Rating Agencies

Origin & History

• Originated in U.S

• Henry Vanuum Poor started publishing financial statistics in 1860

• More importance was given from 1909.

• In India CRISIL was set-up as first institution for Credit Rating Services in 1987.

• ICRA was started in 1991

• CARE was started in 1993

Rating Agencies registered with SEBI

CRISIL - Credit Rating Information Services of India Limited

Fitch Ratings India Private Ltd.

ICRA - Investment Information & Credit Rating Agency.

Credit Analysis & Research Ltd. (CARE)

Brickwork Ratings India Private Limited

SME Rating Agency of India Ltd. (SMERA)

Meaning

• Credit rating is done for debt instruments such as debentures, fixed deposits, commercial papers, bonds, etc.

• “Credit rating is an unbiased and independent opinion as to issuer’s capacity to meet financial obligations. It doesn’t constitute a recommendation to buy/sell or hold a particular debt instrument” By CRISIL

Types of Credit Rating

• Sovereign Rating : Assess the country Credit risk and is used as a point of reference for country borrowings from WB, IMF, etc.

• Entity Rating : Risk rating of Corporate entities.

• Instrument Rating : Rating of the bond issued by different corporations and municipalities.

Functions of Credit Rating

• Superior Information

• Low Cost Information

• Basis for Risk-Return Trade-off

• Healthy discipline for corporate borrowers

• Formulation of public policy guidelines on investment

Credit Ratings

Methodology

Business

Risk Profile

Analysis

Financial

Risk Profile

Analysis

Business

Risk

Country

Risk

Company

Position

Industry

Factors Profitability

/ Peer Group

Comparisons

• Political

• Economic

• Industry – Specific factors

• Foreign exchange

• Industry Trends

• Industry Structure

• Market Size

• Growth Potential

• Competition

• Changing Technology

• Competitive Factors

• Market position

• Keys to Success

• Size

• Diversification

• Management

• Validation of “Company

Position”

• Trends

• Quality of Earnings

& Analytical adjustments

• Peer Group Comparisons

Financial

Risk

Accounting

Cash Flow

Adequacy

Governance

Risk

Liquidity /

Short-term

Factors

• Accounting Regime

• Reporting & Disclosure

• Analytical adjustments

• Ownership

• Board of directors

• Management practices

• Financial Strategy

• Risk Tolerance

• Accounting Practices

• Internal controls

• Focus on debt

service capability

• Analytical distinctions with

profitability

• Cash flow measures /

• ratios

• Operating sources & uses

Of liquidity

• Debt Characteristics

• Bank credit facilities

CRISIL

• Credit Rating Information Services of India (CRISIL Ltd.). This is the first rating agency in India. It was set-up in 1987 jointly by the erstwhile ICICI Ltd. and UTI. Other shareholders include: Asian Development Bank (ADB), LIC, State Bank of India, and HDFC, etc.

Credit Ratings - Long Term Scale

CRISIL AAA (Highest Safety)

Instruments with this rating are considered to have the highest degree of safety regarding timely servicing of financial obligations. Such instruments carry lowest credit risk.

CRISIL AA (High Safety)

Instruments with this rating are considered to have high degree of safety regarding timely servicing of financial obligations. Such instruments carry very low credit risk.

CRISIL A (Adequate Safety)

Instruments with this rating are considered to have adequate degree of safety regarding timely servicing of financial obligations. Such instruments carry low credit risk.

CRISIL BBB (Moderate Safety)

Instruments with this rating are considered to have moderate degree of safety regarding timely servicing of financial obligations. Such instruments carry moderate credit risk.

CRISIL BB (Moderate Risk)

Instruments with this rating are considered to have moderate risk of default regarding timely servicing of financial obligations.

CRISIL B (High Risk)

Instruments with this rating are considered to have high risk of default regarding timely servicing of financial obligations.

CRISIL C (Very High Risk)

Instruments with this rating are considered to have very high risk of default regarding timely servicing of financial obligations.

CRISIL D Default

Instruments with this rating are in default or are expected to be in default soon.

Credit Ratings - Short Term Scale

CRISIL A1 Instruments with this rating are considered to have very strong degree of safety regarding timely payment of financial obligations. Such instruments carry lowest credit risk.

CRISIL A2 Instruments with this rating are considered to have strong degree of safety regarding timely payment of financial obligations. Such instruments carry low credit risk.

CRISIL A3

Instruments with this rating are considered to have moderate degree of safety regarding timely payment of financial obligations. Such instruments carry higher credit risk as compared to instruments rated in the two higher categories.

CRISIL A4 Instruments with this rating are considered to have minimal degree of safety regarding timely payment of financial obligations. Such instruments carry very high credit risk and are susceptible to default.

CRISIL D Instruments with this rating are in default or expected to be in default on maturity.

ICRA

• Investment Information and Credit Rating Agency of India Ltd.

(ICRA Ltd. This company was promoted by the IFCI Ltd. to meet the requirements of the companies based in the north India. Along with IFCI, State Bank of India, Unit Trust of India, PNB and LIC were other promoters of the company)

ICRA’s Long-Term Rating Scale

Long-Term rating Scale All Bonds, NCDs, and other debt instruments (excluding Public Deposits) with original maturity exceeding one year. [ICRA]AAA Instruments with this rating are considered to have the highest degree of safety regarding timely

servicing of financial obligations. Such instruments carry lowest credit risk. [ICRA]AA Instruments with this rating are considered to have high degree of safety regarding timely servicing of financial obligations. Such instruments carry very low credit risk. [ICRA]A Instruments with this rating are considered to have adequate degree of safety regarding timely servicing of financial obligations. Such instruments carry low credit risk. [ICRA]BBB Instruments with this rating are considered to have moderate degree of safety regarding timely servicing of financial obligations. Such instruments carry moderate credit risk. [ICRA]BB Instruments with this rating are considered to have moderate risk of default regarding timely servicing of financial obligations [ICRA]B Instruments with this rating are considered to have high risk of default regarding timely servicing of financial obligations. [ICRA]C Instruments with this rating are considered to have very high risk of default regarding timely servicing of financial obligations. [ICRA]D Instruments with this rating are in default or are expected to be in default soon.

ICRA’s Short-Term Rating Scale

Short-Term Rating Scale All instruments with original maturity within one year. [ICRA]A1 Instruments with this rating are considered to have very strong degree of

safety regarding timely payment of financial obligations. Such instruments carry lowest credit risk. [ICRA]A2 Instruments with this rating are considered to have strong degree of safety regarding timely payment of financial obligations. Such instruments carry low credit risk. [ICRA]A3 Instruments with this rating are considered to have moderate degree of safety regarding timely payment of financial obligations. Such instruments carry higher credit risk as compared to instruments rated in the two higher categories. [ICRA]A4 Instruments with this rating are considered to have minimal degree of safety regarding timely payment of financial obligations. Such instruments carry very high credit risk and are susceptible to default. [ICRA]D Instruments with this rating are in default or expected to be in default on maturity.

CARE

• Credit Analysis and Research (CARE) Ltd. is a credit rating and information services company.

(This company was promoted by the Industrial Development Bank of India (IDBI) jointly with investment institutions, banks and finance companies. It commenced its credit rating operations in October 1993.)

Other Credit Agencies

• Duff and Phelps Credit Rating India Private Ltd.,(DCR) – an international credit rating agency, providing credit rating services in India in Joint-Venture with J.M.Financial and Alliance Group

• Onida Individual Credit Rating Agency Ltd., (ONICRA) – sponsored by Onida Finance Ltd., - does credit rating for individual borrowers.

Benefits to Investor

Benefits to Company

Demerits