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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
Long- and short-term foreign 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
Long- and short-term foreign 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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