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 Protected Business

Interest Rates Environment

Market Driven Liberalisation

Interest Rate Structure

Assessment of Risk Critical

 Benefits of Ratings
Regulatory Authorities
 Investor protection
 Market discipline
Issuers
 Accessibility to wider investor base
 Encourages financial discipline
 Lesser known companies can raise funds
more optimally
 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 Market
Efficiency Position

Financial Risk Business Risk

Management
Evaluation
 Risk Assessment Model

Existing Risk
Business 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