Credit Rating
• An opinion of CRA regarding a borrowing entity just like as Rank allotted to student. • Boring Definition
– “A rating is an opinion on the future ability and legal obligation of the issuer to make timely payment of principal and interest on a specific fixed income security. The rating measures the probability that the issuer will default on the security over its life, which depending on the instrument , may be a matter of the days to 30 years or more. In addition, long term rating incorporate an assessment of the expected monetary loss, should a default occur.”
- Moody
Types of Credit Rating
• Corporate Rating • Sovereign Rating
What are CRAs?
• A credit ratings agency is a company that assigns credit ratings to institutions that issue debt obligations (i.e. assets backed by receivables on loans, such as mortgagebacked securities). These institutions can be companies, cities, non-profit organizations, or national governments, and the securities they issue can be traded on a secondary market.
Origin of concept of CR
• This concept originated in US in 1909 • John Moody, Rated the US Rail Road Bond • Lack of symmetric information and high costs of collecting information increased the popularity of CRAs. • Chronically many such type of agencies raised • India was first among the developing world to set up a CRA – CRISIL in 1988
CRAs in India
• Credit rating information service ltd. (CRISIL) • Investment Information and credit rating Agency of India (ICRA) • Credit Analysis and Research (CARE) • Fitch Rating India Pvt. Ltd.
Rating Methodology
• • Economy Analysis
– Analysis of macro factors – Degree of operating risk, company might face
Business Analysis
– – – – Industry risk Market position Operating efficiency Legal position
Accounting quality Earning protection Financial flexibility Validation of projection
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Financial Analysis
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Management Evaluation
– Vision, Mission & Values – Personnel policies – Performance of group companies