FINAL PROJECT REPORT ON
“CREDIT RATING IN INDIA”
-----------------------------------------------------------------------------------------UNDER THE GUIDANCE OF DIPTI PERIWAL SUBMITTED BY (NAME OF THE CANDIDATE) (ROLL NO: B3) (NAME OF THE DEGREE) (BATCH) _______________________________________________________
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.
.............................................................................................................................................................................................................19 FUNCTIONS OF A CREDIT RATING AGENCY................18
CREDIT RATING AGENCY...17 BENEFITS TO BROKERS AND FINANCIAL INTERMEDIARIES.................6 INTRODUCTION......................................................................................................................................................................................................73 BIBLIOGRAPHY.........................74
......................................................................................................................................................................................................................................................................................................13 BENEFITS OF CREDIT RATING.................................11 TYPES OF RATING....49 MOODY'S INVESTOR SERVICE.........................14 BENEFITS OF RATING TO THE COMPANY...............35 ONICRA CREDIT RATING AGENCY OF INDIA................................................................................................................................................................................................................................14
BENEFITS TO INVESTORS.....................................................................69
CRISIL IPO GRADING...........................20
CREDIT RATING IN INDIA....................................................................24 ICRA....66 IPO GRADING.....................................................................................................................................................................................7 EVOLUTION..........................................................................................................................................CREDIT RATING
Table of Contents
EXECUTIVE SUMMARY........................................................................... (CARE).................................69
CONCLUSION...47 CREDIT ANALYSIS & RESEARCH LTD.....................................................................................................................................................................56
DISADVANTAGES OF CREDIT RATING.........................................22
USES OF RATINGS BY CREDIT RATING AGENCIES..
The project entitled “Credit Rating” gives you an insight to the most important concept in any industry. Credit rating reflects financial. Different Types of Credit Rating are explained in this project. sectoral.
. Functions of Credit Rating are highlighted. In world practice. of various rating agencies like CRISIL. operational. which characterize ability and willingness duly and in full amount to repay obligations. working capital. The main purpose of credit rating is to provide investors with comparable information on credit risk based on standard rating scale. It measures the default probability of the borrower. separate sector of the economy and country as a whole. ICRA. regardless of specifics of companies. Rating Symbols for short term debentures n long term bonds.e. CARE and International Rating Agency. This project has also covered the Rating Process. regional and local executive bodies. financial organizations and etc. corporations. IPO Grading has also been included in this project. credit rating can be assigned to sovereign governments. Rating Methodology. SMERA. Credit rating is a qualified assessment and formal evaluation of company’s credit history and capability of repaying obligations. ONICRA. be it service oriented or a manufacturing firm i. Various advantages and limitation to Credit Rating are highlighted. and its ability to repay fully and timely its financial debt obligations. Credit rating has proven itself to be effective instrument of risk assessment in countries with advanced economy since it demonstrates transparency of an enterprise. legal and organizational sides of companies.
are a simple and easily understood tool enabling the investor to differentiate between debt instruments based on their underlying credit quality. and bankers to determine whether a loan should be granted or credit extended.
." Standard and Poor’s Ratings. simple tool that couples a possibly unknown issuer with an informative and meaningful symbol of credit quality. long term ratings incorporate an assessment of the expected monetary loss should a default occur. “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. A credit rating is generally established by a credit bureau and used by merchants. with specific reference to the instrument being rated. usually expressed in alphabetical or alphanumeric symbols. In addition. The rating measures the probability that the issuer will default on the security over its life. the relative ranking of the default loss probability for a given fixed income investment. It is focused on communicating to the investors. which depending on the instrument may be a matter of days to 30 years or more."
"Credit ratings help investors by providing an easily recognizable. suppliers. in comparison with other rated instruments. 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.CREDIT RATING
CREDIT RATING The evaluation of a people or businesses' ability and past performance in paying debts.
Default occurs whenever a security issuer is late in making one or more payments that it is legally obligated to make. the bond is legally in default. which depending on the instrument may be a matter of days to 30 years or more. The rating measures the probability that the issuer will default on the security over its life. and honesty to repose trust in a person's ability and intention to repay. many investors accept the ratings assigned by credit agencies as a substitute for their own investigation of a security's investment quality. of the opinion about credit quality of the issuer of security/instrument. It is no wonder. Credit rating does not amount to any recommendation to purchase. Credit rating helps investors by providing an easily recognizable. 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. sell or hold that security. the investor who holds title to bankrupt bonds typically loses both principal and interest. In addition. once the company's assets are sold at auction. when any interest or principal payment falls due and is not made on time.CREDIT RATING
. that security ratings are so closely followed by investors. and the issuing company winds up in bankruptcy proceedings. It is concerned with an act of assigning values by estimating worth or reputation of solvency. invested. longterm rating incorporates an assessment of the expected monetary loss should a default occur. In most instances. others never do. 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. then. simple tool that couples a possible unknown issuer with an informative and meaningful symbol of credit quality. through use of symbols. While many defaulted bonds ultimately resume the payment of principal and interest. Credit rating can be defined as an expression. holders of bonds issued by a bankrupt company receive only a part amount on his investments. In the case of a bond. Thus. In fact.
5) The service is designed first and foremost to provide reliable ratings to fulfill the needs of investors interested in obtaining a reliable. the financial media and other observers.CREDIT RATING
Credit Rating Function
1) Credit rating plays an important role in developed and developing capital markets throughout the world. utilities. municipal corporations. economists. financial institutions. public sector units. 2) The use of ratings fosters growth in local and international markets. non-banking finance companies. independent estimate of a company’s credit risk. of issuers and borrowers seeking flexible sources of financing on the capital market and brokering entities enjoying this service namely: savers. real estate developers. nationalized and private banks. stock brokers and others.
Clients for Credit Rating
Clients comprise manufacturing companies. 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. state governments. governments.
John Moody (1868 . John Moody and Company published Moody’s Manual of Industrial and Miscellaneous Securities in 1900. and Moody’s Manual was known from coast to coast. Within two months. Robert Dun subsequently acquired it and its first rating guide was published in 1859.as well as considerable journalistic talent. and food companies.CREDIT RATING
EVOLUTION OF CREDIT RATING AGENCIES
The origins of credit rating can be traced to the 1840's. mining. circulation had exploded. John Bradstreet set up another similar agency in 1849. Louis Tappan established the first mercantile credit agency in New York in 1841. Following the financial crisis of 1837. utilities. Relying on his assessment of the market’s needs. His company would publish a book that analyzed the railroads and their outstanding securities. Moody returned to the financial market in 1909 with a new idea. manufacturing. the publication had sold out. He expressed his conclusions using letter-rating symbols adopted from the mercantile and credit rating system that had been used by the credit-reporting firms since the late 1800s. which became the owner of Moody's Investors Service in 1962. The agency rated the ability of merchants to pay their financial obligations. the company’s founding year. It offered concise conclusions about their relative investment quality. he now offered investors an analysis of security values. and he was forced to sell his manual business.1958) was a self-taught reformer who had a strong entrepreneurial drive and a firm belief about the needs of the investment community . government agencies. which published a rating book in 1857. Instead of simply collecting information on the property. By 1903. The manual provided information and statistics on stocks and bonds of financial institutions. The history of Moody's itself goes back about 100 years. and management of companies.
. These two agencies were merged together to form Dun and Bradstreet in 1933. capitalization. When the stock market crashed in 1907. Moody’s company did not have adequate capital to survive.
The Standard Statistics Company merged in 1941 to form Standard and Poor's. (CRISIL) was set up as the first rating agency in 1987. over by McGraw Hill in 1966. when the Poor's Publishing Company published its first rating followed by the Standard Statistics Company in 1922. The new manual quickly found a place in investors’ hands. Korea. and Fitch Publishing Company in 1924. McCarthy Crisani and Maffei (1975 acquired by Duff and Phelps in 1991). Dominican Bond Rating Service (1997). he became the first to rate public market securities. Japanese Bond Rating Institute (1975). Pakistan. Philippines. and finance. which was subsequently taken. Indonesia. Moody's Investors Service was incorporated. the "Moody's ratings" had become a factor in the bond market. he expanded his base of analyzed companies.CREDIT RATING Moody had now entered the business of analyzing the stocks and bonds of America’s railroads. (formerly known as Investment Information and Credit Rating Agency of India Limited) in 1991. Duff and Phelps has tied up with two Indian NBFCs to set up Duff and Phelps Credit Rating India (P) Limited in 1996. (CARE) in 1994. 1914. In 1913. Thailand and Australia. launching his evaluation of industrial companies and utilities. since the setting up of Fitch Publishing in 1924. On July 1. Moody began expanding rating coverage to bonds issued by US cities and other municipalities. Mexico. and Credit Analysis and Research Ltd. and Duff and Phelps Credit Rating Company (1980). In 1909. a number of credit rating agencies commenced operations all over the world. By that time. These included the Canadian Bond Rating Service (1972). Moody’s Analyses of Railroad Investments described for readers the analytic principles that Moody used to assess a railroad’s operations. Cyprus. In India. That same year. management. There are credit rating agencies in operation in many other countries such as Malaysia. followed by ICRA Ltd. and with this endeavor. For almost 50 years.
. The ownership pattern of all the three agencies is institutional. the Credit Rating and Information Services of India Ltd. Thomson Bankwatch (1974). there were no major new entrants in the field of credit rating and then in the 1970s. IBCA Limited (1978). Further expansion of the credit rating industry took place in 1916.
Commercial papers are issued by manufacturing companies.
(3) Preference Share Rating
Rating of preference share issued by a company is called preference share rating. is called debenture or bond rating.
(2) Equity Rating
Rating of equity shares issued by a company is called equity rating.
(5) Fixed Deposits Rating
Fixed deposits programmes are medium term unsecured borrowings. finance companies. government etc.
(4) Commercial Paper Rating
Commercial papers are instruments used for short-term borrowing.CREDIT RATING
TYPES OF RATING
Following are the different kinds of rating:
(1) Bond/Debenture Rating
Rating the debentures/ bonds issued by corporates. Rating of such programmes is called as fixed deposits rating. banks and financial institutions and rating of these instruments is called commercial paper rating.
(7) Individuals Rating
Rating of individuals is called as individual's credit rating. Structured obligation is generally asset-backed security.CREDIT RATING
(6) Borrowers Rating
Rating of borrowers is referred as borrower rating.
(9) Sovereign Rating
Is a rating of a country. which is being considered whenever a loan is to be extended. to the investors in worst case scenario. or some major investment is envisaged in a country.
(8) Structured Obligation Rating
Structured obligations are also debt obligations and are different from debenture or bond or fixed deposit programmes and commercial papers.
. Credit rating agencies assessed the risk associated with the transaction with the main trust on cash flows emerging from the asset would be sufficient to meet committed payments.
Some of the benefits are: (1) Safeguards Against Bankruptcy Credit rating of an instrument done by a credit rating agency gives an idea to the investors about the degree of financial strength of the issuing company. which enables him to decide about the investment. (3) Credibility Of Issuer Rating gives a clue about the credibility of the issuing company. The rating agency is quite independent of the issuer company and has no business connections or any relationship with it
. A highly rated instrument of a company gives an assurance to the investors of the safety of that instrument and a minimum risk of bankruptcy. It becomes easier for the investors by looking at the symbol to understand the worth of the issuing company. (2) Recognition Of Risk Credit rating provides investors with rating symbols that carry information in easily recognizable manner for the benefit of investors to perceive the risk involved in the investment. The benefits directly accruing to investors through rated instruments are: (A) BENEFITS TO INVESTORS Investors are benefited in many ways if the corporate security in which they intend to invest their saving has been rated. The rating symbol gives them the idea about the risk involved or the expected advantages from the investment.CREDIT RATING
BENEFITS OF CREDIT RATING`
For different classes of persons different benefits accrue from the use of rated instruments.
.CREDIT RATING or its Board of Directors. the portfolio managers etc. (6) Independence Of Investment Decisions For making investment decisions. etc. This relieves investors from the hassle of acquiring knowledge about the fundamentals of a company. 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. financial standing. about the good investment proposal. (5) Saving Of Resources Investors rely upon credit rating. 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. (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. management details. Absence of business links between the rater and the rated firm establishes ground for credibility and attract investors. its actual strength. etc. For rated instruments. the stockbrokers. investors have to seek advice of financial intermediaries. The investor can take quick decisions about the investment to be made in any particular rated security of a company. (4) Easy Understandability Of Investment Proposal An investor needs no analytical knowledge on his part and can understand the rating symbol.
The credit rating agency downgrades the rating of any instrument if subsequently the company's financial strength declines or any event takes place.CREDIT RATING
(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.
. (9) Other Advantages The investor can quickly understand the credit instrument and weigh the ratings with advantages from instruments. or. perceiving of default risk by the company. which necessitates consequent dissemination of information on its position to the investors. and make quick decisions to invest or sell or buy securities to take advantages of market conditions.
Thus. the rated company can economize and minimize cost of public issues
. (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. 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. (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.CREDIT RATING
(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. (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.
which is subject to self-discipline and self-improvement. The merchant bankers are also using credit ratings for pre-packing of issues by way of securitisation/ structured obligations. (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. conferences and other publicity stunts and gimmicks. could use rating as an input for their monitoring of risk exposures. underwriting and placement of issues. pricing.
(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'. 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.
. costs and manpower in convincing their clients about investment in any particular instrument. (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.CREDIT RATING by controlling expenses on media coverage. This enables brokers and other financial intermediaries to save time. Rating facilitates best pricing and timing of issues. like brokers and dealers in securities. 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. energy. The intermediaries. it can perceive and avoid sickness.
This in turn increases the total supply of risk capital in the economy. There exist more than 100 rating agencies worldwide. a form of price discrimination based on the different expected costs of different borrowers. as set out in their credit rating.
. easy-to-use measurements of relative credit risk.
USES OF RATINGS BY CREDIT RATING AGENCIES
Credit ratings are used by investors. It also opens the capital markets to categories of borrower who might otherwise be shut out altogether: small governments. cities. these issuers are companies. broker-dealers. investment banks. In most cases. and affects the interest rate applied to loans. non-profit organizations. issuers. For investors. but instead are based on risk-based pricing. leading to stronger growth. and by governments.CREDIT RATING
CREDIT RATING AGENCY
A credit rating agency (CRA) is a company that assigns credit ratings for issuers of certain types of debt obligations.) Interest rates are not the same for everyone. (A company that issues credit scores for individual credit-worthiness is generally called a credit bureau or consumer credit reporting agency. lowering costs for both borrowers and lenders. or national governments issuing debt-like securities that can be traded on a secondary market. credit rating agencies increase the range of investment alternatives and provide independent. hospitals and universities. the ability to pay back a loan. A credit rating measures credit worthiness. this generally increases the efficiency of the market. startup companies.
and is likely to provide an unbiased opinion.
(2) Low Cost Information
A rating firm gathers. analyses. which may not be publicly available. interprets and summarizes complex information in a simple and readily understood formal manner. It is highly welcome by most investors who find it prohibitively expensive and simply impossible to do such credit evaluation of their own.CREDIT RATING
FUNCTIONS OF A CREDIT RATING AGENCY
Credit rating serves the following functions:
(1) Provides Superior Information:
It provides superior information on credit risk for three reasons: (i) issue. their ability to assess risk is better. It is an independent rating agency. (ii) Due to professional and highly trained staff. financial intermediaries and underwriters who have a vested interest in the
The rating firm has access to a lot of information.
it seeks high quality financial and other information. if investment is done in that security. its financial and other representations acquire greater credibility.
(5) Greater Credence To Financial And Other Representation
When a credit rating agency rates a security.
(4) Healthy Discipline On Corporate Borrowers
Higher credit rating to any credit investment tends to enhance the corporate image and visibility and hence it induces a healthy discipline on corporates. then such instrument enjoys higher confidence from investors. Investors have some idea as to what is the risk that he/she is likely to take. its own reputation is at stake.CREDIT RATING
(3) Basis For A Proper Risk And Return
If an instrument is rated by a credit rating agency.
(6) Formation Of Public Policy
Public policy guidelines on what kinds of securities are eligible for inclusions in different kinds of institutional portfolios can be developed with greater confidence if debt securities are rated professionally. As the issue complies with the demands of the credit rating agency on a continuing basis. Therefore.
reflects the issuer's strength and soundness of operations and management.CREDIT RATING
CREDIT RATING IN INDIA
In the Indian context. the issuer company gets strength and credibility with the grade of rating awarded to the credit instrument it intends to issue to the public to raise funds. Rating. Credit rating has been made mandatory for issuance of the following instruments
(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. 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. then it does not mean firm XYZ is better than firm ABC.
(2) As per the guidelines of Reserve Bank Of India (RBI). It expresses a view on its prospective composite performance and the organizational behaviour based on the study of past results. In other words. However. Therefore.e. For example. the rating will differ for different instruments to be issued by the same company. i. credit rating for a debenture issue will differ from that of a commercial paper or certificate of deposit for the same company because the nature of obligation is different in each case. within the same time span. the scope of credit rating is limited generally to debt. fixed deposits. mutual funds and of late IPO’s as well. and not the company. in a way. credit quality is not general evaluation of issuing organization.
. it is the instrument. Further. commercial paper. if debt of company XYZ is rated AAA and debt of company ABC is rated BBB. which is rated.
(3) As per the guidelines of Reserve Bank of India (RBI). The minimum rating required by the NBFCs to be eligible to raise fixed deposits are FA (-) from CRISIL/ MA (-) from ICRA/BBB from CARE.2 core must get their fixed deposit programmes rated. Name of the CRA CRISIL ICRA CARE Fitch India Brickworks Year of commencement of Operations 1988 1991 1993 1996 2008
. satisfactory. Non
Banking Finance Companies (NBFCs) having net owned funds of more than Rs. by amendment of the companies Act 1956. other than NBFCs also mandatory. the parallel marketers of Liquefied
Petroleum Gas (LPG) and Superior Kerosene Oil (SKO) in India are also subjected to mandatory rating. CRAs registered with SEBI. 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. low risk and high risk
(5) There is a proposal for making the rating of fixed deposit programmes of limited
companies. Similar regulations have been introduced by National Housing Bank (NHB) for housing finance companies also
(4) As per the regulations of the Ministry of Petroleum.
(UTI) as a public limited company with its headquarters at Mumbai. merchant bankers. As part of bank loan ratings. pioneered the concept of credit rating in India and developed the methodology for rating of debt in the context of India's financial. CRISIL's comprehensive offerings include ratings for long-term instruments such as debentures/bonds and preference shares. CRISIL also rates credit 24
. municipal bodies and companies in the infrastructure sector. CRISIL provides rating and risk assessment services to manufacturing companies. CRISIL. it also rates short-term instruments such as commercial paper programmes and short-term deposits. Its rating creates awareness of the concept of credit rating amongst corporations. banks. debt instruments of financial institutions and banks in 1992 and asset-backed securities in 1992. structured obligations (including asset-backed securities) and fixed deposits. It was the first rating agency to rate Commercial Paper Programme in 1989. The main objective of CRISIL has been to rate debt obligation of Indian companies. monetary and regulatory system.CREDIT RATING
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. and helps in creating environment that facilitates the debt rating. brokers. non-banking financial companies. regulatory authorities. financial institutions. Its rating provides a guide to the investors as to the risk of timely payment of interest and principal on a particular debt instrument. incorporated in 1987. housing finance companies.
CRISIL also assigns financial strength ratings to insurance companies.CREDIT RATING facilities extended to borrowers by banks. In addition. CRISIL undertakes credit assessments of various entities including state governments.
CRISIL is uniquely placed in its experience in understanding the extent of credit enhancement arising out of such structures. the team meets and interacts with company's executives. In essence. which generally contains two experts.
. CRISIL assigns the job to an analytical team that will be responsible for carrying out the rating assignment.
CRISIL's Rating Process
CRISIL'S Ratings Processes In As Given Below:
(1) Request Of The Company
The rating process beings at the request of a company desirous of having its issue obligations under proposed instrument rated by CRISIL.
(2) Assignment To Analytical Team
On receipt of the above request. Over the years.
(3) Obtaining And Processing Of Data
The analytical team. CRISIL has pioneered the rating of subsidiaries and joint ventures of multinationals in India and has rated several multinational entities. 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. To obtain clarification and better understanding of the client's operations. The rating agency has also developed a methodology for credit enhancement of corporate borrowing programmes through the use of partial guarantees. both startup entities as well as players with a well established track record in India.CREDIT RATING
CRISIL through the years has continued to innovate and play the role of a pioneer in the development of the Indian debt market. obtains requisite information from the client company and analyses the same.
(4) Findings Presentation
The findings of the team completion of investigation process are presented to Rating committee (which comprises some directors not connected with any CRISIL shareholder) which then decides on the rating. may present some additional information for reconsideration of rating grade assigned to the instrument.
(6) Monitoring Of Change Of Rating
Once the company has decides to use the rating. the rating grade is formally confirmed to the company by CRISIL. so effected. Any change. In case the company has nothing to produce as additional fact. or developments concerning the company. Depending upon new information. if it so likes.
. CRISIL may change the rating. is made public by CRISIL. over the life of the instrument.
(5) Communication Of Decision
The decision of the Rating committee is communicated to the client company with remarks that the company. CRISIL is obliged to monitor the rating.
(b) Market Position Of The Company Within The Industry Market position of the company within the industry is evaluated form different angles. structure of industry. as finally. These five factors are as follows:
(1) Business Analysis
All the relevant information concerning the business is covered under the following subheads. cost structure of industry in domestic and international scenario. energy requirements and availability. demand projection growth stages and maturity of markets. Industry strength is evaluated within the economy considering factors like inflation. competitive advantage through marketing and distribution strength and weakness. marketing/support service infrastructure. government policies etc. strong marketing position of the company within the industry attracts better grade rating. (a) Industry Risk CRISIL evaluates the industry risk by taking into consideration various factors like nature and basis of competition. key success factors.e. Industry risk analysis may set an upper limit on rating. „ market share and stability of market share. the long term sales contract.
. i. diversity of products and customers base. the government policies toward industry. or. demand and supply position. research and development and its linkage to product obsolescence. quality important programme. international competitive situation and socio-political scenario.CREDIT RATING
CRISIL'S Rating Methodology
CRISIL analyses five factors while assessing the instrument.
method of income recognition. the compliance to pollution control requirement on taken into consideration.
(2) Financial Analysis
Under financial analysis. energy cost. (d) Legal Position Legal position of issue of debt instrument is assessed by letter of offer. quality of raw material. or protection of forgery and fraud. the Earning Potential return to long term earning potential under varying conditions is assessed. all relevant aspects connected with the business and financial position of the company is assessed in the following four important segments. capital spending flexibility. Thus. system of timely payment of interest and principal. Under Valued/Over Valuing of assets. source of future earnings. or off balance sheet liabilities. the adequacy of the Cash Flows is appraised in relation to debt and fixed and working capital requirements of the company. availability of labour and labour relations. Main focus of analysis is on variability of future cash flows.CREDIT RATING (c) Operating Efficiency Operating efficiency of the company is assessed vis-à-vis competitors' comparison. cost. pretax coverage ratios. Firstly the accounting finally is seen as qualifications of auditors. cash flows to fixed and working capital 29
. trustees and their responsibilities. or ability to finance growth internally. terms of debenture trust deed. For instance. earnings on assets/capital employed. depreciation policies and inventory calculations. or finally. level of capital employed and productivity. business covers all relevant aspects as related to business operations of the client company to assess the creditworthiness of the company. Key consideration is: Profitability ratios. availability. focus on determining extent to which performance is overstated. Thirdly. integration of manufacturing operations and cost effectiveness of plant and equipments. the pricing or cost advantage. Secondly.
the Financial Flexibility is assessed through financial plans in times of stress and their reliability. • conservatism or aggressiveness with reference to financial risk. • relationship with shareholders. Fourthly.
. • planning and control systems.
(4) Regulatory And Competitive Environment
CRISIL evaluates structure and regulatory framework of the financial system in which it works. capital spending flexibility. asset redeployment potential. ability to attract capital. or the debt service schedule. • strategies and ability to overcome adverse situations. • judgment of management performance based on past operating and financial results. Trends in regulation/ deregulation and their impact on the company are evaluated.CREDIT RATING requirements. talents and succession plans.
(3) Management Evaluation
The track record of management is evaluated by observing: • the goals and philosophies. • depths of managerial. or Working Capital management. • or mergers and acquisition considerations. • shareholding pattern and constitution/ of Board of Directors.
or policy on liquid asset in relation to financing commitments and maturing deposits.CREDIT RATING
(5) Fundamental Analysis
It covers aspects on liquidity management. Liquidity management includes aspects on capital structure.3. revenues on non fund-based services. and interest and tax sensitively. profitability and financial position. revenues on non-fund based activities. Asset Quality includes aspects concerning quality of company's credit risk management. exposure of individual borrowers. system for monitoring credit. Interest or Tax Sensitivity includes aspects dealing with exposure to interest rate changes. and accretion to reserves. Profitability and Financial Position includes aspects on historic profits.
. emphasis is laid in addition to above factors at serial number 4 and 5. Factors listed above at serial number 1. matching of assets and liabilities.2. spreads on fund deployment. assets quality. and accretion to reserves. are evaluated for manufacturing companies but for finance companies. sector risk. or management of problem credits.
They differ only marginally in safety from `AAA' issues. changes in circumstances can adversely affect such issues more than those in the higher rating categories
. However. Any adverse changes in circumstances are most unlikely to affect the payments on the instrument
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.CREDIT RATING
CRISIL’S RATING SYMBOLS FOR LONG TERM INSTRUMENTS
Investment Grade Ratings:
AAA (Triple A) Highest Safety Instruments rated 'AAA' are judged to offer the highest degree of safety with regard to timely payment of financial obligations. A Adequate Safety Instruments rated 'A' are judged to offer an adequate degree of safety with regard to timely payment of financial obligations.
however. adverse business or economic conditions would lead to lack of ability or willingness to pay interest or principal. B High Risk Instruments rated 'B' are judged to have greater likelihood of default. timely payment of financial obligations is possible only if favourable circumstances continue. C Substantial Risk Instruments rated 'C' are judged to have factors present that make them vulnerable to default.
. they are less likely to default in the immediate future than other speculative grade instruments.
Speculative Grade Ratings:
BB (Double B) Inadequate Safety Instruments rated 'BB' are judged to carry inadequate safety with regard to timely payment of financial obligations. changing circumstances are more likely to lead to a weakened capacity to pay interest and repay principal than for instruments in higher rating categories. but an adverse change in circumstances could lead to inadequate capacity to make payment on financial obligations.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. while currently financial obligations are met.
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.
RATING SYMBOL FOR SHORT TERM INSTRUMENT
P-1 This rating indicates that the degree of safety regarding timely payment on the instrument is very strong. P-2 This rating indicates that the degree of safety regarding timely payment on the instrument is strong; however, the relative degree of safety is lower than that for instruments rated 'P-1'. P-3 - This rating indicates that the degree of safety regarding timely payment on the instrument is adequate; however, the instrument is more vulnerable to the adverse effects of changing circumstances than an instrument rated in the two higher categories. P-4 - This rating indicates that the degree of safety regarding timely payment on the instrument is minimal and it is likely to be adversely affected by short-term adversity or less favourable conditions. P-5 - This rating indicates that the instrument is expected to be in default on maturity or is in default. NM - 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. Not Meaningful
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. ICRA’s 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. ICRA’s 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
Grading and Reasearch Services Advisory Services Economic Research Outsourcing
.CREDIT RATING spanning diverse industrial sectors. and currently offers its services under the following banners: Rating Services Information. both in India and overseas. 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.
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. (C) Information Requirements Issuers are provided a list of information requirements and the broad framework for discussions. binding the credit rating agency to maintain confidentiality. These factors have been discussed in detail under rating framework.CREDIT RATING
ICRA'S Rating Process
The Rating Process Follows:
Rating is an interactive process with a prospective approach. The composition of the team is based on the expertise and skills required for evaluating the business of the issuer. These requirements are derived from the experience of the issuers business and broadly conform to all the aspects.
. It involves series of steps. 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. which have a bearing on the rating. Important issues that are covered include. (B) Rating Team The team usually comprises two members.
evaluate the quality of technical personnel and form an opinion on the key variables that influence level . These visits also help in assessing the progress of projects under implementation. outlook. assess the state of equipment and main facilities . (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. All the issues having a bearing on the rating are identified. comprising senior analysts of the credit rating agency.
. and competitive position and funding policies. (F) Preview Meeting : After completing the analysis . an opinion on the rating is also formed. This requires intensive interactions with the issuer’s management specifically relating to plans. Plan visits facilitate understanding of the production process.CREDIT RATING
(D) Secondary Information The credit rating agency also draws on the secondary sources of information including its own research division. At this stage. The credit rating agency also has a panel of industry experts who provide guidance on specific issues to the rating team. the findings are discussed at length in the internal committee . The secondary sources generally provide data and trends including policies about the industry. quality and cost of production.
As has been mentioned earlier. the issuer is bound by the mandate letter to provide information to the credit rating agency.CREDIT RATING
(G) Rating Committee Meeting This is the final authority for assigning ratings. In a surveillance review. (H) Rating Communication The assigned rating along with the key issues is communicated to the issuer’s top management for acceptance. which are not accepted. The rating committee also considers the recommendation of the internal committee for the rating. Issuer's response is presented to the Rating Committee. are either rejected or reviewed. unless the circumstances of the case warrant an early review. The various factors that are evaluated in assigning the ratings have been explained under rating framework. the initial rating could be retained or revised (upgrade or downgrade). A brief presentation about the issuers business and the management is made by the rating team. These reviews are usually taken up only if the issuer provides fresh inputs on the issues that were considered for assigning the rating . The ratings. which influence the rating. (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. If the inputs are convincing. he has a right to appeal for a review of the rating . the Committee can revise the initial rating decision.
. (I) Rating Reviews If the rating is not acceptable to the issuer . The ratings are generally reviewed every year. All the issues identified during discussions in the internal committee are discussed. The rejected ratings are not disclosed and complete confidentiality is maintained. Finally . are clearly spelt out. a rating is assigned and all the issues.
are likely to affect the timely payment of principal and interest as per terms. as may be visualized. LA+. LBBB+.LBBB. as may be visualized. differs from LAAA only marginally. as may visualized. Risk factors are negligible. The protective factors any averse change in circumstances. may alter the fundamental strength and effect the timely payment of principal and interest as per terms. LA.: High Safety: Risk factors are modest and may vary slightly.Moderate Safety: Considerable variability in risk factors.:Adequate Safety: The risk factors are more variable and grater in periods of economic stress. The protective factors are strong and the prospect of timely payment of principal and interest as per terms and interest under adverse circumstances. There may be circumstances adversely affecting the degree of safety but such circumstances.LA. Adverse changes in business/economic circumstances.CREDIT RATING
Rating Scale of ICRA
Long Term — Including Debentures Bonds.
. The protective factors are below average. are not likely to affect the timely payment of principal and interest as per times.LAA. LAA. LAA+. Preference Shares
LAAA: Highest Safety: It indicates fundamentally strong position.LBBB.
. LBB. LC+. Recovery is likely only on liquidation or reorganization. LB. LB.LC. Extremely Speculative: Either already in default in payment of interest and/or principal as per terms or expected to default. 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 are narrow.CREDIT RATING
LBB+. Adverse changes in economic/business conditions could result in inability/unwillingness to service debts on time as per terms.LC. The protective factors fluctuate in case of changes in economy/business conditions.Risk Prone: Risk factors indicate that obligation may not be met when due. LBB+.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.
but not as high as in MAAA rating.
MA+. MB-: Inadequate Safety The timely payment of interest and principal are more likely to be affected by future uncertainties.including Certificates of Deposits and Fixed Deposits Programmes
MAAA: Highest Safety The prospect of timely servicing of interest and principal as per terms is the best. Mc. MB+.Risk Prone Susceptibility to default high. However.High Safety The prospect of timely servicing of interest and principal as per terms is high. MAA. Md Default Either already in default or expected to default. MA-: Adequate Safety The prospect of timely serving interest and principal is adequate. MAA+. debt servicing may be affected by adverse changes in the business/economic conditions. MAA.CREDIT RATING
Medium Term . Adverse changes in the business/economic conditions could result in inability/unwillingness to service debts on time as per terms.
Short Term . Mc+. MB. MA. Mc.including Commercial Papers
A4 Risk Prone The degree of safety is low. Inadequate capacity.
. A5 Default Either already in default or expected to default. Likely to default in case of adverse changes in business/economic conditions. A3 Adequate Safety The prospect of timely payment of interest and installment is adequate. A1 Highest Safety The prospect of timely payment of debt/obligation is the best. A4+. A1 High Safety The relative safety is marginally lower than A1 A3+.CREDIT RATING
Al+. but any adverse changes in business/economic conditions may affect the fundamental strength. A2+.
ICRA’s short-term ratings measure the probability of default on the rated debt securities over their entire tenure. ICRA assigns short-term ratings to instruments such as commercial paper. While the short-term rating of A1 indicates that the rated debt issuance has the highest credit quality. and other money market related instruments maturing within one year from the date of issuance.
ICRA assigns short-term ratings with symbols from A1 through to A5 to debt instruments with original maturity up to one year. short-term debentures. A5 indicates that the rated debt is either in default or is expected to default on its repayment obligations. certificates of deposit. 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.
thus warranting a longer-term rating view. Besides the fact that short-term instruments like commercial paper are usually on-going programmes. Thus. The following table presents a broad guidance to the linkage between ICRA’s short-term and long-term ratings. ICRA also factors in an issuer’s long-term credit profile while assigning short-term ratings to debt instruments issued by it.
. refinancing risk or an issuer’s access to other sources of funding.CREDIT RATING
Linkage Between Long-Term And Short-Term Ratings
Although ICRA ratings are specific to the rated instruments. in ICRA’s opinion. the short-term ratings in general have a linkage with the assigned or implicit long-term ratings of the issuers concerned. apart from focusing on short-term factors like near-term business risk drivers and liquidity position of the issuers. is also largely influenced by the issuer’s longerterm credit profile.
Onicra has been continuously conducting in-depth research into all aspects of the behaviour of credit seekers and has developed a comprehensive rating system for various types of credit extensions. a mandatory check is done to assess the credentials of the individual in question before extending a loan or advance. adherence to defined system and processes and commitment to their customers. Onicra provides a platform to credit seekers and granters build long lasting relationship. So. We assess the financial visibility and look into all related aspects. resources. is recognised as the pioneers of the concept of individual Credit rating in India. We have an in-house developed credit rating module which is customized to suit various customer requirements.CREDIT RATING
ONICRA CREDIT RATING AGENCY OF INDIA
ONICRA CREDIT RATING AGENCY OF INDIA Ltd. After being the first to introduce the concept. Credit Rating With the advance of credit. the principal has an increased level of exposure in the market. Associate Rating We provide an objective assessment of existing and potential associates of our clients.
. with reference to infrastructure. This evaluation helps our clients understand the value their associates bring to their business relationships.
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.CREDIT RATING
Employment Background Screening This service provides our clients with authenticated and validated data on employee’s which includes but is not limited to the Physical Address. This helps their cause to get unbiased analysis in a funding situation. criminal record check and other pertinent information. qualification both educational and professional.
special purpose vehicles. and up to March 31. valuation and credit appraisal systems.
. 2006. conducts sector studies and provides advisory services in the areas of financial restructuring. CARE is well equipped to rate all types of debt instruments like Commercial Paper.CREDIT RATING
Credit Analysis & Research Ltd. In all CARE has 14 shareholders. had completed 3175 rating assignments for an aggregate value of about Rs 5231 billion. incorporated in April 1993. information and advisory services company promoted by Industrial Development Bank of India (IDBI). Debentures and Structured Obligations. CARE has been granted registration by SEBI under the Securities & Exchange Board of India (Credit Rating Agencies) Regulations. and the Securities and Exchange Board of India (SEBI). to include public utilities. CARE's Information and Advisory services group prepares credit reports on specific requests from banks or business partners. CARE's ratings are recognized by the Government of India and all regulatory authorities including the Reserve Bank of India (RBI). Unit Trust of India (UTI) and other leading banks and financial services companies. Government of India. The rating coverage has extended beyond industrial companies. CARE's clients include some of the largest private sector manufacturing and financial services companies’ as well financial institutions of India. for assistance in equity valuation of a number of state owned companies and for suggesting divestment strategies for these companies. CARE assigned its first rating in November 1993. 1999. Canara Bank. financial institutions. CARE was retained by the Disinvestment Commission. is a credit rating. state governments and municipal bodies. Fixed Deposit. (CARE). Bonds. infrastructure projects.
(ii) CARE assigns rating team and team analyses the information.
. (viii) If the rating is accepted by the client. (v) The team analyses the data submitted by the Client and put up to Internal Committee of CARE for previews analyses. undertakes site visits. and. (vii) Client may ask for review of the rating assigned and furnish additional information for the purpose. CARE gives it for notification and a periodic surveillance is undertaken by CARE. Client has the option not to accept the final rating in which case CARE will not publish the rating or monitor it. finally. (iv) The client interacts with the Team respond to queries raised and provides any additional data necessary for the analyses. (vi) Rating Committee of CARE awards rating to the Client.CREDIT RATING
CARE'S Rating Process
The process involves: (i) Client gives request for rating and submits information and details schedules. (iii) The team interacts with the clients.
the difference with CARE AAA rated securities is marginal. While the underlying assumptions may change. They are rated lower than CARE AAA securities because of somewhat lower margins of protection. Changes in assumptions may have a greater impact on the long-term risks may be somewhat larger. not materialize may have a greater impact as compared to the
. CARE AA (FD)/(CD)/(SO) Instruments carrying this rating are judged to be of high quality by all standards. carrying negligible investment risk. Overall. CARE A (FD)/(CD)/(SO) Instruments with this rating are considered upper medium grade instruments and have many favourable investment attributes. such changes as can be visualized are most unlikely to impair the strong position of such instruments. They are also classified as high investment grade. Assumptions that do instruments rated higher. Debt service payments are protected by stable cash flows with good margin.CREDIT RATING
RATING SYMBOLS OF CARE
A. Long-Term And Medium Term Instrument
CARE AAA (FD)/(CD)/(SO) Instruments carrying this rating are considered to be of the best quality. Safety for principal and interest are considered adequate.
While interest and principal payments are being met. with inadequate protection for interest and principal payments. They indicate sufficient safety for payment of interest and principal. adverse changes in business conditions are likely to lead to default. They either are in default or are likely to be in default soon. adverse changes in assumptions are more likely to weaken the debt servicing capability compared to the higher rated instruments. CARE B (FD)/(CD)/(SO) Instruments with such rating are generally classified susceptible to default. CARE C (FD)/(CD)/(SO) Such instruments carry high investment risk with likelihood of default in the payment of interest and principal.CREDIT RATING
CARE BBB (FD)/(CD)/(SO) Such instruments are considered to be of investment grade. However. CARE D (FD)/(CD)/(SO) Such instruments are of the lowest category.
. at the time of rating. CARE BB (FD)/(CD)/(SO) Such instruments are considered to be speculative.
PR-3 Instruments have an adequate capacity for repayment of short-term promissory obligations. Issuers of such PR-instruments will normally be characterized by leading market position in established industries.
.Commercial Paper and ICD .Inter-Corporate Deposits PR-1 Instruments would have superior capacity for repayment of short-term promissory obligation. These include: CP .CREDIT RATING
B. Variability in earning and profitability may result in change in the level of debt protection. Short-Term Instruments
Instruments with maturities of one year or less are classified in this category. 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. 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. The effect of industry characteristics and market composition may be more pronounced.
in/). transparent and reliable.co. seeking information on financial and qualitative factors.
Rating Process Simplified •
Based on receipt of application form. Dun & Bradstreet Information Services India Private Limited (D&B) (http://www. A Questionnaire. SMERA's primary objective is to provide ratings that are comprehensive. SMERA is the country's first rating agency that focuses primarily on the Indian SME segment. would be sent to the SME and would need to be filled by an authorised representative of the SME. SME Rating Agency of India Limited (SMERA) is a joint initiative by SIDBI (http://www. SMERA will begin its process of evaluation. 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.dnb.CREDIT RATING
PR-5 The instrument is in default or is likely to be in default on maturity. Credit Information Bureau (India) Limited (CIBIL) (http://www.sidbi. SMERA shall complete the evaluation exercise and provide SMERA rating within 15 business days of receipt of all documents from the SME.cibil. This would facilitate greater and easier flow of credit from the banking sector to SMEs.
.com/) and several leading banks in the country.in/). applicable rating fees and documents from the SME.
and preferred stock. coverage.CREDIT RATING
Moody's Investor Service
Today. These security ratings are reported in Moody's Bond Record. They carry the smallest degree of investment risk and are generally referred to as "gilt edge". bid and asked price quotations. are judged to be of the best quality. registration status. which is published monthly. call provisions (if any). dates when interest. short-term municipal notes.
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:
Bonds. Moody's also notes for its subscribers the essential terms on each security issue. which are rated Aaa. Interest payments are protected by a large or by an exceptionally stable margin and principal is secure. yield to maturity. tax status. While the
. Moody's Investor Service rates thousands of issues of corporate and municipal bonds. and amount of securities outstanding. principal or dividend payments are due. commercial paper. In addition to assigning issue ratings.
Often the protection of interest and principal payments may be
. in fact. have speculative characteristics as well.CREDIT RATING various protective elements are likely to change.
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. Such bonds lack outstanding investment characteristics and.
Bonds. which are rated Baa. i. they are neither highly protected nor poorly secured. their future cannot be considered as well assured. are judged to be of high quality by all standards. which are rated Aa. 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.
Bonds. 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. which are rated Ba. Together with the AAA group they comprise what are generally known as high-grade bonds.
Bonds.e.. which are rated A. such changes as can be visualized are most likely to impair the fundamentally strong position of such issues. are considered as medium-grade obligations. possess many favourable investment attributes and are to be considered as upper medium-grade obligations. are judged to have speculative elements.
Bonds. which are speculative in some degree. Such issues may be in default and there may be present elements of danger with respect to principal or interest. lack characteristics of a desirable investment. are of poor standing. Uncertainty of position characterizes bonds in this class.
Bonds. Such issues are often in default or have other marked shortcomings.CREDIT RATING moderate and thereby not well safeguarded during both good and bad times over the future. which are rated Caa. 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. Moody's assigns those commercial notes it is willing to rate to one of three quality categories:
Moody's Commercial Paper Ratings
Promissory notes sold in the open market by large corporations and having an original maturity of nine months or less are known as commercial paper.
Bonds. which are rated B generally. Assurance of interest and principal payments or of maintenance of other terms of the contract over any long period of time may be small. which are rated C. which are rated Ca. represent obligations.
Highest quality Prime-2 (or P-2) .Higher quality Prime-3 (or P-3) -High quality
Prime-1 (or P-l) .
For these short-term issues Moody's uses the rating symbol MIG. or both. MIG2 Loans bearing this designation are of high quality. Market access for refinancing. carrying specific risk but having protection commonly regarded as required of an investment security and not distinctly or predominantly
. As shown below. and other local governments are rated by Moody's as to their investment quality. enjoying strong protection from established cash flows of funds for their servicing or from established and broad-based access to the market for refinancing. The rating categories are as follows: MIG I Loans bearing this designation are of the best quality. meaning Moody's Investment Grade. with all security elements accounted for but lacking the undeniable strength of the preceding grades. counties. cities. with margins of protection ample though not so large as in the preceding group. in particular. is likely to be less well established. only four rating categories are used and speculative issues or those for which adequate information is not available are not rated. MIG3 Loans bearing this designation are of favourable quality. MIG4 Loans bearing this designation are of adequate quality.CREDIT RATING
Moody's Ratings of Short-Term Municipal Notes
Short-term securities issued by states.
regardless of a company's stand-alone strength.g.
National Scale Ratings
The domestic local currency ratings assigned by GCR are tiered against an assumed “best possible” (usually central government) rating of ‘AAA' in each country and. but the key difference is that one scale measures the probability of default on FOREIGN CURRENCY obligations (taking into account all sovereign risk and currency conversion considerations). while the other measures the probability of default on LOCAL CURRENCY obligations. do not incorporate the sovereign risks of a country. Such ratings are designed to give an indication of the relative risks only within a specific country and are not comparable across different countries. The rating methodologies and rating scales utilised in the accordance of both types of ratings are very similar. Accordingly. Exceptions can arise in the case of structured finance transactions (if there is an opportunity to pierce the sovereign cap. by trapping foreign currency offshore). e. a Zimbabwe Dollar rating accorded to a Zimbabwean organisation is not comparable to a South African Rand rating accorded to a South African organisation. and measure the ability of an organization to service foreign currency obligations. It stands to reason that. therefore. particularly in emerging markets such as Africa. In this regard.CREDIT RATING
International Scale Ratings
International foreign currency ratings effectively benchmark credit quality off US Government risk. the government can “block” any organization within its jurisdiction from obtaining/disbursing foreign currency. typically no organization or debt issue in a country can be rated higher than the country's “sovereign risk rating” on the basis that. there is a far higher probability of default with regards to the former.
Risk factors are minor. Such a rating provides an indication of the probability of default on any unsecured short term debt obligations. Liquidity factors are excellent and supported by good fundamental protection factors. including internal operating A1+ factors and/or access to alternative sources of funds is outstanding. High certainty of timely payment. Liquidity factors are strong and supported by good fundamental protection factors. including commercial paper. High Grade Highest certainty of timely payment. A1 Very high certainty of timely payment.e. over a 12 month period). Risk factors are very small. and safety is just below that of risk-free treasury bills. BA's and NCD's. bank borrowings.CREDIT RATING
Short Term Debt Rating Scale:
GCR's Rating Symbols and Definitions Summary A short term debt rating rates an organisation's general unsecured creditworthiness over the short term (i. Short-term liquidity.
Liquidity is not sufficient to insure against disruption B in debt service. depending on the underlying characteristics of each issue (e.CREDIT RATING
Good Grade Good certainty of timely payment. Satisfactory Grade A3 Satisfactory liquidity and other protection factors qualify issues as to investment grade. Operating factors and market access may be subject to a high degree of variation.
Non-Investment Grade Speculative investment characteristics. Liquidity factors and company fundamentals are sound. A2 Although ongoing funding needs may enlarge total financing requirements. if secured.
. is it secured or unsecured and. access to capital markets is good.g. However.
Long Term Debt Rating Scale:
GCR's Rating Symbols and Definitions Summary A long term debt rating rates the probability of default on specific long term debt instruments over the life of the issue. what is the nature of the security). Default C Issuer failed to meet scheduled principal or interest payments. It is possible that different issues by a single issuer could be accorded different ratings. is it a senior or a subordinated debt instrument. Risk factors are small. risk factors are larger and subject to more variation.
and/or with unfavourable company developments.Investment Grade BB+ BB BBBelow investment grade but capacity for timely repayment exists. DD Defaulted debt obligations. Adverse changes in business. Overall quality may move up or down frequently within this category. economic or financial conditions would increase investment risk although not significantly. Protection factors are good. Present or prospective financial protection factors fluctuate according to industry conditions or company fortunes. risk factors are more variable and greater in periods of economic stress. AA+ AA AAA+ A ABBB+ BBB BBBHigh credit quality. being only slightly more than for risk free government bonds. Considerable uncertainty exists as to timely payment of principal or interest. Well below investment grade securities. Protection factors are narrow and risk can be substantial with unfavourable economic/industry conditions. Issuer failed to meet scheduled principal and/or Interest payments. B+ B BCCC Below investment grade and possessing risk that obligations will not be met when due. there is considerable variability in risk during economic cycles. The risk factors are negligible. Very high credit quality.
. Adequate protection factors and considered sufficient for prudent investment. However. Financial protection factors will fluctuate widely according to economic cycles. Protection factors are very strong.CREDIT RATING AAA Highest credit quality. However. industry conditions and/or company fortunes.
The risk factors are negligible.e. Very high claims paying ability. but may vary slightly over time due to economic and/or underwriting conditions. Moderate claims paying ability. Protection factors are adequate although there is considerable variability in risk over time due to economic and/or underwriting conditions. or is likely to be. Protection factors are strong. placed under an order of the court. Possessing substantial risk that policyholder and contract-holder obligations will not be paid when due. Risk is modest. Judged to be speculative to a high degree.
. over the next 2 to 3 years) AAA Highest claims paying ability.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. 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. 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. High claims paying ability. AA+ AA AAA+ A ABBB+ BBB BBBBB+ BB BBB+ B BCCC Company has been.
carrying out detailed analysis of the company.
. Dependence for future results on the rating. government policy framework. quality of rating suffers and renders the rating unreliable. political situation. 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.
Concealment Of Material Information
Rating company might conceal material information from the investigating team of the credit rating company. The companies having lower grade rating do not advertise or use the rating while raising funds from the public. therefore defeats the very purpose of risk indicative ness of rating.
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. In such cases. the investor cannot get information about the riskiness of instrument and hence is at loss. In such cases. which directly affect the working of a company. Many changes take place in economic environment.CREDIT RATING
DISADVANTAGES OF CREDIT RATING
(1) Biased Rating And Misrepresentations
In the absence of quality rating. credit rating is a curse for the capital market industry.
company in a particular industry might be temporarily in adverse condition but it is given a low rating.
Reflection Of Temporary Adverse Conditions
Time factor affects rating. misleading conclusions are derived. Independent views should be formed by the public using the rating symbol. credit rating agencies would review the grade and down grade the rating resulting into impairing the image of the company.
Findings of the investigation team. at times.CREDIT RATING
Rating Is No Guarantee For Soundness Of Company
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. This adversely affects the company's interest
Once a company has been rated and if it is not able to maintain its working results and performance. Sometimes. For example. may suffer with human bias for unavoidable personal weakness of the staff and might affect the rating.
rating agencies downgrade even "good" firms in response to higher global risk.CREDIT RATING
Difference In Rating Of Two Agencies
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. investors rationally ignore them. as they actually convey no information about the relative quality of firms
. Such differences are likely to occur because of value judgment differences on qualitative aspects of the analysis in two different agencies.
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. but in fact. The downgrades may look self-fulfilling.
IPO Grading Is Different From An Investment Recommendation
Investment recommendations are expressed as 'buy'. a security with stronger fundamentals would command a higher market price. 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.) to its price.CREDIT RATING
IPO grading (initial public offering grading) is a service aimed at facilitating the assessment of equity issues offered to public.) and 'market factors' (liquidity. financial position etc.
. it is one of the inputs to the investor to aiding in the decision making process.
How Long Would The Assigned Grade Be Valid?
The assigned grade would be a one time assessment done at the time of the IPO and meant to aid investors who are interested in investing in the IPO. 'hold' or 'sell' and are based on a security specific comparison of its assessed 'fundamentals factors' (business prospects. it is not an investment recommendation. IPO grading is expressed on a five-point scale and is a relative comparison of the assessed fundamentals of the graded issue to other listed equity securities in India. Such grading is assigned on a five-point point scale with a higher score indicating stronger fundamentals. All other things remaining equal. The grade will not have any ongoing validity. Rather. demand supply etc. On the other hand. As the IPO grading does not take cognizance of the price of the security.
CRISIL IPO Grading
CRISIL. investors and investor forums have been core inputs in the development of this product. CRISIL believes that IPO grading provided by an independent agency would be free from bias and add structure to the tools available at present for assessing the Investment attractiveness of an equity security. the lowest grade to be indicated by 1 and the highest by 5. The IPO grading will be based on CRISIL’s proprietary framework that has been developed to help investors arrive at their own judgment on factors that drive Equities as an asset class.CREDIT RATING
Main features of SEBI decision
The important features of SEBI's decision on IPO grading are as follows: • • • • The grading exercise will exclude the issue price from its scope. CRISIL has a uniquely evolved understanding of this globally revolutionary idea. Market participants. The debt market has benefited immensely from the availability of such an assessment in the form of credit rating . the originator of this concept. Therefore. likelihood of timely repayment of interest 70
. The grading will be on a 5-point scale. The views and feedback of the regulator. has been at the forefront of developing the IPO grading model into a usable form. and The issuing company will be allowed to choose the rating agency for grading its IPO. It will be carried out by recognised credit rating agencies.a representation of a relative assessment of the fundamentals of the debt security i.e..
information available on new companies varies with the size of the issue.CREDIT RATING and principal. in these documents is meeting regulatory guidelines on disclosures.
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).Comprehensive commentary on the assessment parameters. Investment decisions for IPO are at present based on voluminous and complex disclosure documents. The IPO grading product of CRISIL. 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
. Moreover. The focus. investors often look for structured.
Contents Of The CRISIL IPO Grading Report
The report for each CRISIL IPO grading will contain a summary and a detailed report. consistent and unbiased analysis to aid their investment decisions. • • Summary. our understanding of the industry and company fundamentals. Though seemingly there is a lot of information available on IPOs through free research on websites.One-page report highlighting the key elements of analysis Detailed report. the market conditions and the industry that the issuing company belongs to. is a relative assessment of the fundamentals of the equity security. and interactions with the issuer management and other stakeholders. which pose a challenge to investors to arrive at informed decisions. CRISIL IPO grading aims to bridge this gap and facilitate more informed investment decisions. media and other sources.
CRISIL IPO Grading . Gradings are assigned to various parameters and then aggregated.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
. The companies assessed highest will be scored 5/5 and the lowest score will be 1/5.
CRISIL IPO Grading: Assessment Scale The assessment is an ‘overall assessment of fundamentals’ on a five-point scale. 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.
A comprehensive assessment that aids investment decisions of both Institutional and retail investors.CREDIT RATING Compliance track record Litigation history Capital history.
corporations. It measures the default probability of the borrower. sectorial. credit rating can be assigned to sovereign governments. financial organizations and etc. and its ability to repay fully and timely its financial debt obligations. regional and local executive bodies.CREDIT RATING
Thus we can say that Credit rating is a qualified assessment and formal evaluation of company’s credit history and capability of repaying obligations. Credit rating has proven itself to be effective instrument of risk assessment in countries with advanced economy since it demonstrates transparency of an enterprise. The main purpose of credit rating is to provide investors with comparable information on credit risk based on standard rating scale. Credit rating reflects financial. operational. separate sector of the economy and country as a whole. legal and organizational sides of companies.
. which characterize ability and willingness duly and in full amount to repay obligations In world practice. regardless of specifics of companies.
onicra.wikipedia.care.stretcher.hindubusiness.in www.crisil.com www.com www.org www.com www.gov.smera.CREDIT RATING
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.com www.careratings.sebi.com www.