What is a Credit Rating?

Current opinion on credit quality - Issuers ability and inclination to meet debt obligations in a timely manner Performs isolated function of credit risk evaluation Rating is an issue specific view Useful in differentiation of credit quality

What a Credit Rating is Not

General purpose evaluation of issuer Audit of the issuing company One time assessment valid over life of the instrument A recommendation to purchase, sell, or hold a security

Debt Markets in India

Administered Interest Rates Market Driven Interest Rate Structure

Protected Business Environment

Liberalisation

Assessment of Risk Critical

Benefits of Ratings
Regulatory Authorities

Investor protection Market discipline

Accessibility to wider investor base Encourages financial discipline Lesser known companies can raise funds more optimally

Issuers

Benefits of Ratings (contd.)

Intermediaries
- Fixing coupon rates - Second opinion to supplement own assessment

Investors
- Eases risk identification and diversification - Improves liquidity of security

Risk Assessment Model

Industry Risk

Operating Efficiency

Market Position

Financial Risk

Business Risk

Management Evaluation

Risk Assessment Model

Business Risk Existing Risk

Financial Risk

Project Risk

Management Evaluation

Overall Risk Rating

Industry Risk
Industry Structure
Industry size and importance to economy Determinants of revenue growth Entry barriers

Extent of Competition
Nature and basis of competition Threat from imports and substitutes Presence of unorganized sector

Market Position
Market share Competitive advantages
Brand equity Pricing flexibility

Product and customer diversity

Proportion of exports Nature & type of customer diversity

Operating Efficiency
Cost structure Manufacturing efficiency Production flexibility Technology risk Raw material sourcing Location factors

Financial Risk Analysis

Accounting Quality
Income recognition Expense capitalisation Depreciation and inventory valuation policies Off-balance sheet and contingent liabilities Non-operating income

Financial Risk Analysis

Earnings Protection
- Profitability measures - Interest coverage - Capital structure - Debt service coverage - Working capital indicators - Return on capital employed

Financial Risk Analysis

Adequacy of Cash Flows

- Debt servicing requirements - Sustainability of funds from operations

Financial Flexibility
- Ability to raise equity and debt funds - Alternatives in times of stress - Liquid assets available

Management Evaluation

Strength of linkage to parent/ group

- Operational, financial, managerial support

Systems and track record

- Project implementation record

Management talent and succession Financial Policies

- Attitude to growth and debt orientation

Project Risk

Project size in relation to existing operations Means of financing Funding tie-up Extent of completion Adherence to implementation schedules