2. Credit Rating – What is it?
– Estimates credit worthiness of an individual, corporation or even a country
– Evaluation made by credit rating agencies
– It is an opinion, on the issuer’s capacity to meet its financial obligations in a
timely manner
– Does not include a mathematical formula
– Calculated from financial history, current assets and current liabilities and
mostly, judgement
2 of 10
3. Need and Objectives of Credit
Rating..
Need:
– Growing number of cases of
defaults in interest payment and
principal repayment
– Maintenance of investor’s
confidence
– Protect interest of investors
– Motivate investors to invest
Objective:
– Yardstick to measure risk
– Guidance to investors
– Encourages greater information
disclosure
– Better accounting standards
– Show exact worth of organization
3 of 10
4. Credit Rating Agencies
GLOBAL:
1. Moody’s Investor Service
2. Standard & Poor’s
3. Fitch Rating
INDIAN:
1. CRISIL (Credit Rating Information
Services of India Limited)
2. ICRA (Investment information and
Credit Rating Agency)
3. CARE (Credit Analysis & Research
Limited)
4 of 10
5. Credit Rating Factors
1. Business Risk Analysis Strength of Industry prospects
Pattern of business cycles
Factors affecting the industry
2. Financial Risk Analysis Quantitative means – Financial ratios
3. Management Risk Evaluation Evaluating management’s strategies & abilities
Forecasting
4. Fundamental Analysis Analysis of liquidity management
Asset quality
Profitability
5 of 10
6. Credit Rating Methodology
[CRISIL]
– Issuers request for a rating, signs rating agreement and pays fees
– Information is collected & analyzed by team of professionals assigned by agency
– If necessary, meetings are arranged with top management
– Team of professionals submit their recommendation to rating agency (rating
committee)
– Rating committee discusses report and assigns rating
– Rating assigned is notified to issuer and only on his acceptance, published
– Assures confidentiality of information
– Once published, agency should continuously monitor, called surveillance
6 of 10
7. Credit Rating
Symbols
(for long term instruments)
CRISIL
Rating
Meaning
AAA Highest degree of safety with regard to timely payment of
financial obligation
AA High degree of safety with regard to timely payment of financial
obligation
A Adequate degree of safety with regard to timely payment of
financial obligation
BBB Moderate of safety with regard to timely payment of financial
obligation
BB Inadequate of safety with regard to timely payment of financial
obligation
B Greater likelihood of default
C Have factors present that make them vulnerable to default
D Expected to default on scheduled payment dates
NM Have factors that render the rating meaningless
Investment Grade
Speculative Grade
7 of 10
8. Benefits of Credit Rating
To the Investors:
✓ Helps in investment decisions
✓ Benefits of Rating Reviews
✓ Assurance of Safety
✓ Choice of Instrument
✓ Saves time and effort
To the Company:
✓ Improves corporate image
✓ Lowers cost of borrowing
✓ Wider Audience for borrowing
✓ Acts as a Marketing Tool
✓ Helps in Growth and Expansion
8 of 10
9. Disadvantages of Credit Rating
– Biased rating
– Misrepresentation
– Improper disclosure of material facts
– Static study, doesn’t consider changing environment
– Difference in ratings between two agencies
– Ratings taken under unfavorable conditions
– Downgrading by Rating Agency
9 of 10