University of Management and Technology

School of Commerce and Accountancy

Quaid e Azam Campus

Investment Analysis & Portfolio Management

Assignment:
Credit Rating Process:
PACRA

SUBMITTED TO:
Prof. Abid Noor
SUBMITTED BY:
M. Aziz (F2017045035)
Zahid Hafeez Gondal (F2017045051)
SAJID ALI (F2017045034)
M. Asim Maqsood (F2017045020)
Contents:
 Credit Rating
 Benefits Of Credit Rating
 Process Of Credit Rating
 Credit Rating Symbols & Their Interpretation
Credit Rating:
Credit ratings are opinions about credit risk. Our ratings express our opinion
about the ability and willingness of an issuer, such as a corporation or state or city
government, to meet its financial obligations in full and on time.
Credit ratings can also speak to the credit quality of an individual debt issue, such
as a corporate or municipal bond, and the relative likelihood that the issue may
default.
Credit ratings are not absolute measure of default probability. Since there are
future events and developments that cannot be foreseen, the assignment of
credit ratings is not an exact science. Credit ratings are not intended as
guarantees of credit quality or as exact measures of the probability that a
particular issuer or debt issue will default.
Some credit rating agencies specialize in analyzing the credit risk of issuers and
individual debt issues. They formulate and disseminate ratings opinions that are
used by investors and other market participants who may consider credit risk in
making their investment and business decisions.
Credit rating agencies assign ratings to issuers, such as corporations and
governments, as well as to specific debt issues, such as bonds, notes, and other
debt securities
Our ratings opinions are based on analysis by experienced professionals who
evaluate and interpret information received from issuers and other available
sources to form a considered opinion. In rating an issuer an analyst is assigned,
[often] in conjunction with a team of other analysts, to take the lead in evaluating
the entity’s creditworthiness. Typically, analysts obtain information from
published reports, as well as from interviews and discussions with the issuer’s
management. They use that information and apply their analytical judgement to
assess the entity’s financial condition, operation performance, policies and risk
management strategies.
Benefits of Credit Rating:
For Investors:
1. Protection against bankruptcy
Rated instruments provide investors an idea about the financial strength of
the issuer company. This enables them to evaluate the credit worthiness of the
corporate instrument. Besides, the rating symbol suggests the degree of risk
involved in it. Highly rated instrument of a company assures the investors safety
of investment and protection against bankruptcy.

2. Easy recognition of risk

The rating symbols provided by credit rating are easily recognizable. Investors can
perceive the risks involved in investments by knowing the rating they obtained.
Credit instruments are backed by the financial strength, but they cannot be easily
assessed by the investors themselves. The credit rating agency collects, analyses
and interprets the complex information in a simple manner for the benefit of
investors.
3. Reliability of the issuer
Hiring credit rating agencies suggests that the management of the company is
ready to throw open its operations for an independent scrutiny. The rating agency
is quite independent of the issuer company. It has no business connections or any
relationship with the company. In other words, it has no vested interest. So, rated
securities enhance the dependability of the rated instruments for investors.

4. Independent investment decision

Investors rely on rated instruments. Thus, they are relieved from the botheration
of knowing the intricacies of financial analysis of the company. Through rating
symbols, investors are in a position know about the actual strength, financial
standing and management efficiency of the company. They need not depend
upon the advice of financial intermediaries, portfolio managers, etc. As the rating
symbol indicates the credit worthiness of the instrument and the degree of risk
involved in it, the investors can make direct investment decisions.
5. Wide choice of investments
In the present investment market, investors have a wide choice of credit
instruments to choose from. They can choose a particular instrument according to
their risk profile and diversification plan. Credit rating provides an unbiased
guidance to the investors in making a wise a choice of the investments.

Process of Credit Rating:

Mandate Letter

Following a request from the entity / issuer for a rating, a mandate letter is sent
to the client. Usually the processing time for sending the mandate is 1-2 working
days on receipt of the request. Upon signing, mandate letter becomes a
contractual agreement between the entity / issuer to be rated and PACRA to
undertake a rating assignment. It has two separate mandates i.e.

These mandates explain all the terms and conditions governing the rating
relationship. The mandate is perpetual in nature and valid unless terminated by
either party with an advance notice.

Rating Assignment Allocation

The entity is allocated to one of PACRA's rating teams, each headed by a Unit
Head. The Unit Head takes the responsibility of supervising the rating assignment
and designate it to its rating team. The initial introductory letter or email is
exchanged briefing the time line for completion of the rating assignment and
other modalities. Meanwhile, both PACRA and ratee furnish contact information
on the designated liaison person (s) for ensuring smooth and speedy
communication. The respective sub team manager and analyst take care of all
aspects of the rating assignment as per the PACRA's guidelines.

Preliminary Analysis & Information Solicitation

A Preliminary study is conducted with a careful review of an entity's published

information. From this review, analysts determine what additional information
and data are needed. A detailed questionnaire is sent to the client for soliciting
the required financial & non-financial information over and above that provided
in their financial statements and the notes to their accounts. Upon receipt of the
information, an initial rating assessment is made and discussed internally based
on findings of the rating team. This would be followed by a site visit and
management meeting, preferably at entity's head office.

Site Visit

The respective rating team conducts entity's head office and/or plant visit. The
objective of which is to develop a better understanding of the organizational
structure, and quality of the process, and conduct interview of key department
heads and establish a sense of control environment prevailing in the entity. A
detailed itinerary in advance is sent for the said visit.

Management Meeting

The purpose of Management Meeting is to assimilate the strategic view of the

entity’s top management The meeting is wide-ranging, covering the entity's
ownership, governance, financial position, future prospects, the economic
environment and many other issues that can have a bearing on the rating. The
participants of the meeting include the respective rating team, Unit Head and
members of apex rating committee from PACRA and the senior management of
the client including the Chief Executive Officer. Before heading for the
management meeting, a formal agenda is sent, highlighting the areas where we
expect to have the views and opinions of the entity’s top management. We
expect to have a formal presentation for this meeting covering, at a minimum,
those areas highlighted in the agenda.

Draft Rating Report Review

Subsequent to the management meeting, a draft detailed rating report is sent to

the entity's management for their feedback on completeness and accuracy of the
information contained in the report. If the report containing anything which is
confidential, the client is also expected to communicate the same. The feedback is
expected from the entity within five working days.

Rating Committee

A multi-layered, decision-making process is followed in assigning a rating. In

finalizing the rating, the relevant team prepares a rating proposal based on the
information gathered through the questionnaire and discussion at the
Management Meeting and head office/site visit. This is presented to the rating
committee, comprising at least one apex, two permanent members and the rating
team. The RC is usually conducted within one week following the management
meeting.

Pre-Publication Review

Subsequent to the Rating Committee, PACRA provides rated entities with draft
press release and one page summary report in advance for pre-publication
review. This is to avoid issuing any credit analyses that contain misrepresentations
or are otherwise misleading as to the general credit worthiness of an entity /
issuer.

Rating Review Appeal Policy

In case entity has disagreement with any of PACRA rating opinion – initial or
surveillance – it has the option to appeal for review of rating opinion within 5
working days of the intimation of the rating action. The appeal process is covered
by PACRA’s publicly available “Rating Review Appeal Policy”. Any disagreement
with rating opinion does not restrict PACRA’s right to disseminate its updated
opinion on public rating.

Once reviewed, the rating opinion is final. If no written appeal for rating review is
submitted within stipulated time, the rating is considered accepted by the entity’s
management.

Notification

Once the rating has been finalized, it is formally notified to the entity / issuer. The
rating notification is usually accompanied by a final set of rating report and press
release.
Public Dissemination

In an initial rating assignment, the entity's management has the prerogative to

make this rating public or keep it confidential. The management is expected to
take this decision within five days of notification. In case, the entity decides to go
for public dissemination. PACRA does so through its website and other electronic
media. It provides all the benefits of a publicly available independent rating
opinion of the entity. In case the rating is not made public, any selective
disclosure would not be allowed.

Once an initial rating of an entity is done and publicly disseminated, thereafter, as

long as the rating mandate with PACRA remains outstanding, PACRA is duty-
bound to inform the public of any change in the rating opinion and reserves the
right to take such action without prior notice if so warranted by circumstances.
PACRA attempts to achieve public dissemination of any updating opinion within
two days of its notification.

In case of public rating, PACRA, in addition to respective press release,

disseminates the summary report through its website. However, the detailed
report is made available against a nominal fee.

Turnaround Time

Through experience, we see a timeline spanning six-to-eight weeks to complete a

rating assignment. However, the cooperation of the entity's management with
PACRA in terms of expediting the response to our questionnaire and other
requests for information (via timely and quality information), whenever deemed
necessary and sought during the course of the rating process, aids greatly in
facilitating the completion of the rating process within the planned duration.

Surveillance

Ratings, once notified, remain under surveillance at all times. It is an on-going and
a continuous process in line with best practices. Under the mandate, ratings are
kept under continuing surveillance from the date of notification.
Relationship Termination

Instrument rating, in normal circumstances, is withdrawn only when the rated

instrument is redeemed. However, in extreme scenario of non availability of
requisite information PACRA may withdraw instrument rating. The entity rating is
withdrawn either on the client’s decision to withdraw or in extreme cases owing
to reluctance by the client to provide the required information. PACRA may
suspend rating where circumstances prevent formation of rating opinion. In such
cases PACRA makes all efforts to revive the rating at the earliest. The fact that the
rating is currently withdrawn/suspended, along with the reason/s, is disseminated
publicly.