IPO Grading Process

IPO Rating
Lecture Prepared By Dr. N S Bohra Assistant Professor Faculty of Management GEU

Importance of Credit Rating

Factors Affecting Assigned Ratings
The security issuer’s ability to service its debt. issuer’ The stability of the future cash flows and earning capacity of company. The interest coverage ratio i.e. how many number of times the issuer is able to meet its fixed interest obligations. Ratio of current assets to current liabilities (i.e. current ratio (CR)) is calculated to assess the liquidity position of the issuing firm.


finance companies. Moodys) Rating of Real Estate Builders and Developers Rating of States Rating of Banks Functions of a Credit Rating Agency Provides unbiased opinion. government etc. banks and financial institutions for raising short-term loans. shortFixed deposits raised for medium-term ranking as mediumunsecured borrowings Rating Other than Debt Instruments Country Rating (Morgan Stanlay. Provides quality and dependable information Provides information at low cost: Provide easy to understand information: Provide basis for investment: 2 . Commercial papers issued by manufacturing companies.Nature of Credit Rating Rating is based on information Rating by more than one agency Publication of ratings Rating is for instrument and not for the issuer company. Moodys) Stanlay. Right of appeal against assigned rating: Instruments of Rating Bonds/debentures issued by corporate.

3 . Dependable credibility of issuer. NonRating is no certificate of soundness. Wider choice of investments. Rating builds up image. Freedom of investment decisions. Disadvantages of Credit Rating Non-disclosure of significant information. Rating under unfavorable conditions.Advantages of Rating To Company Advantages of Rating For Investors Safety of investments. Difference in rating grades. Reduced cost of borrowing. Rating may be biased. Recognition of risk and returns. Reduced cost of public issues. Rating facilitates growth. Benefits of Rating to the Company Easy to raise resources.

profitability and financial position. Fundamental Analysis liquidity management. Management Evaluation Accounting quality Earnings potential/profitability Cash flows analysis Financial flexibility 2. interest and tax rates sensitivity of the company.Business Risk Analysis Industry risk Market position of the company Operating efficiency Legal position Size of business Rating Methodology 3. Business Risk Analysis Financial Analysis Management Evaluation Geographical Analysis Regulatory and Competitive Environment Fundamental Analysis Rating Methodology 1. Financial Analysis 4. Goals Plans Strategies Corporate Governance 4 .Rating Methodology The following are the main factors that are analyzed into detail by the credit rating agencies.

A+. grades AAA. BBB. A-. CRAs evaluate the impact of regulation/ deregulation on the issuer company.AA+. A. B. BB-.Rating Methodology 5. C and D. AA. BBB+. Geographical Analysis Geographical Size Location 6. AAABBB-. BBBBB+. BBB+. Grading System CRISIL has 4 main grades and a host of subsubgrades. AA-. Regulatory and Competitive Environment Regulatory framework of the financial system in which it works. BB. B- 5 . B-.

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