credit rating heena

7/28/2019 Credit Rating Heena

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SUBMITTED BY:

HEENA PARKERIA(30)MAYANK GOYAL (12)


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A Credit Rating is an opinion of the rating agencyon the relative ability and willingness of the

issuer of a debt instrument to meet the debt

service obligations as and when they arise.

Rating companies also publish explanations for

their symbols used.

It tells a lender or investor the probability of

the subject being able to pay back a loan.


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According to Moodys-

Ratings are designed exclusively for the

purpose of grading bonds according to theirinvestments qualities.

According to CARE-

Credit ratings is essentially, the opinion of therating agency on the relative ability and

willingness of the issuer of a debt instrument

to meet the debt service obligation as and

when they arise.


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C - Credit WorthinessR - Risk Analysis

E - Equity Assessment

D - Dividend and Earning Prospects

I - Intentions of PromotersT - Transparency of Organization

R - Relative Strength

A - Authentic Information

T - Technical Analysis

I - Industrial Climate of Profile

N - Network Assessment

G - Guidance to Investors, Companies and theGovernment


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Rating is based on information

Many factors affect rating

Rating by more than one agency

Monitoring the already rated issues

Publication of ratings Right of appeal against assigned rating

Rating of rating agencies

Rating is for instrument and not for the issuer

company

Time taken in rating

Not applicable to equity shares


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Equity shares

Preference shares

Bonds/debentures issued by corporate,

government etc.

Commercial papers issued by manufacturingcompanies,

Fixed deposits raised for medium-term ranking as

unsecured borrowings.

Borrowers who have borrowed money.

Individuals.


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The security issuers ability to service its debt. In order,they calculate the past and likely future cash flows andcompare with fixed interest obligations of the issuer.

The volume and composition of outstanding debt.

The stability of the future cash flows and earningcapacity of company.

The interest coverage ratio i.e. how many number oftimes the issuer is able to meet its fixed interestobligations.

Ratio of current assets to current liabilities (i.e. currentratio (CR)) is calculated to assess the liquidity position ofthe issuing firm.


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The value of assets pledged as collateral security

and the securitys priority of claim against the

issuing firms assets.

Market position of the company products is judged

by the demand for the products, competitors

market share, distribution channels etc.

Operational efficiency is judged by capacity

utilisation, prospects of expansion, modernization

and diversification, availability of raw material etc.

Track record of promoters, directors and expertise

of staff also affect the rating of a company.


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Year Credit rating Agencies

1841 Mercantile credit agency

1900 Moodys Investors Service

1916 Poor Publishing Company

1922 Standard Statistics Company

1924 Fitch Publishing Company

1933 Dun &Bradstreet

1941 Standard & Poor

1966 McGraw Hill

1972 Canadian Bond Rating Service


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Year Credit rating Agencies

1974 Thomson Bank watch

1975 Japanese Bond Rating Institute

1975 McCarthy Crisanti & Maffei

1977 Dominician Bond Rating Service

1978 IBCA Limited

1980 Duff and Phelps Credit Rating Co.

1987 CRISIL

1991 ICRA

1994 CARE

1996 Duff and Phelps Credit RatingIndia (P) Limited


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Low cost information

Healthy discipline on corporate borrowers

Provides unbiased opinion.

Provides quality and dependable information Provide easy to understand information:

Provide basis for investment:

Formation of public policy.


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Benefits to Investors

Safety of investments

Recognition of risk and returns

Freedom of investment decisions

Wider choice of investments.

Dependable credibility of issuer.

Easy understanding of investment proposals

Relief from botheration to know company Continuous monitoring


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Benefits of Rating to the Company

Easy to raise resources.

Reduced cost of borrowing.

Reduced cost of public issues.

Rating builds up image.

Recognition to unknown companies.

Benefits to Intermediaries

Less efforts for persuading clients to invest

save time

Save energy costs

Less manpower requirement.


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Non-disclosure of significant information.

Static study.

Rating is no certificate of soundness.

Rating may be biased.

Rating under unfavorable conditions.

Difference In rating grades.


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Traditional debt rating (TDR)

Private placement rating (PPR)

Private placement rating (PPR): Privately rating is newly

introduced credit rating system findingin the literature generated by standard & poor on credit rating ,

private placement rating is not much

different to traditional debt rating but it goes one step ahead to

traditional debt rating ,ie. Apart from

evaluating a risk of default in timely payment it also evaluates the

likelihood of loss to an investorin the vent of default according on the investment .

Never the less, either or both of the two types of rating can be

used for new issues of debt securities

or structured obligations.


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Traditional debt ratings (TDR): Traditional debt ratings are a symbolicprediction about the debtsecurity probability resulting in a default in timely payment of interest

and principal. In other words,

traditional debt rating reflects the current opinion of a credit ratingagency of the relative capability

and willingness of an issuer of a debt instrument to service the debt

obligation as per the term of

contract .Traditional debt rating is specific to specific to to a debt

instrument in term of credit risk

associated with such instrument .Traditional debt rating enable an

investor to establish a link

between risk and return and provide a symbolic yardstick to identify the

risk level associated with

the instrument and the return it offers to match with his preferences

with expectations


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International Ratings

Issuer Credit Ratings (for governments, financial institutions and corporates): these

summarise an entity's overall creditworthiness and its ability and willingness to

meet its financial obligations as they come due. Ratings assigned to an entity are

comparable across international borders. Sectors and the types of ratings that may

be assigned are given below.

Sovereigns and Local Government Long- and short-term local currency ratings

Long- and short-term foreign currency ratings

Banks and other Financial Institutions

Long- and short-term local currency ratings


Financial strength ratings (an opinion of stand-alone financial health)

Support ratings (an assessment of the likelihood that a bank would receive external

support in case of financial difficulties)


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Corporates

Long- and short-term local currency ratings


Issue Credit Ratings (for bonds, Sukuk and other financial obligations):these are an opinion of an entity's ability and willingness to honour itsfinancial obligations with respect to a specific bond or other debtinstrument. The ratings assigned to the debt issues of financialinstitutions and corporates can be either short-term or long-term,depending on the tenor of the financial obligation. A short-term rating isassigned to debt instruments with an original maturity of up to one year.

National Ratings

National Ratings measure the creditworthiness of issuers or issuesrelative to all other issuers or issues within the same country, and unlikeCI's other ratings are not intended to be comparable across countries.

National Ratings are used in countries whose sovereign credit ratings aresome way below 'AAA' on CI's international ratings scales, and wherethere is sufficient demand from capital market participants for suchratings. National Ratings enable the ratings of obligors in a given countryto be distributed across a full rating scale (from 'AAA' to 'D'), therebyallowing greater credit differentiation than may be possible underinternationally comparable rating scales.


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Credit Rating and Information Services of

India Limited (CRISIL).

Investment Information and Credit Rating

Agency of India Limited (ICRA).Credit Analysis and Research Limited (CARE).


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First Credit Rating agency in India. Incorporated in 1987.

Promoted by ICICI along with UTI and otherfinancial institution with an equity capital of Rs. 4

crores. Headquarter in Mumbai.

Has rated over 800 Debt instruments.


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To assist both individual and institutional investors inmaking investment decisions in fixed interest securities.

To guide the investors as to the risk of timely payment ofinterest and principal on a particular debt instrument;

To help the companies to raise funds from a large numberof investors in larger amounts at a lesser cost;

To create awareness of the concept of credit ratingsamongst corporations, merchant bankers, brokers,regulatory authorities and help in creating environment

that facilitates the debt rating;

To provide regulators with a market-driven system in orderto ensure discipline and a healthy growth of capitalmarkets.


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Credit Rating Services

Advisory Services

Research and Information Services


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CRISIL Rates-

Debentures

Fixed Deposits

Commercial Papers Credit Assessment

Structured Obligations

Bonds Bank Loans etc.


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For Debenture:

For High Investment Grades:

AAA (Triple Safety)Highest Safety.

AA (Double Safety) - High Safety.

For Investment Grades:A Adequate Safety

BBB (Triple B)Moderate Safety

For Speculated Grade:

BB - Inadequate SafetyB - High Risk

C - Substantial Risk

D - Default


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Set up in 1991.

Established by Industrial Finance Corporation

Today, ICRA and its subsidiaries together form theICRA Group of Companies (Group ICRA).

ICRA and its subsidiaries together form the ICRAGroup of Companies (Group ICRA)

It is a Public Limited Company, with its shares listed

on the Bombay Stock Exchange and the NationalStock Exchange.

Has a tie-up with Moody Investor Service in the areaof technical service which benefit in-house research

capabilities.


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To provide information and guidance to institutionaland individual investors and creditors.

To enhance the ability of the borrower/issuers toaccess the money market and the capital market fortapping a larger volume of resource from a wider

range of investing public;

To assist the regulators in promoting thetransparency in the financial markets;

To enable the banks, investment bankers, brokers inplacing debt with investors by providing them with amarketing tool.


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Rating Services

Credit Assessment

General Assessment

Bank lines of Credit Rating

Information Services

Advisory Services


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ICRA rates-

Long term instruments

Medium term instruments

Short term instruments Equity

Bank line of credit

Insurance Companies


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For Equity-

Excellent Earnings Prospects:-

ERIA Low Risk

ERIB Moderate Risk ERIC High Risk

Very Good Earning Prospects:-

ER2A Low Risk ER2B Moderate Risk

ER2c High Risk


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Good Earning Prospects:-

ER3A Low Risk

ER3B Moderate Risk

ER3C High Risk

Moderate Earning Prospects:-

ER4A Low Risk

ER4B Moderate Risk ER4C High Risk


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Weak Earning Prospects:-

ER5A Low Risk

ER5B Moderate Risk

Poor Earning Prospects:-

ER6A Low Risk

ER6B Moderate Risk

ER6C High Risk


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Set up in 1993.

Formed jointly by investment companies,banks & finance companies.

Recognized by SEBI, Government of India &Reserve Bank of India etc.

It has three largest shareholder SBI ,IDBI &Canara Bank.


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To earn customer satisfaction & investor

confidence through fairness & professional

excellence.

To provide state of art services of securities

rating ,information & related services of

international standard.


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Credit Rating.

Information Services

Equity Research

Rating of Parallel Marketers of LPG and Kerosene. Other Services.

CARE Loan Rating (CLR)

Credit Analysis Rating (CAR)


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CARE Rates-

Long term & Short term instruments

Credit Analysis

Long term loans Short term loans


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Credit Analysis Rating

CARE 1: Excellent Debt Management Capacity

CARE 2: Very good Debt Management

CapabilityCARE 3: Good capability for Debt

Management

CARE 4: Barely satisfactory capability fordebt management

CARE 5: Poor capability for debt management


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o Agencies must recognize the defaulters.

o Must ensure no marketing development & theemployees involved in credit rating process must notown share of the issuer.

o Must publish information on historical default rates.

o Must disclose fees charged to the client in rating

debt & default rates.

o Must maintain records which contain details ofdiscussion held with stake holder ,rating committeeincluding voting details etc.


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credit rating heena

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