MEANING

A CREDIT RATING EVALUATES THE CREDIT WORTHINESS OF A DEBTOR, ESPECIALLY A BUSINESS (COMPANY) OR A GOVERNMENT. IT IS AN EVALUATION MADE BY A CREDIT RATING AGENCY OF THE DEBTOR'S ABILITY TO PAY BACK THE DEBT AND THE LIKELIHOOD OF DEFAULT.

THE OBJECTIVES OF CREDIT RATING ARE: TO PROVIDE SUPERIOR INFORMATION TO THE INVESTORS AT A LOW COST;

PROVIDE A SOUND BASIS FOR PROPER RISK RETURN STRUCTURE;

SUBJECT BORROWERS TO A HEALTHY DISCIPLINE; AND

ASSIST IN THE FRAMING OF PUBLIC POLICY GUIDELINES ON INSTITUTIONAL INVESTMENT.

CREDIT RATING PROCESS• RECEIPT OF THE REQUEST

• ASSIGNMENT TO ANALYTICAL TEAM

• OBTAINING INFORMATION

• PLANT VISITS AND MEETING WITH MANAGEMENT

• PRESENTATION OF FINDINGS

• RATING COMMITTEE MEETING

• COMMUNICATION OF DECISION

• DISSEMINATION TO THE PUBLIC

• MONITORING FOR POSSIBLE CHANGE

RATING METHODOLOGY

THE MAJOR INDIAN CREDIT RATING AGENCIES USE MORE OR LESS THE SAME THE RATING METHODOLOGY IT INVOLVES AN ANALYSIS OF ALL THE FACTORS AFFECTING THE CREDITWORTHINESS OF AN ISSUER COMPANY E.G. BUSINESS, FINANCIAL AND INDUSTRY CHARACTERISTICS, OPERATIONAL EFFICIENCY, MANAGEMENT QUALITY, COMPETITIVE POSITION OF THE ISSUER AND COMMITMENT TO NEW PROJECTS ETC

A DETAILED ANALYSIS OF THE PAST FINANCIAL STATEMENTS IS MADE TO ASSESS THE PERFORMANCE AND TO ESTIMATE THE FUTURE EARNINGS.

THE COMPANY’S ABILITY TO SERVICE THE DEBT OBLIGATIONS OVER THE TENURE OF THE INSTRUMENT BEING RATED IS ALSO EVALUATED

CREDIT RATING - ACRONYM

C - CREDIT WORTHINESS

R - RISK ANALYSIS

E - EQUITY ASSESSMENT

D - DIVIDEND AND EARNING PROSPECTS

I - INTENTIONS OF PROMOTERS

T - TRANSPARENCY OF ORGANIZATION

R - RELATIVE STRENGTHA - AUTHENTIC INFORMATIONT - TECHNICAL ANALYSISI - INDUSTRIAL CLIMATE OF PROFILEN - NETWORK ASSESSMENTG- GUIDANCE TO INVESTORS,

COMPANIES, AND THE GOVERNMENT

THE MAIN FACTORS THAT ARE ANALYZED INTO DETAIL BY THE CREDIT RATING AGENCIES.

1. BUSINESS RISK ANALYSISa. INDUSTRY RISK

b. MARKET POSITION OF THE COMPANY

c. OPERATING EFFICIENCY

2. FINANCIAL ANALYSISa. ACCOUNTING QUALITY

b. EARNINGS POTENTIAL/PROFITABILITY

c. CASH FLOWS ANALYSIS

d. FINANCIAL FLEXIBILITY

3. MANAGEMENT EVALUATION

4. GEOGRAPHICAL ANALYSIS

5. REGULATORY AND COMPETITIVE ENVIRONMENT

6. FUNDAMENTAL ANALYSIS

TYPES OF CREDIT RATINGFINANCIAL INSTRUMENT RATING

• BOND RATING

• EQUITY RATING

• SHORT-TERM INSTRUMENTS RATING

SOVEREIGN RATING

• CUSTOMER RATING

• BORROWER RATING

SOVEREIGN CREDIT RATING • A SOVEREIGN CREDIT RATING IS THE CREDIT RATING OF A SOVEREIGN ENTITY, I.E., A NATIONAL GOVERNMENT.

THE SOVEREIGN CREDIT RATING INDICATES THE RISK LEVEL OF THE INVESTING ENVIRONMENT OF A COUNTRY AND IS USED BY INVESTORS LOOKING TO INVEST ABROAD. IT TAKES POLITICAL RISK INTO ACCOUNT.

SHORT TERM RATING • A SHORT-TERM RATING IS A PROBABILITY FACTOR OF AN INDIVIDUAL GOING INTO DEFAULT WITHIN A YEAR.

THIS IS IN CONTRAST TO LONG-TERM RATING WHICH IS EVALUATED OVER A LONG TIMEFRAME. IN THE PAST INSTITUTIONAL INVESTORS PREFERRED TO CONSIDER LONG-TERM RATINGS. NOWADAYS, SHORT-TERM RATINGS ARE COMMONLY USED.

• CORPORATE CREDIT RATINGS • The credit rating of a corporation is a financial indicator to potential investors of debt securities such as bonds.

Credit rating is usually of a financial instrument such as a bond, rather than the whole corporation and have letter designations such as A, B, C. The Standard & Poor's rating scale is as follows, from excellent to poor: AAA, AA+, AA, AA-, A+, A, A-, BBB+, BBB, BBB-, BB+, BB, BB-, B+, B, B-, CCC+, CCC, CCC-, CC, C, D. Anything lower than a BBB- rating is considered a speculative or junk bond.

• CRISIL has 4 main grades and a host of sub-grades. In decreasing order of quality, these are AAA, AA+, AA, AA-, A+, A, A-, BBB-, BBB, BBB+, BB+, BB, BB-, B+, B, B-, C and D. ICRA, CARE and Duff and Phelps have similar grading systems. The following table contains a key to the codes used by CRISIL and ICRA

TYPES OF RATINGS

TOP CREDIT RATING AGENCIES TOP AGENCIES :

• Dun & Bradstreet• Moody's• Standard & Poor's• Fitch Ratings

OTHER AGENCIES :• A. M. Best (U.S.),• Baycorp Advantage (Australia)• Egan-Jones Rating Company (U.S.)• Global Credit Ratings Co. (South Africa)• Levin and Goldstein(Zambia)• Agusto& Co(Nigeria)• Japan Credit Rating Agency, Ltd. (Japan). • Rapid Ratings International (U.S.)• Credit Rating Information and Services Limited(Bangladesh

CREDIT RATING AGENCIES OF INDIA ONICRA Credit Rating Agency of India Ltd.

Credit Rating Information Services of India Limited (CRISIL)

Investment Information and Credit Rating Agency of India (ICRA)

Credit Analysis & Research Limited (CARE)

Duff & Phelps Credit Rating India Private Ltd. (DCR India)

CRISIL - The oldest rating agency was originally promoted by ICICI. Standard & Poor, the global leader in ratings, has recently taken a small 10% stake in CRISIL.ICRA - Promoted by IFCI. Moody’s, the other global rating major, has recently taken a small 11% stake in ICRA.CARE - Promoted by IDBI.Duff and Phelps - Co-promoted by Duff and Phelps, the world’s 4th largest rating agency.CRISIL is believed to have about 42% market share followed by ICRA with about 36%, CARE with 18% and Duff and Phelps with 4%.

Moody’s S&P Fitch Meaning

Aaa AAA AAA (Highest quality; EXTREMELY STRONG capacity to meet financial obligations.)

Aa1 AA+ AA+ (High quality; VERY STRONG capacity

Aa2 AA AA to meet financial obligations. It differs from

Aa3 AA- AA- the top-line rating only in small degree.)

A1 A+ A+ (High quality; STRONG capacity to meet financial obligations

A2 A A but is somewhat more susceptible to the adverse effects

WHAT EXACTLY DO THE CREDIT RATINGS MEAN?

The table below summaries the meanings of the comparative ratings of the three major credit rating companies.

A3 A- A- of changes in circumstances and economic conditions.)

Baa1 BBB+ BBB+ (Medium grade; ADEQUATE capacity to meet financial obligations

Baa2 BBB BBB but adverse conditions or changing circumstances are more

Baa3 BBB- BBB- likely to lead to a weakened capacity to meet financial commitments.)

Ba1 BB+ BB+ (Lower medium grade; LESS VULNERABLE but faces major

Ba2 BB BB ongoing uncertainties and exposure to adverse conditions which

Ba3 BB- BB- could lead to inadequate capacity to meet financial commitments.)

B1 B+ B+ (Low grade; MORE VULNERABLE and adverse business,

B2 B B financial, or economic conditions will likely impair its capacity

B3 B- B- or willingness to meet financial commitments.)

Caa CCC CCC (Poor quality; CURRENTLY VULNERABLE and dependent upon favourable conditions to meet commitments.)

Ca CC CC (Poor quality; CURRENTLY HIGHLY-VULNERABLE.)

  C C (CURRENTLY HIGHLY-VULNERABLE to non-payment.)

C D D (FAILED to pay one or more of its financial obligations.)

BENEFITS OF CREDIT RATINGTO THE INVESTORS• HELPS IN INVESTMENT DECISION

• BENEFITS OF RATING REVIEWS

• ASSURANCE OF SAFETY

• EASY UNDERSTANDABILITY OF INVESTMENT PROPOSAL

• CHOICE OF INSTRUMENTS 

• SAVES INVESTOR'S TIME AND EFFORT

TO THE COMPANY

• IMPROVES CORPORATE IMAGE

• LOWERS COST OF BORROWING 

• WIDER AUDIENCE FOR BORROWING

• GOOD FOR NON-POPULAR COMPANIES

• ACT AS A MARKETING TOOL

• HELPS IN GROWTH AND EXPANSION

DEMERITS OF CREDIT RATING• POSSIBILITY OF BIAS EXIST

• IMPROPER DISCLOSURE MAY HAPPEN

• IMPACT OF CHANGING ENVIRONMENT

• PROBLEMS FOR NEW COMPANIES

• DOWNGRADING BY RATING AGENCY 

• DIFFERENCE IN RATING

CREDIT RATINGS

CREDIT RATINGS

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