This document discusses credit rating methodologies. It defines credit ratings and explains that they are determined by credit rating agencies to evaluate a debtor's ability to repay debt. The top credit rating agencies are listed as Dun & Bradstreet, Moody's, Standard & Poor's, and Fitch Ratings. Credit rating methodologies involve business analysis of industry and company risks, financial analysis of accounting practices and cash flows, management evaluation, and fundamental analysis of liquidity, assets, profits, and taxes. The rating process involves agencies collecting information, analyzing it through a team, submitting recommendations to a rating committee, and continuously monitoring the rating.

1. CREDIT RATING
METHODOLOGY
By: PREETHAM.K
VCET DEPT OF MBA

2. MEANING
• A credit rating evaluates the credit worthiness of a debtor,
especially a business (company) or a government. It is an evaluation
made by a credit rating agency of the debtor's ability to pay back the
debt and the likelihood of default.
• Credit ratings are determined by credit ratings agencies. The
credit rating represents the credit rating agency’s evaluation of
qualitative and quantitative information for a company or
government; including non-public information obtained by the
credit rating agencies analysts

3. TOP CREDIT RATING AGENCIES
TOPAGENCIES :
• Dun & Bradstreet
• Moody's
• Standard & Poor's
• Fitch Ratings

4. CREDIT RATING METHODOLOGY
Consist of 4 areas:
 Business analysis-
covers an analysis of industry risk, market position
in the country, operating efficiency of the company and legal
position.

5. 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
Cyclicality
Bases of Competition
Changing Technology
Operating Risk
•
•
•
•
•
•
•
• Regulatory Environment
• Competitive Factors
Market position•
• Keys to Success
Size
Diversification
•
•
• Management
• Validation of “Company
Position”
• Trends
• Quality of Earnings
& Analytical adjustments
• Peer Group Comparisons

6. Financial Analysis- analysis of accounting
quality, earnings protection, cash flow adequacy and
financial flexibility.

7. 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
• Other potential calls on
Liquidity
Debt Characteristics•
• Bank credit facilities

8.  Management Evaluation- study of track record of the
management’s capacity to overcome adverse situations, goals,
philosophy and strategies.
 Fundamental analysis- analysis of liquidity management,
asset quality, profitability and interest and tax sensitivity.

9. Steps:-
• information is collected and then analyzed by a team of professionals agency.
• If necessary, meetings with top management suppliers and dealers and a visit
to the plant of proposed sites are arranged to collect additional data. This
team of professionals submit their recommendations to the rating committee.
• Committee discusses this report and then assigns rating.
• Rating assigned is then notified to the issuer and only on his acceptance,
rating is published.
• Once the issuer decides to use and publish the rating, agency has to
continuously monitor it over the entire life of instrument.