Professional Documents
Culture Documents
Learning Objective
Presented By:
Asif Naqvi
What is a Rating:
Grade summarizing the willingness and ability to repay. Ability to pay-quantitative Willingness to pay-qualitative Letter Grades Sub-categories of grades. Major Credit Rating Companies: S & P, Moodys, Fitch etc. Locally: JCR-VIS & PACRA Why Credit Rating???
A rating is NOT:
A judgment or statement regarding any aspect of public policy. A political statement in favor of or against a particular person or administration. A dictate of which should be done or how a matter should be handled.
Sovereign Ratings: Assess the country Credit risk and is used as a point of reference for country borrowings from WB, IMF, ADB, IDB etc
AAA AA+ AA AAA+ A ABBB+ BBB BBB- etc (Please refer to notes)
Investment Banks:
Leasing Companies:
Insurance Companies:
Bonds & Securitization etc.
Rating Methodology
Following major factors are assessed in the Credit Rating Process: Industry Risk Market Position Ownership & Support Earning & Performance Cash Flows Management Evaluation Capital & Debt Structure Funding & Flexibility Corporate Governance Additional Factors for Financial Institutions
I - Industry Risk
Economic importance of the industry to the country. Potential for support. Employment significance. Industrial relations record. Significance of legislation: protective and harmful, relationship with government. Maturity of the industry. International competition. Barriers to entry. Competitive situation domestically: monopoly, oligopoly, fragmentation. Nature of the industry: capital intensity, product lifespan, marketing requirements. Cyclic factors: demand, supply, implications for price volatility. Industry cost and revenue structure: susceptibility to energy prices, interest rate levels, government policies. Important developments and trends in the industry.
II - Market Position:
Competitive position within the industry: size, market share & trend, price-setting ability. Major product importance. Product lives and competition. Degree of product diversification. Significance of R&D expenditure and of new product development. Geographic diversity of sales and production. Significance of major customers. Dependence on major suppliers and access to alternatives. Marketing needs. Distribution network, control and susceptibility to external factors.
Structure of ownership.
Other benefits: access to technology, products.
Contd
V Cash Flows
Relationship of cash flow to leverage and ability to internally meet all cash requirements is evaluated. The volatility of cash flow over time and the impact of seasonality on cash flow is also assessed. The specific issues include : Adequacy of cash flow to maintain the operating capacity of the business: working capital levels, replacement of fixed assets. Contribution from cash flow towards expansion: major capital spending projects, acquisitions. Discretionary spending included in cash flow including advertising, exploration, research & development expenditure. contd
V Cash Flows
Volatility of cash flow over time. Relationship between cash flow and total debt. Restrictions on cash flow : limits on repatriation, potential taxation effects, access to dividends from subsidiaries. Liquidity levels and fluctuations: seasonality, sensitivities.
VI Management Evaluation
The specific issues include: Record to date in financial terms. Corporate goals and outlook: aggressive stance, attitude to risk. Experience, background, credibility. Depth of management: key individuals, succession. Record compared with peers.
Off-balance sheet assets and liabilities : goodwill or other intangibles written off, undervalued assets, pension under funding.
IX Corporate Governance
The independence and effectiveness of the board of directors
Thanks