Credit Rating Analysis

8/3/2019 Credit Rating Analysis

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Definition

• Rating is a tool that enables the investor to differentiate between debt

instruments on the basis of their underlying credit quality. It is specific to

a debt instrument and is intended as a grade, an analysis of the credit risk

associated with the particular instrument.

• It is based upon the relative capability and willingness of the issuer of the

instrument to service the debt obligations (both principal and interest)

as per the terms of the contract.

• Rating of a security examines three factors - probability of default, the

terms and character of the security and the degree of protection that can

be granted to investors if the security issuer faces liquidation.



Functions of Credit Rating

• Provides the investor with risk-return analysis.

•

Provides low cost and extensive information, esp. to lesser knowncompanies to access the money and capital markets.

• Gives the investor a wider choice of instruments.

• Provides intermediaries with a tool to improve efficiency in the funds

raising process.

• For the issuer, it lowers the cost of borrowing.

• Rating is also used as a marketing tool by the issuer.

• Greater credence to financial and other institutions.

• Reduction of cost in public issues.

• Assist the regulators in promoting transparency in the financial markets.



Credit Rating in India

• CRISIL

• ICRA

• CARE

• Fitch India.



Rating

Process

Borrower/Issuer Rating Agency

Request for a Rating Assign Analysts, conduct research

Document preparation Collection of Information

Rating Committee assigns Rating

Communication of Rating to Issuers

Plant visits and Management Meetings

Appeal

Surveillance/Annual Reviews

DisseminationofRating/Publication



Credit Analysis & Research Ltd.-

CARE

Qualitative Factors

• Capital Adequacy Ratio

•

Asset Quality

• Resources

• Liquidity

• Earnings Quality

Quantitative Factors

• Ownership

•

Management Quality

• Risk Management

• Accounting Quality

• Size and Market Presence



ICRA

Business Risk

• Operating Environment

• Product Mix and

Competitive Position• Franchise and Size,

competitive position

• Ownership Structure

• Management, Systems andStrategy, Governance

structure

Financial Risk

• Asset Quality

• Liquidity

• Profitability

• Capital Adequacy



Credit Rating and Information Services of

India Ltd - CRISIL

Trends believed

• Strengthening of credit

appraisal & Monitoring

system• Increasing reliance on

capital markets for meeting

resource requirements

•

Increased use of Securitisation

Specific Business characters

• Market Position

• Management

• Asset Quality

• Capital Adequacy

• Resource raising ebility

• Earnings

• Liquidity/Asset Liability

Management



Credit Analysis & Research Ltd.-

CARE

Qualitative Factors

• Managementdepthand

experience

• Strategicposition

• Competitiveadvantage

• Fundingstability

• Riskmanagementcapabilities

Quantitative Factors

• Historical performance

• Trend analysis

• Analysis of risk appetite

• Assessment of market, credit,

liquidity, counterparty and

reputation risks

• Reviews of capital and leverage



For Long TermCrisil Icra Care Fitch India Risk Level

AAA LAAA CARE AAA AAA (Ind) Highest Safety

AA

LAA+

CARE AA AA (Ind) High SafetyLAA

LAA-

A

LA+

CARE A A (Ind) Adequate SafetyLALA-

BBB

LBBB+CARE BBB BBB (Ind) Moderate Safety

LBBB

LBBB-CARE BB BB (Ind) Inadequate Safety

LBB+

BBLBB

CARE B B( ind) Risk Prone

LBB-

LB+

BLB

LB-

CLC+

CARE C C (Ind) Substantial risk LC

DLC-

CARE D D (Ind) DefaultLD



Medium TermCrisil Icra Care Fitch India Risk Level

FAAAMAAA

CARE AAA tAAA (Ind) Highest safety

MAA+

FAA

MAA

CARE AA tAA ( Ind) High SafetyMAA-

MA+

FA

MA

CARE A tA (Ind) Adequate SafetyMA-

MB+

FB

MB

CARE B tB (Ind) Inadequate SafetyMB-

MC+

FCMC

CARE C tC (Ind) Risk prone

MC-FD MD CARE D tD (Ind) Default



Short TermCrisil Icra Care Fitch India Risk Level

P1

A1+

PR1 F1 (Ind) Highest SafetyA1

A2+

P2A2

PR2 F2 (Ind) High Safety

A3+

P3A3

PR3 F3 (Ind) Adequate Safety

A4+

P4 A4 PR4 F4 (Ind) Risk Prone

P5 A5 PR5 F5 (Ind) Default



Documents

Credit Rating Analysis