CREDIT RATINGProf.B.R.Mishra

Credit Rating-MeaningCredit rating is an assessment of the capacity of an issuer of debt security, by an independent agency ,to pay interest and repay the principal as per the term of issue of debt.A rating agency collects the qualitative as well as quantitative data from a company which has to be rated and assesses the relative strength and capacity of company to honor its obligations contained in the debt instrument through out the duration of the instrument.The rating given is based on an objective judgment of a team of experts from rating agency.

----------MeaningThe ratings are expressed in code number which can be easily comprehended even by lay investors.The ratings are the quickest way of understanding a companys financial standing without going in to the complicated financial reports.Credit rating is only a guidance to the investor and not a recommendation to a particular debt instrument.. (The investment decision of debt security are based up on YTM, risk tolerance, Credit risk)

----------MeaningCredit rating, as it exist in India, is done for a specific debt security and not for a company as a whole.No rating agency tells that it is an indicator of the financial status of the company.All that a rating agency claims is that the rating symbols indicates the capacity of the company to honor the terms of contract of a debt instrument.

----------MeaningA debt rating is not a one time evaluation of credit risk, which can be regarded as valid for the entire life of the security. It is an ongoing appraisal.Changes in dynamic world of business may imply a change in risk characteristic of the security.Hence debt rating agencies monitor the business and financial condition of the issuer to determine whether modification in rating is warranted.

----------MeaningA credit rating does not create a fiduciary relationship between the rating agency and the user of rating since there is no legal basis for such relationship.

Functions of Credit RatingsSuperior information on credit risk (unbiased opinion, professional evaluation, access to information which is not publicly available)Low Cost Information (Rating firm gathers, analyses, interprets and summarizes complex information in simple and readily understood format for wide public consumption)

------Functions of Credit RatingsBasis for proper risk return trade off (If debt securities are professionally rated and ratings enjoy widespread acceptance proper risk return trade off is established in capital market.)Healthy discipline on corporate borrowers (Public exposure has healthy influence over the management of the issuer)Formulation of Public Policy Guidelines on Institutional Investment.( can be done with greater confidence if securities are rated professionally)

Benefits of Rating to investorsLow cost informationQuick investment decisionIndependent investment decision(investors do not depend up on advice of financial intermediaries)Investors Protection(The credible and objective rating agency can provide increased disclosures, better accounting standard and improved investors protection)

Benefits of Rating to Rated CompaniesSource of additional certificateIncrease the Investor populationForewarns risks (to companies which get lower rating)Encourages financial disciplineMerchant Bankers job made easyForeign collaborations made easy(Credit standing can be known easily by rating)

---Benefits to Rated CompaniesBenefits the industry as a whole(small & unknown companies use rating to instill confidence in investors, higher rated companies can raise larger amount of money)Lower cost of Borrowing(A company with highly rated instrument has the opportunity to reduce the cost of borrowing by quoting lower interest rate)Rating as a marketing tool to create better image in dealing with customers, lenders, creditors.

Credit rating Agencies in IndiaCRISIL-Credit Rating Information Service LtdICRA-Investment information And Credit Rating Agency of India.CARE-Credit Analysis and ResearchFITCH Rating IndiaONICRA- Onida Individual Credit Rating Agency LtdDCR India-Duff Phelps Credit Rating Pvt LtdSMERA-Small & Medium Enterprise Rating Agency

International Credit Rating AgencyStandard & Poors Corporation-USAMoodys Investors service-USAFitch Investors Service-USADuff & Phelps Credit Rating-USAThomson Bank Watch-USAIBCA Ltd-United KingdomCanadian Bond Rating Service-CanadaJapanese Credit Rating Agency-JapanJapanese Bond Rating Institute-Japan

Credit Rating-Symbols-CRISILDEBENTURE RATING SYMBOLSAAA-Highest SafetyAA-High Safety (+/=/-)A-Adequate Safety (+/=/-)BBB-Moderately Safety(+/=/-)BB-Inadequate safety(+/=/-)B-High risk(+/=/-)C-Substantial Risk(+/=/-)D-DefaultPreference share rating symbols are identical to debenture rating symbols except the letterspfused.

Credit Rating-Symbols-CRISILFIXED DEPOSIT RATING SYMBOLSFAAA-Highest SafetyFAA-High safety(+/=/-)FA-Adequate safety(+/=/-)FB-Inadequate safety(+/=/-)FC-High Risk(+/=/-)FD-Default

Credit Rating-Symbols-CRISILSHORT-TERM INSTRUMENTSP-1-Highest safety(+/=/-)P-2-High safety(+/=/-)P-3-Adequate safety(+/=/-)P-4-High riskP-5-Default

Credit Rating-Symbols-ICRALONG-TERM-DEBT(Debentures ,Bond,Pref share)LAAA-Highest safetyLAA-High safety(+/=/-)LA-Adequate safety (+/=/-)LBBB-Moderately safety(+/=/-)LBB-Inadequate safety (+/=/-)LB-Risk prone(+/=/-)LC-Substantial Risk(+/=/-)LD-Default extremely speculative

Credit Rating-Symbols-ICRAMEDIUM-TERM-DEBT-INCLUDING FDsMAAA-Highest safetyMAA-High safety-(+/=/-)MA-Adequate safety-(+/=/-)MB-Moderate safety-(+/=/-)MC-Risk prone-(+/=/-)MD-Default

Credit Rating-Symbols-ICRASHORT-TERM-DEBT-(Including CPs)A1+/A1-Highest safetyA2+/A2-High safetyA3+/A3-Adequate safetyA4+/A4-Risk ProneA5-Default

Credit Rating ProcessContract between rater and clientSending Expert Team to Clients placeData collection (Quantitative, Qualitative)Data analysisDiscussionCredit report PreparationSubmission to Grading CommitteeGrade Communication to client

Rating FrameworkCredit rating aims at providing an opinion on the relative credit risk (default risk) associated with an instrument.This calls for estimating the cash generation capacity of the issuer, through primary cash flows operation.While doing so, an assessment is also made of the secondary cash flows available through the sale of marketable securities. These can be liquidated, if required to supplement the primary cash flow.Secondary cash flows have a greater bearing in the short-term ratings, while the long term ratings are generally based on adequacy of primary cash flows.

Major Factors determining Rating BUSINESS FACTORSNature of Industry (Low industry risk, high industry risk)Market Position (Product positioning, perceived quality, proximity to market, distribution network)Efficiency of operation (Operational efficiency, Relative efficiency)

---Major Factors determining RatingBUSINESS FACTORS:Project Risk (Scale and nature of new projects)Protective Factors (Track record of project implementation team, experience & quality of project implementation team, track record of technology supplier etc)Quality of management

---Major Factors determining RatingFINANCIAL FACTORSFinancing Policies (Level of leveraging, currency risk, asset liability matching)Flexibility of financial structure (Liquid investments, unutilized lines of credit, financial strength of Group companies, market reputation, relationship with financial institution.)Past track record( (Review of previous financial statements to determine the future cash flow adequacy)

---Major Factors determining RatingFINANCIAL FACTORS:Quality of accounting policy (accounting policies, notes to accounts,finacial evaluation & inter firm comparisons)Financial performance indicators (analyzed for 5 years & comparison with peers- Profitability,Gearing,Coverage ratios,liquidity,cash flows)

IPO Grading/Equity GradingThe rating of equity issues of companies is known as equity grading.It is aimed at contributing towards enhancement of the capital mobilizing process by providing authentic information, particularly when the dominant fund raising option is through equity.

ICRAs IPO GradeICRAs Grading of Initial Public Offerings (IPOs) is a service aimed at facilitating assessment of equity issues offered to the public. The Grade assigned to any individual IPO is a symbolic representation of ICRAs assessment of the fundamentals of the issuer concerned relative to other listed securities.IPO Grades are assigned on a five-point point scale, where IPO Grade 5 indicates the highest grading and IPO Grade 1 indicates the lowest grading, i.e a higher score indicates stronger fundamentals. An IPO Grade is not an opinion on the price of the issue, pre- or post-listing.

Why IPO Grading?An investor in a hitherto unlisted company may either have limited access to information on it, or may find it challenging to appropriately assess, on the basis of the information available, its business prospects and risks. An IPO Grade provides an additional input to investors, in arriving at an investment decision based on independent and objective analysis.

------Why IPO Grading?In recent times, with the stock market participation of new and foreign investors increasing, there is need for greater value-added information on companies tapping the capital market and their intrinsic quality . In this context, IPO Grades, being simple, objective indicators of the relative fundamental positions of the issuers concerned, could help in both widening and deepening the market.

IPO Grading-Other DimensionAs already stated, IPO Grading is NOT a recommendation to buy sell or hold the securities Graded.Similarly, it is NOT a comment on the valuation or pricing of the IPO Graded nor is it an indication of the likely listing price of the securities Graded.The IPO grading is a comment on the fundamentals of the company being graded. All other things remaining equal, an entity with stronger fundamentals and better growth prospects should be able to generate higher shareholder returns related indicators in the long run

---IPO Grading-Other DimensionThe assigned grade would be a one time assessment done at the time of the IPO and meant to aid investors who are interested in investing in the IPO. While the grading itself is valid for a period of 6 months from the date of issuance, the grading letter will have a validity of 2 months from the date of issue and would need to be revalidated subsequently- there would not be any additional charges for the revalidation. ICRA however reserves the right to change the grading after the same has been assigned should the circumstances so warrant.

ICRAs IPO Grading SymbolsIt is intended that IPO fundamentals would be graded on a five point scale from grade 5 (indicating strong fundamentals) to grade 1 (indicating poor fundamentals). The grade would read as: Rating Agency name " IPO Grade 1 viz ICRA IPO Grade 1. The full scale is as follows:ICRA IPO Grade 5: Strong fundamentalsICRA IPO Grade 4: Above-average fundamentalsICRA IPO Grade 3: Average fundamentalsICRA IPO Grade 2: Below-average fundamentalsICRA IPO Grade 1: Poor fundamentals

Credit Rating-DrawbacksGuidance ,not recommendationBased on assumption (Rating is done on the basis of information provided by the issuer)Competitive Rating (Chance of surrogated rating-due to completion between rating firms)

THANK YOU

**