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Credit rating

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Credit rating

  1. 1. Hemant Batham
  2. 2.  Credit rating is essentially , the symbolic indicator of the current opinion of the rating agency on the relative ability and willingness of the issuer of a financial (debt) instrument to meet the service obligation as and when they arise. It provides a relative ranking of credit quality of debt/financial instrument or their grading according to investment qualities.
  3. 3.  A credit rating is a measure used by creditors to determine how much they can trust a certain borrower, whether the borrower is an individual, a corporation, or a country. The credit rating is derived using past financial data or the borrower’s credit history.  Factors that affect credit rating:-1. The ability to pay a loan.2. The amount of credit in existence3. Credit history  A poor credit rating indicates a high risk of defaulting on a loan, and thus leads to high interest rates(S&P D-grade).
  4. 4.  Rating is nothing but estimated worth or value in terms of symbolic grade given to a person’s or organization’s ability to pay back the loans raised , with the help of individual or organisation. As per SEBI regulations, credit rating is nothing but an opinion regarding securities expressed in the form of standard symbol or in any other standarised form assigned by Credit Rating agency.
  5. 5.  With offices in 23 countries and a history that dates back more than 150 years, Standard & Poor’s is known to investors worldwide as a leader of financial- market intelligence. Today Standard & Poor’s strives to provide investors who want to make better informed investment decisions with market intelligence in the form of credit ratings, indices, investment research and risk evaluations and solutions. Most notably, we are known as an independent provider of credit ratings. In 2010 S&P issued 162,418 new and 556,872 revised ratings.
  6. 6.  Depend on rating agency. Ex.- (S&P) ‘AAA’—Extremely strong capacity to meet financial commitments. Highest Rating. ‘AA’—Very strong capacity to meet financial commitments. ‘A’—Strong capacity to meet financial commitments, but somewhat susceptible to adverse economic conditions and changes in circumstances. ‘BBB’—Adequate capacity to meet financial commitments, but more subject to adverse economic conditions. ‘BBB-‘—Considered lowest investment grade by market participants. ‘BB+’—Considered highest speculative grade by market participants. ‘BB’—Less vulnerable in the near-term but faces major ongoing uncertainties to adverse business, financial and economic conditions. ‘B’—More vulnerable to adverse business, financial and economic conditions but currently has the capacity to meet financial commitments. ‘CCC’—Currently vulnerable and dependent on favorable business, financial and economic conditions to meet financial commitments. ‘CC’—Currently highly vulnerable. ‘C’—Currently highly vulnerable obligations and other defined circumstances. ‘D’—Payment default on financial commitment
  7. 7. Credit Ratings Methodology Business FinancialRisk Profile Risk Profile Analysis Analysis
  8. 8. • Validation of “Company Country • Political Position” • Economic• Trends Risk • Industry – Specific factors• Quality of Earnings • Foreign exchange & Analytical adjustments• Peer Group Comparisons Profitability Industry / Peer Group Business Factors Comparisons Risk • Industry Trends • Industry Structure • Market Size• Competitive Factors • Growth Potential• Market position • Cyclicality• Keys to Success Company • Bases of Competition• Size Position • Changing Technology• Diversification • Operating Risk• Management • Regulatory Environment
  9. 9. • Operating sources & uses Of liquidity • Accounting Regime• Other potential calls on Accounting • Reporting & Disclosure Liquidity • Analytical adjustments• Debt Characteristics • Inventory valuation and• Bank credit facilities Liquidity / Governance Short-term Financial Risk Factors Risk • Ownership • Board of directors• Working capital need • Management practices• Analytical distinctions with • Financial Strategy profitability Cash Flow • Risk Tolerance• Cash flow measures Adequacy • Accounting Practices• Stability of cash flow • Internal controls
  10. 10.  Source of additional certification Lower cost of borrowing. Increase the investors population. Rating as marketing tool. Self discipline by the companies. Reduction of cost in public issues. Motivation for growth Foreign collaborations made easy
  11. 11.  Safeguard against bankruptcy. Low cost information Recognition of risk. Creditability of issuer. Quick investment decisions. No need to depend on investment advisors and professionals. Choice of investments. Benefits of rating surveillance
  12. 12.  Specificity. ‡ Relativity.‡ Guidance.‡ Not a Recommendation.‡ Broad Parameters.‡ No Guarantee.‡
  13. 13.  CRISIL :- Credit rating information services of India limited. Fitch Ratings India Private Ltd. ICRA Limited Credit Analysis & Research Ltd. (CARE) Brickwork Ratings India Private Limited SME Rating Agency of India Ltd. (SMERA)
  14. 14.  CRISIL is Indias leading Ratings, Research, Risk and Policy Advisory Company. CRISIL, the first credit agency was set up in January 1987.‡ It was started jointly by ICICI & UTI with an equity capital of Rs-4 cr. Each of them holds 18% of the capital.‡ Other contributions to the capital are as follows. Asian Development bank 15% LIC, GIC & SBI 5% each HDFC 6.2% Banks (Indian) 19.25% Banks (Foreign) 13.55%
  15. 15.  CRISIL Ratings is Indias largest rating agency, having rated more than 24,541 debt instruments, of more than USD 655 billion (Rs.30,71,459 cr.), issued by over 7938 companies.‡ CRISIL has strong 60% penetration in the domestic bond market and a 53% market share in the bank loan rating segment.‡ CRISIL Ratings rates virtually every kind of organization, including industrial companies, banks ,SMEs, non-banking financial institutions, insurance providers, mutual funds, infrastructure entities, state governments, and urban local bodies. It also rates securitized paper.

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