credt rating
Post on 19-Oct-2014
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An assessment of the credit worthiness of individuals and corporations/ govt.
It is based upon the history of borrowing and repayment,
as well as the availability of assets and extent of liabilities
Evaluation of credit worthiness of an issuer of specific types of debt issued by a business
It is an evaluation made by credit rating agency of the debt issuers likelihood of default
Credit ratings are determined by credit ratings agencies.
Not a mathematical calculation
indicates a credit rating agency's opinion - high risk of defaulting, based on the agency's analysis of the company’s history and analysis
It Indicates that in the past, other individuals with similar credit reports defaulted on loans at a high rate.
The credit score does not take into account future prospects or changed circumstances
ability to pay a loan interest amount of credit used saving patterns spending patterns Debt
In different parts of the world different personal credit score systems exist.
Industry risk Market position Ownership and support Earning & performance Cash flows Capital & debt structure Corporate governance
“Ratings are designed exclusively for the purpose of grading bonds according to their investment qualities”
- Moody’s “Ratings are opinions on the relative
capability of timely servicing of corporate debt & obligations. These are not recommendations to buy or sell…. Neither the accuracy nor the completeness of the information is guaranteed” - ICRA
A credit rating represents the rating agency's opinion on the likelihood of a rated debt obligation being repaid in full and on time.
A simple alphanumeric symbol is normally used to convey a credit rating.
It is focused on the risk of non-payment of debt instruments
1. An assessment of the capacity of the issuer of debt security – to repay with interest as per the terms of debt
2. Collection of qualitative & quantitative data has to be assessed for rating
3. Rating given is based on an objective judgement of a team of experts
4. Ratings are given in code numbers5. Easiest way of understanding without
going into the complicated financial reports
6. It is only a guidance not a recommendation to the investors (for the particular debt instrument)
Investors always look for (1) yield to maturity (2) risk tolerance to
investor (3)credit risk of security7. Credit rating focuses only on one aspect (3)
so it is only a current opinion of capacity of repayment
8. In India, rating is done on a security and not on a company as a whole
9. It is not one time assessment, but a continuous appraisal
10.It does not create fiduciary relationship between rating agencies and the users as there is no legal basis for such relationships
Where one person places complete confidence in another in regard to a particular transaction or one's general affairs or business.
The relationship is not necessarily formally or legally established as in a declaration of trust, but can be one of moral or personal responsibility,
due to the superior knowledge and training of the fiduciary as compared to the one whose affairs the fiduciary is handling.
S & P – standard & poor company based in US
CNX - CRISIL NSE index India Index Services & Products
Ltd.,(IISL) - India's first specialized company focused upon the index as a core product.
IISL has a marketing and licensing agreement with Standard & Poor's.
NIFTY – NSE fifty (index - weighted by market capitalisation)
1. CRISIL Limited, Bombay 2. Fitch Ratings India Private Ltd.
Bombay 3. ICRA Limited. Delhi (alliance Moody )4. Credit Analysis & Research Ltd. (CARE)
Bombay 5. Brickwork Ratings India Private
Limited. Bangalore6. SME Rating Agency of India Ltd.
(SMERA) Bombay7. ONICRA (ONIDA credit rating)8. DUFF PHELPS credit Rating Agency
Ltd.,
CRISIL500 index along with NSE Alliance with S&P (S&P acquired 9.68% in CRISIL
1997) So far, CRISIL has rated 30,000 debt
instruments, covering the entire debt market.
The debt obligations rated by CRISIL include:
1. Non-convertible debentures/ bonds/ preference shares
2. Commercial papers/certificates of deposits/short-term debt
3. Fixed deposits4. Loans5. Structured debt
Industrial companiesBanksNon-banking financial companies (NBFCs)Infrastructure entitiesMicrofinance institutionsInsurance companiesMutual fundsState governmentsUrban local bodies
All the industry majors - 23 of the BSE Sensex constituent companies and
39 of the NSE Nifty constituent companies,
accounting for 80% of the equity market capitalisation
Rating process about 2- 3 weeks
A credit rating agency provides an opinion relating to future debt repayments by borrowers.
A credit bureau provides information on past debt repayments by borrowers
CRISIL uses simple alphanumeric symbols to convey credit ratings on three basic scales:
1. long-term scale2. short-term scale3. fixed deposit scale
Symbol(Rating
category).
Description (with regard to the likelihood of meeting the debt obligations on time)
AAA Highest Safety (strongly supported by highest repayment)
AA High Safety (strongly supported by timely repayment)
A Adequate Safety (satisfactory repayment)
BBB Moderate SafetyBB Inadequate SafetyB High RiskC Substantial RiskD Default
1. Superior informationa. Provides unbiased data (independent firms)a. Accessibility to more information which is not privy to publica. Grater ability to assess (professional
2. Low cost information (simple, easy & readily understandable format)
3. Basis for risk return trade offs
4. Healthy influence on corporate borrowers (desire to have clear image)
5. Formulation of public policy guidelines on institutional investment (with different kinds of securities /portfolios can be developed)
Concept originated in USA – 1860 Henry Vannum Poor started publishing
financial statistics of railroad companies 1909 Moody’s Investors Agencies
started rating railroad with more thrust System of ratings got institutionalised
following great depression 1933 US controller of currency enacted a
rule that banks could purchase securities rated onlyBBB/Baa or above
1970 Penn Central, then largest railroad company in the world went bankrupt with $100 million in commercial paper
Which forced investors to ask for rating for commercial paper
Today 100% commercial paper and 99% corporate bond volume are rated in USA
Credit Rating Information Services of India Ltd was set up in 1987 (CRISIL)
Investment Information and Credit Rating Agency of India -1991 (ICRA)
Credit Analysis and Research Ltd – 1993 (CARE)
All 3 agencies wer approved by RBI
The first rating institution in India was DUFFs and Phelps Credit Rating India Pvt Ltd – formed in 1995
After another merger with DCR it is known as FITCH INDIA LTD
Sources of additional information Increases investor base Encourages financial discipline Foreign collaboration made easy Rating can be used as a marketing tool to
create a better image among the lenders, creditors,….
To know the quantum of degault risk Gives Small companies better confidence to
get credit Big companies will get credit at a lower rate
Absence of wide spread network limits the skills of rating
Unskilled or overloaded staff cannot do justice to the job
Rigid Mathematical formulas cannot be used
Since they work for a fee rating may be manipulated
It is not permanent in nature
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