Credit Rating
Content
Credit Rating (CR) as financial service, has come a long way, since John Moody first introduced the concept 1909. In India it started in 1988. Credit rating is has been used to rate debt instrument viz. Fixed Deposit, Commercial Paper Credit rating is a technique of credit risk valuation for the corporate debt instruments reflecting borrower’s expected capability and inclination to pay interest and principal in a timely manner. • In evaluation both qualitative and quantitative criteria are applied. It involves past performance as an assessment of its future prospects and entails judgment of the company’s competitive position, operating efficiency, management evaluation, accounting quality, legal position, earnings, cash flow adequacy, financial flexibility, the quality of the product etc.
The main objective is to provide superior and low cost information to investors for taking a decision regarding risk-return trade off, but it also helps to market participants in the following ways; • • • • • Improves a healthy discipline on borrowers, Lends greater representations, credence to financial and other
Facilitates formulation of public guidelines on institutional investment, Helps merchant bankers, brokers, regulatory authorities, etc., in discharging their functions related to debt issues, Encourages greater information disclosure, better accounting standards, and improved financial information (helps in investors protection), May reduce interest costs for highly rated companies, Acts as a marketing tool
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CREDIT RATINGS: An assessment of the credit worthiness of individuals and corporations. It is based upon the history of borrowing and repayment, as well as the availability of assets and extent of liabilities • Rating is a symbolic indicator of the current opinion on the relative capability of timely servicing of the debts and obligations. Lower rating does not mean lesser funds available rather it suggests higher risk level. Credit rating essentially establishes a link between risk and return. A rating is valid for the lifetime of the debt instrument subject to continuous surveillance and depending upon the performance of the issuer, it may be retained, placed under watch, upgraded or downgraded.
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FUNCTIONS OF CREDIT RATING AGENCIES • • • • • Superior information Low cost information Basis for proper risk, return & Trade off Healthy discipline on corporate borrowers Formulation of public policy guidelines on Institutional investment
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BENEFITS: • • • • • • • • • • • • • • • • 1. Benefits to Investors Safeguard against bankruptcy Recognition of risk Credibility of issuer Easy understandability of investment proposal Saving of resource Independent of investment decision Choice of investments Benefits of rating surveillance 1. Benefits of Rating to Company Lower cost of borrowing Wider audience for borrowing Rating as marketing tool Reduction of cost in public issues Motivation for growth Unknown issuer recognition Benefits to brokers and financial intermediaries 1. For Brokers and financial intermediaries Saves time, money, energy, and manpower in convincing their clients about investments.
NEED FOR CREDIT RATING – It is necessary in view of the growing number of cases of defaults in payment of interest and repayment of principal sum borrowed by way of fixed deposits, issue of debentures or preference shares or commercial papers. Maintenance of investors’ confidence, since defaults shatter the confidence of investors in corporate instruments. Protect the interest of investors who can not into merits of the debt instruments of a company. Motivate savers to invest in industry and trade.
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OBJECTIVES OF CREDIT RATING
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Less effort in studying company’s credit position to convince their clients. Easy to select profitable investment security Helps to improve business
Credit Rating Information Services Limited (CRISIL) • The first credit agency floated on January 1, 1988, jointly started by ICICI and UTI with an equity capital of Rs. 4 crores, as public Ltd company. CRISIL is India's leading rating agency, and is the fourth largest in the world. With over a 60% share of the Indian Ratings market, CRISIL Ratings is the agency of choice for issuers and investors. CRISIL Ratings is a full service rating agency that offers a comprehensive range of rating services. CRISIL Ratings provides the most reliable opinions on risk by combining its understanding of risk and the science of building risk frameworks, with a contextual understanding of business.
Advantages: • • Rating system works in the interest of the issuing company as well as the investors. Rating directly influence the cost and availability of funds to the issuers (upward rating = funds at lower cost). Ratings help channel funds according to the inherent worth of the projects rather than according to mere names.
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Disadvantages of CR • • • • • • • • Biased rating and misrepresentations Static study Concealment of material information Rating is no guarantee for soundness of company Human bias Reflection of temporary adverse condition Down grade Difference in rating of two agencies
OBJECTIVE OF CRISIL – The principal objective of CRISIL is to rate the debt obligations of Indian companies. Its rating guides the investors about the risk of timely payment of interest and principal on a particular debt instrument.
Types of Rating • • • • • • • • • Bond / Debenture Rating Equity Rating Preference share rating Commercial Paper rating Fixed deposit rating Borrower rating – Rating of borrower Individuals Rating – Individuals credit rating Structured Obligation – Asset backed security Sovereign Rating – Rating of a country
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Credit Rating Committee - CRISIL's rating process and rating committee are designed to ensure that all assigned ratings are based on the highest standards of independence and analytical rigor. The rating committee comprises members who have the professional competence to meaningfully assess the credit analysis that underlies the rating, and have no interest in the entity being rated. A team of analysts carries out the credit analysis.
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EMERGING AREAS OF CREDIT RATING • • • • • Equity Research Banking Sector Insurance Sector New Instruments viz. Floating Rate Notes (FRN) Intermediary in Financial Sector Indian Corporate raising funds overseas
RATING METHODOLOGY OF CRISIL • • • Business Analysis – Industry risk, market position and operating efficiency of the company, legal position. Financial Analysis – Accounting quality, earnings position, adequacy of cash flows, and financial flexibility. Management Evaluation – Goals, philosophy, strategies, ability to overcome adverse situations, managerial talents and succession plans, commitment, consistency and credibility. Regulatory and Competitive Environment Fundamental Analysis – Liquidity management, assets quality, profitability and financial position, interest and tax sensitivity.
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CREDIT RATING AGENCIES IN INDIA • • • • • Credit Rating Information Services Limited (CRISIL) Investment Information and Credit Rating Agency of India (ICRA) Credit Analysis and research (CARE) Duff Phelps Credit Rating Pvt. Ltd. (DCR India) and Onicra Credit Rating Agency of India Limited: Is an established player in the individual credit assessment and scoring services space in the Indian market.
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Investment Information and Credit Rating Agency of India (ICRA)
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ICRA was set up by IFCI on 16th January 1991.
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ICRA Limited is an Associate of Moody's Investors Service and an independent and professional company. It is a public limited company with an authorized share capital of Rs.10 crores, Rs. 5 crores is paid up. ICRA’s major shareholders IFCI (26%), and the balance by UTI, LIC, GIC, PNB, Central Bank of India, Bank of Baroda, UCO Bank and banks (SBI)
Investment Information and Credit Rating Agency of India (ICRA)
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OBJECTIVES OF ICRA To access the credit instrument and award it a grade consonant to the risk associated with such instrument. • • • • To assist investors in making well informed investment decision To assist issuers in raising funds from a wider investors base To enable banks, investment bankers and brokers in placing debt with investors by providing them with a marketing tool To provide regulators with a market driven system to encourage the healthy growth of the capital markets in a disciplined manner without costing an additional burden on the Government for this purpose. STRATEGIES OF ICRA – Create awareness of the rating concept and benefits among issuers, investors, regulators, and financial institutions. • Win the credibility, confidence and trust of the constituents by demonstrating that its methodology is transparent and its ratings are independent and consistent. Aggressively focus on business development whitish would result in a significant increase in the volume of rating assignments and spur the Govt. into introducing an exclusively market-driven interest rate structure.
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Medium term including Fixed deposits Rating Symbols MAAA: Highest Safety MAA: High Safety MA : Adequate Safety MB : Inadequate Safety MC : Risk prone MD : Default Short-term including CPs A-1: Highest Safety A-2: High Safety A-3: Adequate Safety A-4: Risk prone A-5: Default
Long term Debentures, Bonds and Preference shares-Rating Symbols
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LAAA LAA LA LBBB LBB LB LC LD
: : : : : : : :
Highest Safety High Safety Adequate Safety Moderate Safety Inadequate Safety Risk prone Substantial Risk Default, Extremely speculative
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RATING METHODOLOGY OF ICRA The rating methodology comprises the study of industry as well as the company’s SWOT analysis. • • • • • • • • • • • • Marketing strategies, Competitive edge, Level of technological development, Operational efficiency, Competence and effectiveness of management, HRD policies and practices, Hedging of risks, Cash flow trends and potential, Liquidity, Financial flexibility, Asset quality and past record of servicing debts and obligations, and Government policies and status affecting the industry.
The main objective is to provide superior and low cost information to investors for taking a decision regarding risk-return trade off, but it also helps to market participants in the following ways; • • • • • Improves a healthy discipline on borrowers, Lends greater representations, credence to financial and other
Facilitates formulation of public guidelines on institutional investment, Helps merchant bankers, brokers, regulatory authorities, etc., in discharging their functions related to debt issues, Encourages greater information disclosure, better accounting standards, and improved financial information (helps in investors protection), May reduce interest costs for highly rated companies, Acts as a marketing tool
•
CREDIT RATINGS: An assessment of the credit worthiness of individuals and corporations. It is based upon the history of borrowing and repayment, as well as the availability of assets and extent of liabilities • Rating is a symbolic indicator of the current opinion on the relative capability of timely servicing of the debts and obligations. Lower rating does not mean lesser funds available rather it suggests higher risk level. Credit rating essentially establishes a link between risk and return. A rating is valid for the lifetime of the debt instrument subject to continuous surveillance and depending upon the performance of the issuer, it may be retained, placed under watch, upgraded or downgraded.
• •
FUNCTIONS OF CREDIT RATING AGENCIES • • • • • Superior information Low cost information Basis for proper risk, return & Trade off Healthy discipline on corporate borrowers Formulation of public policy guidelines on Institutional investment
• • •
BENEFITS: • • • • • • • • • • • • • • • • 1. Benefits to Investors Safeguard against bankruptcy Recognition of risk Credibility of issuer Easy understandability of investment proposal Saving of resource Independent of investment decision Choice of investments Benefits of rating surveillance 1. Benefits of Rating to Company Lower cost of borrowing Wider audience for borrowing Rating as marketing tool Reduction of cost in public issues Motivation for growth Unknown issuer recognition Benefits to brokers and financial intermediaries 1. For Brokers and financial intermediaries Saves time, money, energy, and manpower in convincing their clients about investments.
NEED FOR CREDIT RATING – It is necessary in view of the growing number of cases of defaults in payment of interest and repayment of principal sum borrowed by way of fixed deposits, issue of debentures or preference shares or commercial papers. Maintenance of investors’ confidence, since defaults shatter the confidence of investors in corporate instruments. Protect the interest of investors who can not into merits of the debt instruments of a company. Motivate savers to invest in industry and trade.
–
– –
OBJECTIVES OF CREDIT RATING
• • •
Less effort in studying company’s credit position to convince their clients. Easy to select profitable investment security Helps to improve business
Credit Rating Information Services Limited (CRISIL) • The first credit agency floated on January 1, 1988, jointly started by ICICI and UTI with an equity capital of Rs. 4 crores, as public Ltd company. CRISIL is India's leading rating agency, and is the fourth largest in the world. With over a 60% share of the Indian Ratings market, CRISIL Ratings is the agency of choice for issuers and investors. CRISIL Ratings is a full service rating agency that offers a comprehensive range of rating services. CRISIL Ratings provides the most reliable opinions on risk by combining its understanding of risk and the science of building risk frameworks, with a contextual understanding of business.
Advantages: • • Rating system works in the interest of the issuing company as well as the investors. Rating directly influence the cost and availability of funds to the issuers (upward rating = funds at lower cost). Ratings help channel funds according to the inherent worth of the projects rather than according to mere names.
• • •
•
Disadvantages of CR • • • • • • • • Biased rating and misrepresentations Static study Concealment of material information Rating is no guarantee for soundness of company Human bias Reflection of temporary adverse condition Down grade Difference in rating of two agencies
OBJECTIVE OF CRISIL – The principal objective of CRISIL is to rate the debt obligations of Indian companies. Its rating guides the investors about the risk of timely payment of interest and principal on a particular debt instrument.
Types of Rating • • • • • • • • • Bond / Debenture Rating Equity Rating Preference share rating Commercial Paper rating Fixed deposit rating Borrower rating – Rating of borrower Individuals Rating – Individuals credit rating Structured Obligation – Asset backed security Sovereign Rating – Rating of a country
•
Credit Rating Committee - CRISIL's rating process and rating committee are designed to ensure that all assigned ratings are based on the highest standards of independence and analytical rigor. The rating committee comprises members who have the professional competence to meaningfully assess the credit analysis that underlies the rating, and have no interest in the entity being rated. A team of analysts carries out the credit analysis.
•
EMERGING AREAS OF CREDIT RATING • • • • • Equity Research Banking Sector Insurance Sector New Instruments viz. Floating Rate Notes (FRN) Intermediary in Financial Sector Indian Corporate raising funds overseas
RATING METHODOLOGY OF CRISIL • • • Business Analysis – Industry risk, market position and operating efficiency of the company, legal position. Financial Analysis – Accounting quality, earnings position, adequacy of cash flows, and financial flexibility. Management Evaluation – Goals, philosophy, strategies, ability to overcome adverse situations, managerial talents and succession plans, commitment, consistency and credibility. Regulatory and Competitive Environment Fundamental Analysis – Liquidity management, assets quality, profitability and financial position, interest and tax sensitivity.
•
CREDIT RATING AGENCIES IN INDIA • • • • • Credit Rating Information Services Limited (CRISIL) Investment Information and Credit Rating Agency of India (ICRA) Credit Analysis and research (CARE) Duff Phelps Credit Rating Pvt. Ltd. (DCR India) and Onicra Credit Rating Agency of India Limited: Is an established player in the individual credit assessment and scoring services space in the Indian market.
• •
Investment Information and Credit Rating Agency of India (ICRA)
•
ICRA was set up by IFCI on 16th January 1991.
• • •
ICRA Limited is an Associate of Moody's Investors Service and an independent and professional company. It is a public limited company with an authorized share capital of Rs.10 crores, Rs. 5 crores is paid up. ICRA’s major shareholders IFCI (26%), and the balance by UTI, LIC, GIC, PNB, Central Bank of India, Bank of Baroda, UCO Bank and banks (SBI)
Investment Information and Credit Rating Agency of India (ICRA)
•
OBJECTIVES OF ICRA To access the credit instrument and award it a grade consonant to the risk associated with such instrument. • • • • To assist investors in making well informed investment decision To assist issuers in raising funds from a wider investors base To enable banks, investment bankers and brokers in placing debt with investors by providing them with a marketing tool To provide regulators with a market driven system to encourage the healthy growth of the capital markets in a disciplined manner without costing an additional burden on the Government for this purpose. STRATEGIES OF ICRA – Create awareness of the rating concept and benefits among issuers, investors, regulators, and financial institutions. • Win the credibility, confidence and trust of the constituents by demonstrating that its methodology is transparent and its ratings are independent and consistent. Aggressively focus on business development whitish would result in a significant increase in the volume of rating assignments and spur the Govt. into introducing an exclusively market-driven interest rate structure.
• • •
•
• • •
Medium term including Fixed deposits Rating Symbols MAAA: Highest Safety MAA: High Safety MA : Adequate Safety MB : Inadequate Safety MC : Risk prone MD : Default Short-term including CPs A-1: Highest Safety A-2: High Safety A-3: Adequate Safety A-4: Risk prone A-5: Default
Long term Debentures, Bonds and Preference shares-Rating Symbols
• • • • • • • •
LAAA LAA LA LBBB LBB LB LC LD
: : : : : : : :
Highest Safety High Safety Adequate Safety Moderate Safety Inadequate Safety Risk prone Substantial Risk Default, Extremely speculative
•
RATING METHODOLOGY OF ICRA The rating methodology comprises the study of industry as well as the company’s SWOT analysis. • • • • • • • • • • • • Marketing strategies, Competitive edge, Level of technological development, Operational efficiency, Competence and effectiveness of management, HRD policies and practices, Hedging of risks, Cash flow trends and potential, Liquidity, Financial flexibility, Asset quality and past record of servicing debts and obligations, and Government policies and status affecting the industry.
