzed companies, launching his evaluation of industrial companies and utilities. By that time, the "Moody's ratings" had become a factor in the bond market. On July 1, 1914, Moody's Investors Service was incorporated. That same year, Moody began expanding rating coverage to bonds issued by US cities and other municipalities. Further expansion of the credit rating industry took place in 1916, when the Poor's Publishing Company published its first rating followed by the Standard Statistics Company in 1922, and Fitch Publishing Company in 1924. The Standard Statistics Company merged in 1941 to form Standard and Poor's, which was subsequently taken, over by McGraw Hill in 1966. For almost 50 years, since the setting up of Fitch Publishing in 1924, there were no major new entrants in the field of credit rating and then in the 1970s, a number of credit rating agencies commenced operations all over the world. These included the Canadian Bond Rating Service (1972), Thomson Bankwatch (1974), Japanese Bond Rating Institute (1975), McCarthy Crisani and Maffei (1975 acquired by Duff and Phelps in 1991), Dominican Bond Rating Service (1997), IBCA Limited (1978), and Duff and Phelps Credit Rating Company (1980). There are credit rating agencies in operation in many other countries such as Malaysia, Philippines, Mexico, Indonesia, Pakistan, Cyprus, Korea, Thailand and Australia. In India, the Credit Rating and Information Services of India Ltd. (CRISIL) was set up as the first rating agency in 1987, followed by ICRA Ltd. (formerly known as Investment Information and Credit Rating Agency of India Limited) in 1991, and Credit Analysis and Research Ltd. (CARE) in 1994. The ownership pattern of all the three agencies is institutional. Duff and Phelps has tied up with two Indian NBFCs to set up Duff and Phelps Credit Rating India (P) Limited in 1996.
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TYPES OF RATING
Following are the different kinds of rating:
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CREDIT RATING or its Board of Directors, etc. Absence of business links between the rater and the rated firm establishes ground for credibility and attract investors. (4) Easy Understandability Of Investment Proposal An investor needs no analytical knowledge on his part and can understand the rating symbol. The investor can take quick decisions about the investment to be made in any particular rated security of a company. (5) Saving Of Resources Investors rely upon credit rating. This relieves investors from the hassle of acquiring knowledge about the fundamentals of a company, its actual strength, financial standing, management details, etc. The quality of credit rating done by professional experts of the credit rating agency repose confidence in him to rely upon the rating for taking investment decisions. (6) Independence Of Investment Decisions For making investment decisions, investors have to seek advice of financial intermediaries, the stockbrokers, merchant bankers, the portfolio managers etc. about the good investment proposal. For rated instruments, investors need not depend upon the advice of these financial intermediaries as the rating symbol assigned to a particular instrument suggests the credit worthiness of the instrument and indicates the degree of risk involved in it. (7) Choice Of Investments Several alternative credit rating instruments are available at a particular point of time for investing in the capital market and the investors can make choice depending upon their own risk profile and diversification plan.
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(8) Benefits Of Rating Surveillance Investors get the benefit of the credit rating agency's on-going surveillance of the rating and rated instruments of different companies. The credit rating agency downgrades the rating of any instrument if subsequently the company's financial strength declines or any event takes place, which necessitates consequent dissemination of information on its position to the investors. (9) Other Advantages The investor can quickly understand the credit instrument and weigh the ratings with advantages from instruments; and make quick decisions to invest or sell or buy securities to take advantages of market conditions; or, perceiving of default risk by the company.
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(B) BENEFITS OF RATING TO THE COMPANY Company which had its credit instrument or security rated by a credit rating agency is benefited in many ways as summarized below: (1) Lower Cost Of Borrowing A company with highly rated instrument has the opportunity to reduce the cost of borrowing from the public by quoting lesser interest on fixed deposits or debentures or bonds as the investors with low risk preference would come forward to invest in safe securities though yielding marginally lower rate of return. (2) Wider Audience For Borrowing A company with a highly rated instrument can approach the investors extensively for the resource mobilization using the press media. Investors in different strata of the society could be attracted by higher rated instrument, as the investors understand the degree of certainty about timely payment of interest and principal on a debt instrument with better rating. (3) Rating As Marketing Tool Companies with rated instruments improve their own image and avail of the rating as a marketing tool to create better image in dealing with its customers feel confident in the utility products manufactured by the companies carrying higher rating for their credit instruments. (4) Reduction Of Cost In Public Issues A company with higher rated instrument is able to attract the investors and with least efforts can raise funds. Thus, the rated company can economize and minimize cost of public issues
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CREDIT RATING by controlling expenses on media coverage, conferences and other publicity stunts and gimmicks. Rating facilitates best pricing and timing of issues. (5) Motivation For Growth Rating provides motivation to the company for growth as the promoters feel confident in their own efforts and are encouraged to undertake expansion of their operations or new projects. With better image created though higher credit rating the company can mobilize funds from public and instructions or banks from self-assessment of its own status, which is subject to self-discipline and self-improvement, it can perceive and avoid sickness.
(6) Unknown Issuer Credit rating provides recognition to a relatively unknown issuer while entering into the market through wider investor base who rely on rating grade rather than on 'name recognition'. (C) BENEFITS TO BROKERS AND FINANCIAL INTERMEDIARIES Rating is a useful tool for merchant bankers and other capital market intermediaries in the process of planning, pricing, underwriting and placement of issues. The intermediaries, like brokers and dealers in securities, could use rating as an input for their monitoring of risk exposures. The merchant bankers are also using credit ratings for pre-packing of issues by way of securitisation/ structured obligations. Highly rated instruments put the brokers at an advantage to make less efforts in studying the company's credit position to convince their clients to select an investment proposal. This enables brokers and other financial intermediaries to save time, energy, costs and manpower in convincing their clients about investment in any particular instrument.
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unlike brokers, financial intermediaries and underwriters who have a vested interest in the
and finally,
(iii)
The rating firm has access to a lot of information, which may not be publicly available.
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(1) As per the regulations of Securities and Exchange Board of India (SEBI) public issue of
debentures and bonds convertible/ redeemable beyond a period of 18 months need credit rating.
(2) As per the guidelines of Reserve Bank Of India (RBI), one of the conditions for issuance
of Commercial Paper in India is that the issue must have a rating not below the P2 grade from CRISIL/A2 grade from ICRA/PR2 from CARE.
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(4) As per the regulations of the Ministry of Petroleum, the parallel marketers of Liquefied
Petroleum Gas (LPG) and Superior Kerosene Oil (SKO) in India are also subjected to mandatory rating. The three rating agencies have a common approach for such rating and the dealers are categorized into four grades between 1 to 4 indicating good, satisfactory, low risk and high risk
(5) There is a proposal for making the rating of fixed deposit programmes of limited
companies, other than NBFCs also mandatory, by amendment of the companies Act 1956. CRAs registered with SEBI. Name of the CRA CRISIL ICRA CARE Fitch India Brickworks Year of commencement of Operations 1988 1991 1993 1996 2008
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CRISIL
Credit Rating Information Services Of India Limited (CRISIL) has been promoted by Industrial Credit and Investment Corporation of India Ltd. (ICICI) and Unit Trust of India Ltd. (UTI) as a public limited company with its headquarters at Mumbai. CRISIL, incorporated in 1987, pioneered the concept of credit rating in India and developed the methodology for rating of debt in the context of India's financial, monetary and regulatory system. It was the first rating agency to rate Commercial Paper Programme in 1989, debt instruments of financial institutions and banks in 1992 and asset-backed securities in 1992. The main objective of CRISIL has been to rate debt obligation of Indian companies. Its rating provides a guide to the investors as to the risk of timely payment of interest and principal on a particular debt instrument. Its rating creates awareness of the concept of credit rating amongst corporations, merchant bankers, brokers, regulatory authorities, and helps in creating environment that facilitates the debt rating. CRISIL provides rating and risk assessment services to manufacturing companies, banks, non-banking financial companies, financial institutions, housing finance companies, municipal bodies and companies in the infrastructure sector. CRISIL's comprehensive offerings include ratings for long-term instruments such as debentures/bonds and preference shares, structured obligations (including asset-backed securities) and fixed deposits; it also rates short-term instruments such as commercial paper programmes and short-term deposits. As part of bank loan ratings, CRISIL also rates credit 24
CREDIT RATING facilities extended to borrowers by banks. In addition, CRISIL undertakes credit assessments of various entities including state governments. CRISIL also assigns financial strength ratings to insurance companies.
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CRISIL through the years has continued to innovate and play the role of a pioneer in the development of the Indian debt market. CRISIL has pioneered the rating of subsidiaries and joint ventures of multinationals in India and has rated several multinational entities, both startup entities as well as players with a well established track record in India. Over the years, CRISIL has also developed several structured ratings for multinational entities based on Guarantees from the parent as well as Standby Letter of Credit arrangements from bankers. The rating agency has also developed a methodology for credit enhancement of corporate borrowing programmes through the use of partial guarantees. In essence, CRISIL is uniquely placed in its experience in understanding the extent of credit enhancement arising out of such structures.
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CREDIT RATING (c) Operating Efficiency Operating efficiency of the company is assessed vis--vis competitors' comparison. For instance, the pricing or cost advantage; availability, cost, quality of raw material; availability of labour and labour relations; integration of manufacturing operations and cost effectiveness of plant and equipments; level of capital employed and productivity; energy cost; or finally, the compliance to pollution control requirement on taken into consideration. (d) Legal Position Legal position of issue of debt instrument is assessed by letter of offer; terms of debenture trust deed, trustees and their responsibilities; system of timely payment of interest and principal; or protection of forgery and fraud. Thus, business covers all relevant aspects as related to business operations of the client company to assess the creditworthiness of the company.
CREDIT RATING requirements; or Working Capital management. Fourthly, the Financial Flexibility is assessed through financial plans in times of stress and their reliability; ability to attract capital; capital spending flexibility; asset redeployment potential; or the debt service schedule.
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AA (Double A) High Safety Instruments rated 'AA' are judged to offer a high degree of safety with regard to timely payment of financial obligations. They differ only marginally in safety from `AAA' issues. A Adequate Safety Instruments rated 'A' are judged to offer an adequate degree of safety with regard to timely payment of financial obligations. However, changes in circumstances can adversely affect such issues more than those in the higher rating categories
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CREDIT RATING BBB (Triple B) Moderate Safety Instruments rated 'BBB' are judged to offer a moderate safety with regard to timely payment of financial obligations for the present; however, changing circumstances are more likely to lead to a weakened capacity to pay interest and repay principal than for instruments in higher rating categories.
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CREDIT RATING D Default Instruments rated 'D' are in default or are expected to default on scheduled payment dates. Such instruments are extremely speculative and returns from these instruments may be realized only on reorganisation or liquidation. NM Not Meaningful Instruments rated 'N.M' have factors present in them, which render the rating outstanding meaningless. These include reorganisation or liquidation of the issuer, the obligation is under dispute in a court of law or before a statutory authority etc.
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ICRA
ICRA Limited (an Associate of Moody's Investors Service) was incorporated in 1991 as an independent and professional company. ICRA is a leading provider of investment information and credit rating services in India. ICRAs major shareholders include Moody's Investors Service and leading Indian financial institutions and banks. With the growth and globalization of the Indian capital markets leading to an exponential surge in demand for professional credit risk analysis, ICRA has been proactive in widening its service offerings, executing assignments including credit ratings, equity gradings, specialized performance grading and mandated studies spanning diverse industrial sectors. In addition to being a leading credit rating agency with expertise in virtually every sector of the Indian economy, ICRA has broad-based its services for the corporate and financial sectors, both in India and overseas, and currently offers its services under the following banners: ICRA Limited (an Associate of Moody's Investors Service) was incorporated in 1991 as an independent and professional company. ICRA is a leading provider of investment information and credit rating services in India. ICRAs major shareholders include Moody's Investors Service and leading Indian financial institutions and banks. With the growth and globalisation of the Indian capital markets leading to an exponential surge in demand for professional credit risk analysis, ICRA has been proactive in widening its service offerings, executing assignments including credit ratings, equity gradings, specialised performance gradings and mandated studies
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CREDIT RATING spanning diverse industrial sectors. In addition to being a leading credit rating agency with expertise in virtually every sector of the Indian economy, ICRA has broad-based its services for the corporate and financial sectors, both in India and overseas, and currently offers its services under the following banners: Rating Services Information, Grading and Reasearch Services Advisory Services Economic Research Outsourcing
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Rating Process
Rating is an interactive process with a prospective approach. It involves series of steps. The main points are described as below: (A) Rating Request Ratings in India are initiated by a formal request (or mandate) from the prospective issuer . This mandate spells out the terms of the rating assignment. Important issues that are covered include, binding the credit rating agency to maintain confidentiality, the right to the issuer to accept or not to accept the rating and binds the issuer to provide information required by the credit rating agency for rating and subsequent surveillance. (B) Rating Team The team usually comprises two members. The composition of the team is based on the expertise and skills required for evaluating the business of the issuer. (C) Information Requirements Issuers are provided a list of information requirements and the broad framework for discussions. These requirements are derived from the experience of the issuers business and broadly conform to all the aspects, which have a bearing on the rating. These factors have been discussed in detail under rating framework.
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(D) Secondary Information The credit rating agency also draws on the secondary sources of information including its own research division. The credit rating agency also has a panel of industry experts who provide guidance on specific issues to the rating team. The secondary sources generally provide data and trends including policies about the industry. (E) Management Meetings And Plant Visits Rating involves assessment of number of qualitative factors with a view to estimate the future earnings of the issuer. This requires intensive interactions with the issuers management specifically relating to plans, outlook, and competitive position and funding policies. Plan visits facilitate understanding of the production process, assess the state of equipment and main facilities , evaluate the quality of technical personnel and form an opinion on the key variables that influence level , quality and cost of production. These visits also help in assessing the progress of projects under implementation. (F) Preview Meeting : After completing the analysis , the findings are discussed at length in the internal committee , comprising senior analysts of the credit rating agency. All the issues having a bearing on the rating are identified. At this stage, an opinion on the rating is also formed.
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(G) Rating Committee Meeting This is the final authority for assigning ratings. A brief presentation about the issuers business and the management is made by the rating team. All the issues identified during discussions in the internal committee are discussed. The rating committee also considers the recommendation of the internal committee for the rating. Finally , a rating is assigned and all the issues, which influence the rating, are clearly spelt out. (H) Rating Communication The assigned rating along with the key issues is communicated to the issuers top management for acceptance. The ratings, which are not accepted, are either rejected or reviewed. The rejected ratings are not disclosed and complete confidentiality is maintained. (I) Rating Reviews If the rating is not acceptable to the issuer , he has a right to appeal for a review of the rating . These reviews are usually taken up only if the issuer provides fresh inputs on the issues that were considered for assigning the rating . Issuer's response is presented to the Rating Committee. If the inputs are convincing, the Committee can revise the initial rating decision. (J) Surveillance It is obligatory on the part of the credit rating agency to monitor the accepted ratings over the tenure of the rated instrument. As has been mentioned earlier, the issuer is bound by the mandate letter to provide information to the credit rating agency. The ratings are generally reviewed every year, unless the circumstances of the case warrant an early review. In a surveillance review, the initial rating could be retained or revised (upgrade or downgrade). The various factors that are evaluated in assigning the ratings have been explained under rating framework.
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LBB+, LBB, LBB-Inadequate Safety: The timely payment of interest and principal are more likely to be affected by present or prospective changes in business/economic circumstances. The protective factors fluctuate in case of changes in economy/business conditions. LBB+, LB, LB- Risk Prone: Risk factors indicate that obligation may not be met when due. The protective factors are narrow. Adverse changes in economic/business conditions could result in inability/unwillingness to service debts on time as per terms. LC+,LC,LC- Substantially Risk: There are inherent elements of risk and timely servicing of debts/obligations could be possible only in case of continued existence of favourable circumstances. LD Default. Extremely Speculative: Either already in default in payment of interest and/or principal as per terms or expected to default. Recovery is likely only on liquidation or reorganization.
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MA+, MA, MA-: Adequate Safety The prospect of timely serving interest and principal is adequate. However, debt servicing may be affected by adverse changes in the business/economic conditions. MB+, MB, MB-: Inadequate Safety The timely payment of interest and principal are more likely to be affected by future uncertainties. Mc+, Mc, Mc- Risk Prone Susceptibility to default high. Adverse changes in the business/economic conditions could result in inability/unwillingness to service debts on time as per terms. Md Default Either already in default or expected to default.
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Al+, A1 Highest Safety The prospect of timely payment of debt/obligation is the best. A2+, A1 High Safety The relative safety is marginally lower than A1 A3+, A3 Adequate Safety The prospect of timely payment of interest and installment is adequate, but any adverse changes in business/economic conditions may affect the fundamental strength. A4+, A4 Risk Prone The degree of safety is low. Likely to default in case of adverse changes in business/economic conditions. A5 Default Either already in default or expected to default. Inadequate capacity.
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Short-Term Ratings
ICRA assigns short-term ratings with symbols from A1 through to A5 to debt instruments with original maturity up to one year. ICRAs short-term ratings measure the probability of default on the rated debt securities over their entire tenure. A suffix of + may be attached to the rating symbols of A1 through to A4 to indicate the relative position of the issuer within the rating category. While the short-term rating of A1 indicates that the rated debt issuance has the highest credit quality, A5 indicates that the rated debt is either in default or is expected to default on its repayment obligations. ICRA assigns short-term ratings to instruments such as commercial paper, certificates of deposit, short-term debentures, and other money market related instruments maturing within one year from the date of issuance.
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Employment Background Screening This service provides our clients with authenticated and validated data on employees which includes but is not limited to the Physical Address, qualification both educational and professional, criminal record check and other pertinent information. SSI/SME Rating We help Small Scale Industries that are looking for loans and financial assistance to get assessed on their credit worthiness, financial viability and performance. This helps their cause to get unbiased analysis in a funding situation.
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CARE
Credit Analysis & Research Ltd. (CARE), incorporated in April 1993, is a credit rating, information and advisory services company promoted by Industrial Development Bank of India (IDBI), Canara Bank, Unit Trust of India (UTI) and other leading banks and financial services companies. In all CARE has 14 shareholders. CARE assigned its first rating in November 1993, and up to March 31, 2006, had completed 3175 rating assignments for an aggregate value of about Rs 5231 billion. CARE's ratings are recognized by the Government of India and all regulatory authorities including the Reserve Bank of India (RBI), and the Securities and Exchange Board of India (SEBI). CARE has been granted registration by SEBI under the Securities & Exchange Board of India (Credit Rating Agencies) Regulations, 1999. The rating coverage has extended beyond industrial companies, to include public utilities, financial institutions, infrastructure projects, special purpose vehicles, state governments and municipal bodies. CARE's clients include some of the largest private sector manufacturing and financial services companies as well financial institutions of India. CARE is well equipped to rate all types of debt instruments like Commercial Paper, Fixed Deposit, Bonds, Debentures and Structured Obligations. CARE's Information and Advisory services group prepares credit reports on specific requests from banks or business partners, conducts sector studies and provides advisory services in the areas of financial restructuring, valuation and credit appraisal systems. CARE was retained by the Disinvestment Commission, Government of India, for assistance in equity valuation of a number of state owned companies and for suggesting divestment strategies for these companies.
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CARE BBB (FD)/(CD)/(SO) Such instruments are considered to be of investment grade. They indicate sufficient safety for payment of interest and principal, at the time of rating. However, adverse changes in assumptions are more likely to weaken the debt servicing capability compared to the higher rated instruments. CARE BB (FD)/(CD)/(SO) Such instruments are considered to be speculative, with inadequate protection for interest and principal payments. CARE B (FD)/(CD)/(SO) Instruments with such rating are generally classified susceptible to default. While interest and principal payments are being met, adverse changes in business conditions are likely to lead to default. CARE C (FD)/(CD)/(SO) Such instruments carry high investment risk with likelihood of default in the payment of interest and principal. CARE D (FD)/(CD)/(SO) Such instruments are of the lowest category. They either are in default or are likely to be in default soon.
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B. Short-Term Instruments
Instruments with maturities of one year or less are classified in this category. These include: CP - Commercial Paper and ICD - Inter-Corporate Deposits PR-1 Instruments would have superior capacity for repayment of short-term promissory obligation. Issuers of such PR-instruments will normally be characterized by leading market position in established industries, high rates of return on funds employed etc. PR-2 Instruments would have strong capacity for repayment of short-term promissory obligations. Issuers would have most of the characteristics as for those with PR1 instruments but to a lesser degree. PR-3 Instruments have an adequate capacity for repayment of short-term promissory obligations. The effect of industry characteristics and market composition may be more pronounced. Variability in earning and profitability may result in change in the level of debt protection. PR-4 Instruments have minimal degree of safety regarding timely payment of short-term promissory obligations and safety is likely to be adversely affected by short-term adversity or less favourable conditions.
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PR-5 The instrument is in default or is likely to be in default on maturity. SME Rating Agency of India Limited (SMERA) is a joint initiative by SIDBI (http://www.sidbi.in/), Dun & Bradstreet Information Services India Private Limited (D&B) (http://www.dnb.co.in/), Credit Information Bureau (India) Limited (CIBIL) (http://www.cibil.com/) and several leading banks in the country. SMERA is the country's first rating agency that focuses primarily on the Indian SME segment. SMERA's primary objective is to provide ratings that are comprehensive, transparent and reliable. This would facilitate greater and easier flow of credit from the banking sector to SMEs.
Based on receipt of application form, applicable rating fees and documents from the SME, SMERA will begin its process of evaluation. A Questionnaire, seeking information on financial and qualitative factors, would be sent to the SME and would need to be filled by an authorised representative of the SME. A SMERA correspondent will contact the SME to collect a duly filled questionnaire to facilitate the rating process. The correspondent would also conduct a site visit as part of the evaluation process. SMERA shall complete the evaluation exercise and provide SMERA rating within 15 business days of receipt of all documents from the SME.
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Moody's Corporate Bond Ratings The credit ratings assigned by Moody's to corporate bonds are listed below with the definitions of each rating category:
AAA
Bonds, which are rated Aaa, are judged to be of the best quality. They carry the smallest degree of investment risk and are generally referred to as "gilt edge". Interest payments are protected by a large or by an exceptionally stable margin and principal is secure. While the
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AA
Bonds, which are rated Aa, are judged to be of high quality by all standards. Together with the AAA group they comprise what are generally known as high-grade bonds. They are rated lower than the best bonds because margins of protection may not be as large as in Aaa securities or fluctuation of protective elements may be of greater amplitude or there may be other elements present which make the long-term risks appear somewhat larger than in Aaa securities.
A
Bonds, which are rated A, possess many favourable investment attributes and are to be considered as upper medium-grade obligations. Factors giving security to principal and interest are considered adequate but elements may be present which suggest a susceptibility to impairment sometime in the future.
BAA
Bonds, which are rated Baa, are considered as medium-grade obligations, i.e., they are neither highly protected nor poorly secured. Interest payments and principal security appear adequate for the present but certain protective elements may be lacking or may be characteristically unreliable over any great length of time. Such bonds lack outstanding investment characteristics and, in fact, have speculative characteristics as well.
BA
Bonds, which are rated Ba, are judged to have speculative elements; their future cannot be considered as well assured. Often the protection of interest and principal payments may be
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B
Bonds, which are rated B generally, lack characteristics of a desirable investment. Assurance of interest and principal payments or of maintenance of other terms of the contract over any long period of time may be small.
CAA
Bonds, which are rated Caa, are of poor standing. Such issues may be in default and there may be present elements of danger with respect to principal or interest.
CA
Bonds, which are rated Ca, represent obligations, which are speculative in some degree. Such issues are often in default or have other marked shortcomings.
C
Bonds, which are rated C, are the lowest rated class of bonds and issues so rated are to be regarded as having extremely poor prospects of ever attaining any real investment standing.
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Prime-1 (or P-l) - Highest quality Prime-2 (or P-2) - Higher quality Prime-3 (or P-3) -High quality
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CREDIT RATING
A1-
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CREDIT RATING
Good Grade Good certainty of timely payment. Liquidity factors and company fundamentals are sound. A2 Although ongoing funding needs may enlarge total financing requirements, access to capital markets is good. Risk factors are small. Satisfactory Grade A3 Satisfactory liquidity and other protection factors qualify issues as to investment grade. However, risk factors are larger and subject to more variation.
Non-Investment Grade Speculative investment characteristics. Liquidity is not sufficient to insure against disruption B in debt service. Operating factors and market access may be subject to a high degree of variation. Default C Issuer failed to meet scheduled principal or interest payments.
Investment Grade
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CREDIT RATING AAA Highest credit quality. The risk factors are negligible, being only slightly more than for risk free government bonds. AA+ AA AAA+ A ABBB+ BBB BBBHigh credit quality. Protection factors are good. However, risk factors are more variable and greater in periods of economic stress. Adequate protection factors and considered sufficient for prudent investment. However, there is considerable variability in risk during economic cycles. Very high credit quality. Protection factors are very strong. Adverse changes in business, economic or financial conditions would increase investment risk although not significantly.
Non - Investment Grade BB+ BB BBBelow investment grade but capacity for timely repayment exists. Present or prospective financial protection factors fluctuate according to industry conditions or company fortunes. Overall quality may move up or down frequently within this category. B+ B BCCC Below investment grade and possessing risk that obligations will not be met when due. Financial protection factors will fluctuate widely according to economic cycles, industry conditions and/or company fortunes. Well below investment grade securities. Considerable uncertainty exists as to timely payment of principal or interest. Protection factors are narrow and risk can be substantial with unfavourable economic/industry conditions, and/or with unfavourable company developments. DD Defaulted debt obligations. Issuer failed to meet scheduled principal and/or Interest payments.
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CREDIT RATING GCR's Rating Symbols and Definitions Summary Such ratings are exclusively accorded to insurance/reinsurance companies and rate the probability of timeously honouring policyholder obligations over the medium term (i.e. over the next 2 to 3 years) AAA Highest claims paying ability. The risk factors are negligible. AA+ AA AAA+ A ABBB+ BBB BBBBB+ BB BBB+ B BCCC Company has been, or is likely to be, placed under an order of the court. High claims paying ability. Protection factors are above average although there is an expectation of variability in risk over time due to economic and/or underwriting conditions. Adequate claims paying ability. Protection factors are adequate although there is considerable variability in risk over time due to economic and/or underwriting conditions. Moderate claims paying ability. The ability of these organisations to discharge obligations is considered moderate and thereby not well safeguarded in the event of adverse future changes in economic and/or underwriting conditions. Possessing substantial risk that policyholder and contract-holder obligations will not be paid when due. Judged to be speculative to a high degree. Very high claims paying ability. Protection factors are strong. Risk is modest, but may vary slightly over time due to economic and/or underwriting conditions.
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CREDIT RATING
In the absence of quality rating, credit rating is a curse for the capital market industry, carrying out detailed analysis of the company, should have no links with the company or the persons interested in the company so that their reports impartial and judicious recommendations for rating committee. The companies having lower grade rating do not advertise or use the rating while raising funds from the public. In such cases, the investor cannot get information about the riskiness of instrument and hence is at loss.
(2)
Static Study
Rating is done on the present and the past historic data of the company and this is only a static study. Prediction of the company's health through rating is momentary and anything can happen after assignment of rating symbols to the company. Dependence for future results on the rating, therefore defeats the very purpose of risk indicative ness of rating. Many changes take place in economic environment, political situation, government policy framework, which directly affect the working of a company.
(3)
Rating company might conceal material information from the investigating team of the credit rating company. In such cases, quality of rating suffers and renders the rating unreliable.
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CREDIT RATING
(4)
Rating is done for a particular instrument to assess the credit risk but it should not be construed as a certificate for the matching quality of the company or its management. Independent views should be formed by the public using the rating symbol.
(5)
Human Bias
Findings of the investigation team, at times, may suffer with human bias for unavoidable personal weakness of the staff and might affect the rating.
(6)
Time factor affects rating. Sometimes, misleading conclusions are derived. For example, company in a particular industry might be temporarily in adverse condition but it is given a low rating. This adversely affects the company's interest
(7)
Down Grade
Once a company has been rated and if it is not able to maintain its working results and performance, credit rating agencies would review the grade and down grade the rating resulting into impairing the image of the company.
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CREDIT RATING
(8)
Rating done by the two different credit rating agencies for the same instrument of the same issuer company in many cases would not be identical. Such differences are likely to occur because of value judgment differences on qualitative aspects of the analysis in two different agencies.
(9)
Conservative Rating
Default by an investment-grade firm is seen as the most costly error for the agency. In order to preserve their reputation by avoiding the failure of any investment-grade firm, rating agencies downgrade even "good" firms in response to higher global risk. The downgrades may look self-fulfilling, but in fact, investors rationally ignore them, as they actually convey no information about the relative quality of firms
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CREDIT RATING
IPO GRADING
IPO grading (initial public offering grading) is a service aimed at facilitating the assessment of equity issues offered to public. The grade assigned to any individual issue represents a relative assessment of the 'fundamentals' of that issue in relation to the universe of other listed equity securities in India. Such grading is assigned on a five-point point scale with a higher score indicating stronger fundamentals.
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CREDIT RATING
CREDIT RATING and principal. The IPO grading product of CRISIL, is a relative assessment of the fundamentals of the equity security. Investment decisions for IPO are at present based on voluminous and complex disclosure documents, which pose a challenge to investors to arrive at informed decisions. The focus, in these documents is meeting regulatory guidelines on disclosures. Though seemingly there is a lot of information available on IPOs through free research on websites, media and other sources, investors often look for structured, consistent and unbiased analysis to aid their investment decisions. Moreover, information available on new companies varies with the size of the issue, the market conditions and the industry that the issuing company belongs to. CRISIL IPO grading aims to bridge this gap and facilitate more informed investment decisions.
This report will be a one-time assessment based on the information disclosed in the draft prospectus filed with Securities Exchange Board of India (SEBI); our understanding of the industry and company fundamentals; and interactions with the issuer management and other stakeholders. The report will comprise our assessment on the following parameters: Management quality Business prospects: Industry and company Financial performance Corporate governance Project related factors Other factors: 71
A comprehensive assessment that aids investment decisions of both Institutional and retail investors.
CRISIL IPO Grading: Assessment Scale The assessment is an overall assessment of fundamentals on a five-point scale. The companies assessed highest will be scored 5/5 and the lowest score will be 1/5. Gradings are assigned to various parameters and then aggregated. CRISIL IPO grading is not to be construed to mean A valuation of the equity offering; present or future A comment on the issue price or the likely price on listing An assessment of the market risk associated with equity investments An audit or a recommendation to invest A forensic exercise that can detect fraud. CRISIL IPO Grading - Scale
CRISIL IPO Grade 5/5 4/5 3/5 2/5 1/5 Assessment Strong fundamentals Above average fundamentals Average fundamentals Below average fundamentals Poor fundamentals
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CREDIT RATING
CONCLUSION
Thus we can say that Credit rating is a qualified assessment and formal evaluation of companys credit history and capability of repaying obligations. It measures the default probability of the borrower, and its ability to repay fully and timely its financial debt obligations. The main purpose of credit rating is to provide investors with comparable information on credit risk based on standard rating scale, regardless of specifics of companies, separate sector of the economy and country as a whole. Credit rating has proven itself to be effective instrument of risk assessment in countries with advanced economy since it demonstrates transparency of an enterprise. Credit rating reflects financial, sectorial, operational, legal and organizational sides of companies, which characterize ability and willingness duly and in full amount to repay obligations In world practice, credit rating can be assigned to sovereign governments, regional and local executive bodies, corporations, financial organizations and etc.
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CREDIT RATING
BIBLIOGRAPHY
www.crisil.com www.stretcher.com www.careratings.com www.onicra.com www.care.org www.careratings.com www.smera.in www.sebi.gov.in www.hindubusiness.com www.wikipedia.org
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