Bond credit rating

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The presentation is on the credit rating and its importance ... services provided by 2 major credit rating agencies are been discussed

The presentation is on the credit rating and its importance ... services provided by 2 major credit rating agencies are been discussed

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  • 1. TOPIC: CREDIT RATING AGENCIES
  • 2. TABLE OF CONTENT INTRODUCTION & IMPORTANCE TO CREDIT RATING ROLE AND FUNCTIONS OF CREDIT RATING AGENCIES BENEFITS OF CREDIT RATING AGENCIES DISADVANTAGES OF CREDIT RATING ROLE OF CREDIT RATING AGENCIES IN THE GLOBAL SUBPRIME CRISIS OF 2008-09 A)CRISIL INTRODUCTION TO CRISIL PRODUCTS SERVICES BY CRISIL 1. CREDIT QUALITY RATINGS 2. PROJECT CREDIT RATING 3. CAPITAL PROTECTION-ORIENTED FUNDS RATING 4. BANK LOAN RATINGS
  • 3. TABLE OF CONTENT 5. BROKER QUALITY GRADINGS CREDIT RATING PROCESS CRISIL CREDIT RATING SCALE B)MOODY’S INTRODUCTION TO MOODY’S SERVICES BY MOODYS 1. BANK DEPOSIT RATINGS 2. NATIONAL SCALE LONG-TERM RATINGS 3. NATIONAL SCALE SHORT-TERM RATINGS 4. BOND FUND RATINGS 5. EQUITY FUND ASSESSMENTS 6. MONEY MARKET FUND (MF) RATINGS MOODY’S RATING SCALE SEBI CREDIT RATING AGENCIES REGULATIONS,1999 (CODE OF CONDUCT) CREDIT RATING FAQ’S
  • 4. INTRODUCTION & IMPORTANCE TO CREDIT RATING  India was perhaps the first amongst developing countries to set up a credit rating agency in 1988.  Credit rating establish a link between risk and return. They thus provide a yardstick against which to measure the risk inherent in any instrument.  The risk perception of a common investor, in the absence of a credit rating system, largely depends on his familiarity with the names of the promoters or the collaborators.  Thus, the need for credit rating in today’s world cannot be over- emphasized. It is of great assistance to the investors in making investment decisions.
  • 5. INTRODUCTION & IMPORTANCE TO CREDIT RATING  Investors usually follow security ratings while making investments.  Credit rating is a professional opinion given after studying all available information at a particular point of time.  A rating agency cannot be held responsible for any losses suffered by the investor taking investment decision on the basis of its rating.  In the long run, the credibility of rating agency has to be built.
  • 6. ROLE AND FUNCTIONS OF CREDIT RATING AGENCIES  A Credit rating agency (CRA) is a company that assigns credit ratings for issuers of certain types of debt obligations as well as the debt instruments themselves.  A credit rating for an issuer takes into consideration the issuers credit worthiness.  The primary function of the credit rating agencies is to provide credit ratings to the service providers of various forms of debt products and services.  The clients of the credit rating agencies are those entities that deal in the provision of debt products and services.  The non-profit seeking organizations and the national governments also avail the services of the credit rating agencies.
  • 7. CREDIT RATING AGENCIES PERFORM THE FOLLOWING FUNCTIONS: 1. Collecting Information: Valuable information relating to credit quality of an issuer of a debt security is collected by the Credit Rating Agencies. 2. Supply of Information: The information about the credit quality of the issuer is provided to the public (potential investors). 3. Providing basis for measuring risk and return: The information enables investors to decide whether to invest in the debt security or not. 4. Facilitates corporate discipline: Investors prefer appropriate credit rating as good credit rating enhances corporate image and visibility of the firms.
  • 8. BENEFITS OF CREDIT RATING AGENCIES  INVESTORS 1. Safeguards against bankruptcy: Credit rating done by credit rating agency gives an idea to the investors about degree of financial strength. 2. Recognition of Risk: Credit rating provides investors with rating symbols which carry information in easily recognizable manner for the benefit of investors to perceive risk involved in instrument. 3. Credibility of the issuer: Since the rating agency has no business connections with the issuer company, it can independently assess the credibility of the issuer company. 4. Easy understandability of investment proposal: Rating symbols can be easily understood by investor since their understanding requires no analytical ability.
  • 9. BENEFITS OF CREDIT RATING AGENCIES 5. Saving of resources: Credit rating work is done by professional experts due to which investor generally rely upon the credit rating assigned to any investment instrument by credit rating agencies. 6. Choice of investments: Several alternative credit rating instruments are available at a particular point of time for making investments. 7. Benefits of rating surveillance: Investors get the benefit off credit rating agency’s on-going surveillance of the rating and rated instruments of different companies.
  • 10. BENEFITS OF CREDIT RATING AGENCIES  CORPORATE BORROWERS: 1. Lower cost of borrowing: It facilitates companies with good rating enter the capital market confidently and raise funds at comparatively cheaper rates. 2. Rating as marketing tool: It can be used as a marketing tool to create a better image about the company. 3. Wider audience for borrowing: A company with high rated instrument can approach the investors extensively for resource mobilization. 4. Encourages discipline among the corporate borrowers: Credit rating agency assesses the financial strength, profitability, risk management efficiency etc and then assign a rating.
  • 11. BENEFITS OF CREDIT RATING AGENCIES 5. Benefits to brokers and financial intermediaries: Investors understand that a high rated instrument provides a high degree of certainty. 6. Helps in foreign collaborations: Since high credit rating promotes the image and brand name of the company.
  • 12. DISADVANTAGES OF CREDIT RATING 1. Biased rating and misrepresentations: It is very important that credit rating agencies function independently and are objective in their assessment of company’s financial position and its ability to meet its obligations on time. 2. Static study: Rating is done on the basis of present and past historical data of the company and this is only a static study. 3. Concealment of material information: The issuer company might conceal vital information from the investigation team of the agency. 4. No guarantee for soundness of company: Independent views should be formed by the user public in general of the rating symbol.
  • 13. DISADVANTAGES OF CREDIT RATING 5. Human bias: Human bias may adversely affect the credit rating. 6. Subsequent downgrading: credit rating agencies would review the grade and downgrade the rating resulting into impairing the image of the company. 7. Reflection of temporary adverse conditions: it might get low rating which might adversely affect company’s interest. 8. Difference in rating of two agencies : Rating done by two different credit rating for the same instrument of the same issuer company in many cases can be different.
  • 14. ROLE OF CREDIT RATING AGENCIES IN THE GLOBAL SUBPRIME CRISIS OF 2008-09  To free up their capital in order to make fresh loans, mortgage banks started issuing mortgage-backed securities (MBS).  Wall Street firms then began to use these MBS as components for more complex structured products such as collateralized debt obligations (CDOs).  These CDO tranches were given credit ratings by the established credit rating agencies.  These CDOs were then sold across the world to across-section of banks, mutual funds, pension funds, state bodies such as municipal organizations.
  • 15. ROLE OF CREDIT RATING AGENCIES IN THE GLOBAL SUBPRIME CRISIS OF 2008-09  However, monetary policy had begun to tighten from 2004 when in order to control growing inflation the Federal Reserve raised its key short term interest rate.  Simultaneously the boom in U.S. housing prices faded out and housing prices started to actually fall.  As borrowers started defaulting, first the market prices of MBS fell, and then the values of CDOs began dropping too.  Many mortgage lenders went bankrupt and large investment banks had to raise emergency capital. As their capital was eroded, they cut down on ending to maintain their capital adequacy ratio (CAR).
  • 16. BORROWERSMORTGAGE MORTGAGE LENDER INVESTMENT BANK 1.Converted to complex CDO’s 2. Sold to final investors COMMERCIAL BANKS PENSION FUNDS MUTUAL FUNDS MUNICIPAL BODIES CREDIT RATING AGENCIES The Process Of Sub-Prime Lending Structured Ratings ROLE OF CREDIT RATING AGENCIES IN THE GLOBAL SUBPRIME CRISIS OF 2008-09
  • 17. A) CRISIL CRISIL (Credit Rating Information Services of India Limited)
  • 18. INTRODUCTION TO CRISIL  CRISIL is a global analytical company providing ratings, research, and risk and policy advisory services.  It is India's leading ratings agency, It is also the foremost provider of high- end research to the world's largest banks and leading corporations.  Our defining trait is our ability to convert data and information into expert judgements and forecasts across a wide range of domains.  CRISIL's majority shareholder is Standard and Poor’s (S&P).
  • 19. INTRODUCTION TO CRISIL  It address a rich and globally diversified client base.  It also work with governments and policy-makers in India and other emerging markets in the infrastructure domain.  It empower the customers, and the markets at large, with independent analysis, benchmarks and tools.  The offerings allow markets and market participants to become more transparent and efficient.  By helping shape public policy on infrastructure in emerging markets, it help catalyse economic growth and development in these countries.
  • 20. PRODUCTS  A CRISIL rating reflects CRISIL's current opinion on the relative likelihood of timely payment of interest and principal on the rated obligation. • The debt obligations rated by CRISIL include:  Non-convertible debentures/bonds/preference shares  Commercial papers/certificates of deposits/short-term debt  Fixed deposits  Loans  Structured debt  CRISIL Ratings clientele includes accounting for 80 per cent of the equity market capitalization, are CRISIL's clients.
  • 21. PRODUCTS  CRISIL ratings are based on a robust and clearly articulated analytical framework.  The assessment is based on the highest standards of independence and analytical rigour. • CRISIL rates a wide range of entities for long-term debt obligations, including: 1. Industrial companies 6. Microfinance institutions 2. insurance companies 7. Banks 3. Mutual funds 8.Non-Banking Financial Companies (NBFC’s) 4. State governments 9. Infrastructure Entities 5. Urban Local Bodies
  • 22. SERVICES BY CRISIL CREDIT QUALITY RATINGS  CRISIL pioneered the concept of credit quality ratings for the money market and debt funds in the domestic market.  CRISIL's Credit Quality Ratings are an opinion on the expected default probability of securities in the fund portfolio.  These ratings are assigned only to funds that invest entirely or almost entirely in debt.  To maintain the rating at all times, the fund has to maintain a certain level of credit quality of the portfolio.  Long Term Ratings  Short Term Ratings
  • 23. PROJECT CREDIT RATING  CRISIL's Project Credit Rating is an independent opinion on the standalone risks of projects.  The evaluation includes project implementation risks as well as post commissioning risk.  The rating is assigned on an eight-point scale ranging from CRISIL PCR 1 to CRISIL PCR 8.  The ratings denote the likelihood of the project being completed on time.
  • 24. CAPITAL PROTECTION-ORIENTED FUNDS RATING  CRISIL assigned the country's first rating on a Capital Protection-Oriented Fund (CPF).  The rating on CPFs is on the structured obligation (so) scale.  CPF ratings are monitored to analyse the probability of the following: 1. The portfolio value falling below the initially contracted principal value. 2. Investors getting their money back in full.
  • 25. BANK LOAN RATINGS  A bank loan rating indicates the degree of risk regarding timely payment of the bank facility being rated.  CRISIL commenced rating bank loans post the Reserve Bank of India's guidelines on capital adequacy for banks, in 2007.  The Basel II guidelines, as they are called, require banks to provide capital on the credit exposure as per credit ratings assigned by approved external credit assessment institutions (ECAIs), such as CRISIL.  CRISIL rates the maximum number of companies for their bank loans in India.  It has, so far, assigned ratings to the bank facilities of more than 12,614 entities as on March 31, 2013.
  • 26. BANK LOAN RATINGS  CRISIL has rated bank facilities of all types:  term loans,  project loans,  corporate loans,  general purpose loans,  working capital demand loans,  cash credit facilities, and  non-fund-based facilities, I. such as letters of credit and II. bank guarantees.
  • 27. BANK LOAN RATINGS  CRISIL bank loan ratings cover companies of all sizes with bank facilities ranging from Rs.50 million to Rs.500 billion.  The break-up of ratings according to size of bank facilities is given below SALES Less Than Rs. 100 Million Rs. 100-250 Million Rs. 250-500 Million Rs. 500-2500 Million Rs. 2500-5000Million More Than Rs. 5,000 Million 11% 36% 21% 24% 4% 4%
  • 28. BROKER QUALITY GRADINGS  A CRISIL Broker Grading is an opinion on the quality of operations and services provided by the graded stock broker.  CRISIL uses the key parameters listed below to assess the quality of operations of a broking firm and the services offered by it.  Each parameter is assessed individually; these assessments are then aggregated to arrive at the final grading.  Quality of compliance  Systems framework  Management of market risk  External interface  Credit risk profile
  • 29. CREDIT RATING PROCESS ISSUER Request for rating Signs rating agreement Provides information And rating fees Management interactions with the rating team CRISIL Rating team assigned. Team collates information, Conducts preliminary analysis. Team conducts site visits and performs analysis.
  • 30. Analysis presented to rating committee. Rating assigned and communicated to issuer. Rating disseminated and carried in www.crisil.com All ratings kept under continuous surveillance throughout validity Accepts the rating or Appeal CREDIT RATING PROCESS
  • 31. CRISIL CREDIT RATING 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.
  • 32. CRISIL CREDIT RATING SCALE  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.
  • 33. CRISIL CREDIT RATING SCALE  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.
  • 34. B) MOODY’S
  • 35. INTRODUCTION TO MOODY’S  Moody's is an essential component of the global capital markets, providing credit ratings, research, tools and analysis that contribute to transparent integrated financial markets.  Moody's Corporation (NYSE: MCO) is the parent company of Moody's Investors Service.  Moody's Analytics, which offers leading-edge software, advisory services.  Moody’s also offer research for credit and economic analysis and financial risk management.
  • 36. SERVICES BY MOODY’S BANK DEPOSIT RATINGS  Bank Deposit Ratings are opinions of a bank’s ability to repay punctually its foreign and/or domestic currency deposit obligations.  In the case of long-term deposit ratings, also reflect the expected financial loss of the default.  Bank Deposit Ratings do not apply to deposits that are subject to a public or private insurance scheme; rather, the ratings apply to uninsured deposits.  Foreign currency deposit ratings are subject to Moody’s country ceilings for foreign currency deposits.
  • 37. NATIONAL SCALE LONG-TERM RATINGS  Moody’s long-term National Scale Ratings (NSRs) are opinions of the relative creditworthiness of issuers and financial obligations within a particular country.  NSRs are not designed to be compared among countries.  Moody’s assigns national scale ratings in certain local capital markets.
  • 38. NSR LONG-TERM RATING SCALE
  • 39. Aaa.n Issuers or issues rated Aaa.n demonstrate the strongest creditworthiness relative to other domestic issuers. Aa.n Issuers or issues rated Aa.n demonstrate very strong creditworthiness relative to other domestic issuers. A.n Issuers or issues rated A.n present above-average creditworthiness relative to other domestic issuers. Baa.n Issuers or issues rated Baa.n represent average creditworthiness relative to other domestic issuers. Ba.n Issuers or issues rated Ba.n demonstrate below-average creditworthiness relative to other domestic issuers. B.n Issuers or issues rated B.n demonstrate weak creditworthiness relative to other domestic issuers. Caa.n Issuers or issues rated Caa.n demonstrate very weak creditworthiness relative to other domestic issuers. Ca.n Issuers or issues rated Ca.n demonstrate extremely weak creditworthiness relative to other domestic issuers. C.n Issuers or issues rated C.n demonstrate the weakest creditworthiness relative to other domestic issuers.
  • 40. NATIONAL SCALE SHORT-TERM RATINGS  Moody’s short-term NSRs are opinions of the ability of issuers in a given country, relative to other domestic issuers, to repay debt obligations that have an original maturity not exceeding one year. Short- term NSRs in one country should not be compared with short-term NSRs in another country, or with Moody’s global ratings.
  • 41. NATIONAL SCALE SHORT-TERM RATINGS N-1 Issuers rated N-1 have the strongest ability to repay short- term senior unsecured debt obligations relative to other domestic issuers N-2 Issuers rated N-2 have an above average ability to repay short- term senior unsecured debt obligations relative to other domestic issuers N-3 Issuers rated N-3 have an average ability to repay short- term senior unsecured debt obligations relative to other domestic issuers N-4 Issuers rated N-4 have a below average ability to repay short- term senior unsecured debt obligations relative to other domestic issuers
  • 42. BOND FUND RATINGS  Bond Fund Ratings are opinions of the credit quality of investments within mutual funds and similar in- vestment vehicles.  As such, these ratings primarily reflect Moody’s assessment of the creditworthiness of the assets held by the fund.  The ratings are intended to represent opinions on a fund’s underlying assets.  they specifically do not consider the historic, current, or prospective performance of a fund with respect to appreciation, volatility of net asset value, or yield.
  • 43. BOND FUND RATINGS Aaa-bf Bond Funds rated Aaa-bf generally hold assets judged to be of the highest credit quality Aa-bf Bond Funds rated Aa-bf generally hold assets judged to be of high credit quality A-bf Bond Funds rated A-bf generally hold assets considered upper-medium credit quality Baa-bf Bond Funds rated Baa-bf generally hold assets considered medium credit quality Ba-bf Bond Funds rated Ba-bf generally hold assets judged to have speculative elements B-bf Bond Funds rated B-bf generally hold assets considered to be speculative. Caa-bf Bond Funds rated Caa-bf generally hold assets judged to be of poor standings Ca-bf Bond Funds rated Ca-bf generally hold assets that are highly speculative and that are likely in, or very near, default, with some prospect of recovery of principal or interest C-bf Bond Funds rated C-bf generally hold assets that are in default, with little prospect for recovery of principal or interest.
  • 44. EQUITY FUND ASSESSMENTS  Moody’s equity fund assessments are opinions of the relative investment quality of investment funds.  Investment quality is judged based on the fund’s historical performance relative to funds employing a similar investment strategy, as well as on the quality of the fund manager.
  • 45. EF-1 Equity funds assessed at EF-1 have the highest investment quality relative to funds with a similar investment strategy EF-2 Equity funds assessed at EF-2 have high investment quality relative to funds with a similar investment strategy EF-3 Equity funds assessed at EF-3 have moderate investment quality relative to funds with a similar investment strategy EF-4 Equity funds assessed at EF-4 have low investment quality relative to funds with a similar investment strategy EF-5 Equity funds assessed at EF-5 have the lowest investment quality relative to funds with a similar investment strategy
  • 46. MONEY MARKET FUND (MF) RATINGS  Moody’s Money Market Fund Ratings are opinions of the investment quality of shares in mutual funds and similar investment vehicles which principally invest in short-term fixed income obligations.  The ratings are not intended to consider the prospective performance of a fund with respect to appreciation, volatility of net asset value, or yield.
  • 47. MONEY MARKET FUND (MF) RATINGS Aaa-mf Money market funds rated Aaa-mf have very strong ability to meet the dual objectives of providing liquidity and preserving capital. Aa-mf Money market funds rated Aa-mf have strong ability to meet the dual objectives of providing liquidity and preserving capital. A-mf Money market funds rated A-mf have moderate ability to meet the dual objectives of providing liquidity and preserving capital. Baa-mf Money market funds rated Baa-mf have marginal ability to meet the dual objectives of providing liquidity and preserving capital. B-mf. Money market funds rated B-mf are unable to meet the objective of providing liquidity and have marginal ability. C-mf Money market funds rated C-mf are unable to meet either objective of providing liquidity or preserving capital.
  • 48. MOODY’S RATING SCALE
  • 49. Rating Long-term ratings Short-term ratings Aaa Rated as the highest quality and lowest credit risk. Prime-1 Best ability to repay short- term debt Aa1 Rated as high quality and very low credit risk.Aa2 Aa3 A1 Rated as upper-medium grade and low credit risk. A2 Prime-1/Prime-2 Best ability or high ability to repay short term debt A3 Baa1 Rated as medium grade, with some speculative elements and moderate credit risk. Prime-2 High ability to repay short term debt Baa2 Prime-2/Prime-3 High ability or acceptable ability to repay short term debt Baa3 Prime-3 Acceptable ability to repay short term debt
  • 50. SEBI CREDIT RATING AGENCIES REGULATIONS,1999 (CODE OF CONDUCT)  A credit rating agency, in the conduct of its business, shall observe high standards of integrity, dignity and fairness in the conduct of its business.  A credit rating agency shall fulfill its obligations in a prompt, ethical and professional manner.  A credit rating agency shall at all times exercise due diligence, ensure proper care and exercise independent professional judgment.  A credit rating agency shall have a reasonable and adequate basis for performing rating evaluations.  A credit rating agency shall have in place a rating process that reflects consistent and international rating standards.
  • 51. SEBI CREDIT RATING AGENCIES REGULATIONS,1999 (CODE OF CONDUCT)  A credit rating agency shall not indulge in any unfair competition nor shall it wean away the clients of any other rating agency on assurance of higher rating.  A credit rating agency shall keep track of all important changes relating to the client companies.  A credit rating agency shall disclose its rating methodology to clients, users and the public.  A credit rating agency shall, wherever necessary, disclose to the clients, possible sources of conflict of duties and interests, which could impair its ability to make fair, objective and unbiased ratings.  A credit rating agency shall not make any exaggerated statement, whether oral or written, to the client either about its qualification or its capability to render certain services or its achievements with regard to the services rendered to other clients.
  • 52. SEBI CREDIT RATING AGENCIES REGULATIONS,1999 (CODE OF CONDUCT)  A credit rating agency shall not make any untrue statement, suppress any material fact or make any misrepresentation in any documents.  A credit rating agency shall ensure that the Board is promptly informed about any action, legal proceedings etc.  A credit rating agency shall maintain an appropriate level of knowledge and competence and abide by the provisions of the Act, regulations and circulars, which may be applicable and relevant to the activities carried on by the credit rating agency.  A credit rating agency or any of his employees shall not render, directly or indirectly any investment advice about any security in the publicly accessible media.  A credit rating agency shall maintain an arm’s length relationship between its credit rating activity and any other activity.
  • 53. CREDIT RATING FAQ’S 1.What is a credit rating? 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. 2. How does a credit rating agency differ from a credit bureau? 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. 3. Is a credit rating a recommendation to invest in a debt instrument? A credit rating is not a recommendation to buy, hold, or sell a debt instrument. A credit rating is one of the inputs used by investors to make an investment decision. 4. Does a credit rating assure repayment? A credit rating is not an assurance of repayment of the rated instrument. Rather, it is an opinion on the relative degree of risk associated with such repayment. This opinion represents a probabilistic estimate of the likelihood of default.
  • 54. CREDIT RATING FAQ’S 5. What is the difference between credit rating and equity research? Credit ratings are assigned to debt instruments, while equity research relates to equity shares. A credit rating is focused on the risk of non-payment, the primary variable in debt instruments. Equity research is focused on growth possibilities, for that is what drives equity valuations. 6. How does a credit rating differ from an audit? A credit rating agency relies on a variety of information sources, including published annual reports. An audit process is designed to detect fraud or misrepresentation of information, whereas the credit rating process is not. 7. How does a rating agency operate when issuers' disclosure levels are low? During a credit rating exercise, issuers provide rating agencies with confidential information and insights into business strategy that are not normally available in the public domain. As a policy, CRISIL does not assign credit ratings without issuer interaction, except when a previously rated instrument is outstanding or when a specific investor asks for a private exercise. In cases where CRISIL believes that the information is inadequate to assign a rating, it may not do so.
  • 55. CREDIT RATING FAQ’S Also, for rated clients, if subsequent information is not adequate, CRISIL may suspend the rating and inform the investors. 8. Who pays for a credit rating? Most credit rating agencies across the world use a revenue model where the issuer pays for the credit rating. Alternative revenue models (such as the one based on investor fees) pose numerous challenges in terms of ease and practicality of implementation that have Yet been overcome. 9. If the issuer pays for the rating, how does a credit rating agency maintain its independence? Although the issuer pays for the rating, the investor uses it. Like any other product or service, the value' of the rating depends entirely on the perceptions of the investor. Investor perceptions are based on the credibility of the past ratings assigned by each rating agency. 10. Who regulates a rating agency? The capital market regulator regulates rating agencies in most regions. In India, the capital markets regulator, the Securities and Exchange Board of India (SEBI), regulates the rating agencies in the country.
  • 56. CREDIT RATING FAQ’S 11.Is competition desirable in the credit rating industry? Competition in the credit rating industry is desirable to meet the 'better service at a cheaper price' objective on an ongoing basis. However, it is essential to guard against some undesirable effects of competition, such as lax ratings or sub-optimal quality of research and analysis. 12. How do investors benefit from a credit rating? Credit ratings help investors facilitate comparative assessment of investment options, complement the investors' own credit analysis, and allow asset monitoring. 13. What do the various credit rating symbols mean? CRISIL uses simple alphanumeric symbols to convey credit ratings. CRISIL assigns credit ratings to debt obligations on three basic scales: the long-term scale, the short-term scale, and the fixed deposit scale. 14. Does the minus sign in a rating symbol have negative connotations relating to the issuer's performance or its debt-servicing capability? Plus and minus symbols are used to indicate finer distinctions within a rating category. The minus symbol associated with ratings has no negative connotations whatsoever.
  • 57. CREDIT RATING FAQ’S 15.What are Structured Obligation (so) ratings? Are they different from other credit ratings? Structured Obligation (so) ratings are ratings that are based on a 'credit enhancement' mechanism and/or a structured payment mechanism. A suffix in the form of '(so)' indicates the presence of non-credit risk in the form of risks associated with the instrument structure. 16. What is the validity period of a credit rating? Credit ratings are assigned either to specific instruments or to the general debt obligations of issuers. CRISIL assigns credit ratings to debt obligations. A rating is valid until the rated debt obligation is fully paid. 17. How are credit rating changes communicated? Once a credit rating is assigned and published, CRISIL keeps the credit rating under surveillance until the instrument is fully repaid. The surveillance process may result in credit rating changes from time to time. All changes in CRISIL's credit ratings are communicated publicly through CRISIL's website (www.crisil.com) and media releases.
  • 58. CREDIT RATING FAQ’S 18.Why do credit ratings change? Credit ratings are assigned based on certain expectations and assumptions about variables that impact the issuer's performance. However, these variables can change, causing the rated entities' performance to deviate materially from expectations. This is reflected in their changed credit ratings. 19. If a credit rating is downgraded, does it mean that a default is imminent? Not necessarily. In most cases, a downgrade does not mean that a default is anticipated. All it indicates is that the risk associated with the debt obligation is relatively higher than what it was before the downgrade. 20. Does the size of the rated debt obligation affect its credit rating? No. What matters is the size of the total debt in the company, and not the amount that is sought to be rated.
  • 59. THANKYOU