CREDIT RATING:Definations
According to the CRISIL,Credit rating is Unbiased,Objectives and Indipendent opinion as to an issuer capacity to meet it's financial obligations.
According to the Moody's,Rating is designed exclusively for the purpose of grading Bonds according to there investment qualities.
According to the Standard and Poor's,corporate or municipal debt rating is a current assesment of creditworthiness of an obliger with respect to specific obligation.
According to the Australian rating agency,A corporate credit rating provides lenders with a simple system of gradation by which the relative capacities of companies to make timely payment of the interest and principle on a particular types of debt can be noted.
Credit Rating:Meanings
Credit Ratings is a types of ranking given to the entity which want to borrow fund from the market on the basis of the good credit rating.Credit Rating done by specialized rating agencies on the behalf of Governments or Corporations for there close entities or for themself for raising foreign debts.
The entity have high credit rating means it have high creditworthiness and able to pay it's debts on times.High creditworthiness corporations get credit at low interest rates and also able to pay it's debts on due date.
Before given rating to any Corporations,rating agencies done detail audit of the corporation related to there books of accounts.
Investment grades of Credit rating agencies:
1.Highest safety-AAA(High Investment grade):Any Corporations rated AAA are judged to offer highest safety of timely payment of principle and interest.
2.High safety-AA(High Investment grade):Any Corporations or instruments rated AA are judged to offer high safety of timely payment of interest and principle.
3.Adequate safety-A(Investment grade):Any instrument of firm rated A are judged to offer adequate safety of timely payment of interest and principle.
4.High safety-BBB(Investment grade):Any firms or instrument rates BBB are judged to offer moderate safety of timely payment of interest and principle.
5.Inadequate safety-BB(Speculative grade):An instrument rated BB are judged to offer inadequate safety of timely payment of interest and principle.
6.High risk-B(Speculative grade):Any corporation rated B are judged to have grater susceptibility to default.
7.Substantial risk-C(Speculative grade):An instruments rated C are judged to have factor present that make them vulnerable to default.
8.In Default-D(Speculative grade):An Instrument rated C are in default and arrears of interest or principle payments or expected to default on maturity.
Rating Process:
1.The rating process start with the client approaches to the credit rating.
2 After client approache to the rating agency,rating agency take all necessary information required for this by meeting the management of the comapany /borrowers.
3.Thereafter,rating agency analyse the information collected from the client and generate report.Based on the generated report rating would be decided.
4.After that rating has to be communicated to the client along with the reson supporting the rating.If client is not agree with the rating then client will appeal for reviewing the rating along with addtitional/new information wil have to be provided.
5.Finally,if the rating is accepted by the client,it will then be declared by the credit rating agency.
6.Hence,rating is not a one time process,there would be continuous monitoring of client's performance and it's operational environment.Based on this information,rating may be affirmed,upgraded or downgraded.Any changes may be informed to the public.
Types of Ratings:
1.Shadow Rating:This rating is not shown by the rating agency or companies to the public.This rating is performed by the companies to assess hoe much debt issue is worth to the investors.Before,it releases to the public,companies do detail analyses of it's impact.So,this rating useful for the companies own benefits.
2.Formal Rating:In this rating grade is given to any instruments and shown it to the public for there uses.
3.Security Rating:There are various types of security ratings
3.1 Debt/Bond rating:In this rating grade is given to the Bonds which indicate its credit quality. Credit rating agencies give ranking which shows Bonds issuers financial strength to repay interest and principle to the investors on maturity.
3.2 Equity rating:In this rating grade is given to the equity/share of any company on the bases of the companies financial strength.Higher grade shown the higher price appreciation of the value of the share.
3.3 Individual/Borrower rating:In this rating,the creditworthiness of individual /borrower is judge and provide grade accordingly.This rating shows the borrowers ability to repay the principle and interest on time.
3.4 Sovereign rating:In this rating a credit rating of a particular country has done.Rating agency evaluate the economic and political condition of particular country and give rank accordingly.This rating give insight to the investors about the risk involvement in investment of a particular country.Obtainig good sovereign rating helps developing countries to attract good investments.
Debt Rating Regulatory requirements:
1.There is compulsory Credit rating requirement if conversion is made for Fully Convertible Debenture(FCD) after 18 months.
2.In case of Non Convertable Debenture(NCD) Credit rating is compulsory where maturity exceeds 18 months.
3.If any Company rollover NCD,fresh Credit rating shall be obtained within the period of 6 months prior to the date of redemptions and communicate to the holder before roll over.
4.Under Debt rating,rating of commercial paer and fixed deposit is also compulsory.
Debt Rating Key parameters:
1.Industry Evaluations:There are some major constrains of Industry evaluation by rating agencies like General profile of the company,Major competitors,Intensity of competition,Growth potential and trend of development both domestic and international,Demand and supply position of the product,Existing insatall and licenced capacity,capacities in pipeline,Position of import and export,Technological development,Price trends,Quality and prices of major inputs,Government policies and regulation affecting industry.
2.Unit Evaluations:There are some unit evaluation criterias used by rating agencies like Position of the unit in the industry,Market sahre,Competitive edge,Major strength and weeknesses,Product range and quality,Market segmentation and Seasonality and market,Marketing strategies,Channel and network,Future programe,Goals and targets,Product range(wide,depth,scope and prospects),Brand equity,Age,Corporate governance,Group or assocaite company performances.
3.Technical Evaluations:There are various technical prameters which rating agencies consider during analyses like Level of technology,Operation efficiencies of the plant,Vintage of the pant and level of maintenace,Need and plan for modernization,Competence and support of technical collaborators,Terms of collaborations,Royalty and buyback,In house expertise and expertise for absorption of technology,Efforts of skill development and productivity improvement,Location advantages and infrastrucutral facilities,Yield analysis,Protection against hazards and other natural calamities.
4.Financial Evaluations: This is most important evaluations for credit rating by rating agancies.This includes parameters like Accounting policies, extent of disclosures,Inventory valuations,Depriciations and other major policies,Revaluation of assets,Assets quality,Contingent and off balance sheet liabilities,Auditors report and Director report,Capitalization trends and policies,Cash flow trend and potential,Future projections,Profitability and liquidity management,Interest coverage,Debt service coverage and other aspect of debt servicing,Requirements of future debts,major fund commitments and overall liquidity,Financial flexibility,Unutilized borrowing potential,Standing in capital market,Capabilities to raise resources and to absorbed debts,Working capital policies,Management of cash,debts and inventory,Budgeting and cost control systems, Sensitivity to change interest rates,taxe rates,exchange rates, Risk management policies.
5.Statutory Evaluations:There are some statutory factors take into consideration while doing analyses for rating like Compliance status in respect of government regulations and directive affecting industry,Position of obtaining approvals and NOC,Pending dispute by and against the unit,Practice regarding payments of statutory dues,Mandatory corporate governance issues.
6.Management Evaluations:Some management evaluation during credit rating are like Shareholding pattern and controlling interest,Composition of Board of directors, Organizational profile,Adequacy and quality of setup,extent and effectiveness of delegations, Competency and integrity of management and it's capability to face crises,Policies and practices regarding recruitment,taining,career planning and developement of employees,Style of management functioning,approaches and outlook,organizational culture,employee morale,Management information and monitoring system.
Commercial Paper Rating:
Commercial Paper are the short term money market instrument issued for the maturity period not more than 270 days.It is issued by the corporations to finance account recievable,inventories and short term liabilities.
Credit rating is compulsory to Commercial papers,so the company should obtain specific credit rating from the approved agencies.Minimum credit rating of A2(by ICRA), P2(by CRISIL), D2(by Fitch).Credit rating obtained for Commercial papers should not be 2 month old.
Key Ratios for Commercial Paper Rating:
1.Pre tax interest coverage ratio
2.Pre tax interest and full rental coverage
3.Cash flow / long term debt(%)
4.Cash flow / total debt(%)
5. Pre tax return on average long term capital employed(%)
6.Operating income / Sales(%)
7.Long term debt / Total capitalization(%)
8.Total debt / Capitalization including short term debt(%)
9.Total liabilities / Tangible shareholders equity(%)
Equity Rating:Key considerations:
1.ICRA has started the Equity rating which is also known as grading.
2.There is an seperate division of ICRA,which is known as Earning Prospect and Risk Analysis(EPRA) group.It is set up to do two tasks:(1).Grading of Primary market.(2 )Assesment for Secondary market.
3. The grading is grouped into 6 categories ,ER1 to ER6-In decending order of earning prospects viz,Excellent,Very good,Good,Moderate,Week and Poor.
Equit Rating: Complete Rating Symbols:
1.ER1A:Excellent Rating Prospects(Low risk)
2.ER1B:Excellent Rating Prospects(Moderate risk)
3.ER1C:Excellent Earning Prospects(High risk)
4.ER2A:Very Good Earning Prospects(Low risk)
5.ER2B:Very Good Earning Prospects(Moderate risk)
6.ER2C:Very Good Earning Prospects(High risk)
7.ER3A:Good Earning Prospects(Low risk)
8.ER3B:Good Earning Prospects(Moderate risk)
9.ER3C:Good Earning Prospects(High risk)
10.ER4A:Moderate Earning Prospects(Low risk)
11.ER4B:Moderate Earning Prospects(Moderate risk)
12.ER4C:Moderate Earning Prospects(High risk)
13.ER5A:Week Earning Prospects(Low risk)
14.ER5B:Week Earning Prospects(Moderate risk)
15.ER5C:Week Earning Prospects(High risk)
16.ER6A:Poor Earning Prospects(Low risk)
17.ER6B:Poor Earning Prospects(Moderate risk)
18.ER6C:Poor Earning Prospects(High risk)
Individual Credit Rating:
During the era of Globalization and Liberalization the Auto loans,Home Loans,Personal loans ect are easily available in india,So there is the requirements of individual credit rating is arises.Individual credit rating evaluate the risk involved to a financial transactions with respect to the individual at a given point of time.
Therefore,Equifax inc. of USA and Onida finance ltd(india) set up ONICRA to meet this types of rating requirements.
Individual Credit rating Process:
1.An Individual should not approache directly to the ONICRA,but finance company insists to it's customers to obatain an individual credit rating to reduce its risk exposure.
2.An ONICRA has tie ups with various financial firms like Home loans companies on fee bases which depend upon the quantity of work.
3.After getting work ONICRA start its work of assessing creditworthiness of the customers of its clients.
There are 3 vital parameters are studied for Individual:
1.Potential:
1.1 Personal Strength-In individual credit rating personal strength is very important parameter based on the followings
1.1.1 Qualification:Credit rating agency has to identify the individual educationalqualifications,higher the qualifications higher would be the rating.
1.1.2 Occupation:Agency also has to identified and verify the individual occupation and were he/she is working.
1.2 Stability-Stability in the occupation and job is also one of the important parameters for credit rating agencies,It is judge on the followings:
1.2.1 Job Tenure:Agencies has to identify and verify the tenure of the job,higher the tenure higher would be the credit rating.
1.2.2 Duration of stay in presence place of resedence:it is also one of the important parameters to show the stability of the individual.
2.Capability:A personal capabilities are inportant factors in individual ratings,which are followings
2.1 Income:It is one of the important parameters for raing agencies to identify the creditworthiness of the individual.
2.2 Future Job prospects:Credit rating has to identify the individual future job prospects to judge the capabilities of paying debts in future.
3.Strength-The are some strength of individual has to identify like:
3.1 Financial Assets:It is one of the imortant parameters of the rating of individual to shows the financial strength of the individual.
3.2 Discipline:There should be the decipline of payment of past debt is also identify by the individual.
3.3 Willingness to pay:Rating agencies also identify the willingness to pay the debt by the individual in present .
There are 3 vital Transaction parameters:
1.Risk:There are some risk involved in individual transactions parameters are follows
1.1 Security:Rating agency identify if there is any assets possess to the individual.
1.2 Ownership of the assets:If there is any assets shown by the individual then the ownership has to identify.
1.3 Control over the end use of funds:Rating agency has to identify the controller of the end use of funds provided by its client in the form of debt.
1.4 Collaterals:There should be the proper searching/ identification of collateral kept by the individual.
1.5 Exposure:There should be the proper analyses of how much exposure alloted to the individual.
2.Modes of payments:There are some methods payments analyses of individual by credit rating agencies are follows
2.1 Direct deduction from salary
2.2 Post dated cheques
2.3 Automated debiting of bank account
2.4 Payments on due date
2.5 Payments on demand
2 After client approache to the rating agency,rating agency take all necessary information required for this by meeting the management of the comapany /borrowers.
3.Thereafter,rating agency analyse the information collected from the client and generate report.Based on the generated report rating would be decided.
4.After that rating has to be communicated to the client along with the reson supporting the rating.If client is not agree with the rating then client will appeal for reviewing the rating along with addtitional/new information wil have to be provided.
5.Finally,if the rating is accepted by the client,it will then be declared by the credit rating agency.
6.Hence,rating is not a one time process,there would be continuous monitoring of client's performance and it's operational environment.Based on this information,rating may be affirmed,upgraded or downgraded.Any changes may be informed to the public.
Types of Ratings:
1.Shadow Rating:This rating is not shown by the rating agency or companies to the public.This rating is performed by the companies to assess hoe much debt issue is worth to the investors.Before,it releases to the public,companies do detail analyses of it's impact.So,this rating useful for the companies own benefits.
2.Formal Rating:In this rating grade is given to any instruments and shown it to the public for there uses.
3.Security Rating:There are various types of security ratings
3.1 Debt/Bond rating:In this rating grade is given to the Bonds which indicate its credit quality. Credit rating agencies give ranking which shows Bonds issuers financial strength to repay interest and principle to the investors on maturity.
3.2 Equity rating:In this rating grade is given to the equity/share of any company on the bases of the companies financial strength.Higher grade shown the higher price appreciation of the value of the share.
3.3 Individual/Borrower rating:In this rating,the creditworthiness of individual /borrower is judge and provide grade accordingly.This rating shows the borrowers ability to repay the principle and interest on time.
3.4 Sovereign rating:In this rating a credit rating of a particular country has done.Rating agency evaluate the economic and political condition of particular country and give rank accordingly.This rating give insight to the investors about the risk involvement in investment of a particular country.Obtainig good sovereign rating helps developing countries to attract good investments.
Debt Rating Regulatory requirements:
1.There is compulsory Credit rating requirement if conversion is made for Fully Convertible Debenture(FCD) after 18 months.
2.In case of Non Convertable Debenture(NCD) Credit rating is compulsory where maturity exceeds 18 months.
3.If any Company rollover NCD,fresh Credit rating shall be obtained within the period of 6 months prior to the date of redemptions and communicate to the holder before roll over.
4.Under Debt rating,rating of commercial paer and fixed deposit is also compulsory.
Debt Rating Key parameters:
1.Industry Evaluations:There are some major constrains of Industry evaluation by rating agencies like General profile of the company,Major competitors,Intensity of competition,Growth potential and trend of development both domestic and international,Demand and supply position of the product,Existing insatall and licenced capacity,capacities in pipeline,Position of import and export,Technological development,Price trends,Quality and prices of major inputs,Government policies and regulation affecting industry.
2.Unit Evaluations:There are some unit evaluation criterias used by rating agencies like Position of the unit in the industry,Market sahre,Competitive edge,Major strength and weeknesses,Product range and quality,Market segmentation and Seasonality and market,Marketing strategies,Channel and network,Future programe,Goals and targets,Product range(wide,depth,scope and prospects),Brand equity,Age,Corporate governance,Group or assocaite company performances.
3.Technical Evaluations:There are various technical prameters which rating agencies consider during analyses like Level of technology,Operation efficiencies of the plant,Vintage of the pant and level of maintenace,Need and plan for modernization,Competence and support of technical collaborators,Terms of collaborations,Royalty and buyback,In house expertise and expertise for absorption of technology,Efforts of skill development and productivity improvement,Location advantages and infrastrucutral facilities,Yield analysis,Protection against hazards and other natural calamities.
4.Financial Evaluations: This is most important evaluations for credit rating by rating agancies.This includes parameters like Accounting policies, extent of disclosures,Inventory valuations,Depriciations and other major policies,Revaluation of assets,Assets quality,Contingent and off balance sheet liabilities,Auditors report and Director report,Capitalization trends and policies,Cash flow trend and potential,Future projections,Profitability and liquidity management,Interest coverage,Debt service coverage and other aspect of debt servicing,Requirements of future debts,major fund commitments and overall liquidity,Financial flexibility,Unutilized borrowing potential,Standing in capital market,Capabilities to raise resources and to absorbed debts,Working capital policies,Management of cash,debts and inventory,Budgeting and cost control systems, Sensitivity to change interest rates,taxe rates,exchange rates, Risk management policies.
5.Statutory Evaluations:There are some statutory factors take into consideration while doing analyses for rating like Compliance status in respect of government regulations and directive affecting industry,Position of obtaining approvals and NOC,Pending dispute by and against the unit,Practice regarding payments of statutory dues,Mandatory corporate governance issues.
6.Management Evaluations:Some management evaluation during credit rating are like Shareholding pattern and controlling interest,Composition of Board of directors, Organizational profile,Adequacy and quality of setup,extent and effectiveness of delegations, Competency and integrity of management and it's capability to face crises,Policies and practices regarding recruitment,taining,career planning and developement of employees,Style of management functioning,approaches and outlook,organizational culture,employee morale,Management information and monitoring system.
Commercial Paper Rating:
Commercial Paper are the short term money market instrument issued for the maturity period not more than 270 days.It is issued by the corporations to finance account recievable,inventories and short term liabilities.
Credit rating is compulsory to Commercial papers,so the company should obtain specific credit rating from the approved agencies.Minimum credit rating of A2(by ICRA), P2(by CRISIL), D2(by Fitch).Credit rating obtained for Commercial papers should not be 2 month old.
Key Ratios for Commercial Paper Rating:
1.Pre tax interest coverage ratio
2.Pre tax interest and full rental coverage
3.Cash flow / long term debt(%)
4.Cash flow / total debt(%)
5. Pre tax return on average long term capital employed(%)
6.Operating income / Sales(%)
7.Long term debt / Total capitalization(%)
8.Total debt / Capitalization including short term debt(%)
9.Total liabilities / Tangible shareholders equity(%)
Equity Rating:Key considerations:
1.ICRA has started the Equity rating which is also known as grading.
2.There is an seperate division of ICRA,which is known as Earning Prospect and Risk Analysis(EPRA) group.It is set up to do two tasks:(1).Grading of Primary market.(2 )Assesment for Secondary market.
3. The grading is grouped into 6 categories ,ER1 to ER6-In decending order of earning prospects viz,Excellent,Very good,Good,Moderate,Week and Poor.
Equit Rating: Complete Rating Symbols:
1.ER1A:Excellent Rating Prospects(Low risk)
2.ER1B:Excellent Rating Prospects(Moderate risk)
3.ER1C:Excellent Earning Prospects(High risk)
4.ER2A:Very Good Earning Prospects(Low risk)
5.ER2B:Very Good Earning Prospects(Moderate risk)
6.ER2C:Very Good Earning Prospects(High risk)
7.ER3A:Good Earning Prospects(Low risk)
8.ER3B:Good Earning Prospects(Moderate risk)
9.ER3C:Good Earning Prospects(High risk)
10.ER4A:Moderate Earning Prospects(Low risk)
11.ER4B:Moderate Earning Prospects(Moderate risk)
12.ER4C:Moderate Earning Prospects(High risk)
13.ER5A:Week Earning Prospects(Low risk)
14.ER5B:Week Earning Prospects(Moderate risk)
15.ER5C:Week Earning Prospects(High risk)
16.ER6A:Poor Earning Prospects(Low risk)
17.ER6B:Poor Earning Prospects(Moderate risk)
18.ER6C:Poor Earning Prospects(High risk)
Individual Credit Rating:
During the era of Globalization and Liberalization the Auto loans,Home Loans,Personal loans ect are easily available in india,So there is the requirements of individual credit rating is arises.Individual credit rating evaluate the risk involved to a financial transactions with respect to the individual at a given point of time.
Therefore,Equifax inc. of USA and Onida finance ltd(india) set up ONICRA to meet this types of rating requirements.
Individual Credit rating Process:
1.An Individual should not approache directly to the ONICRA,but finance company insists to it's customers to obatain an individual credit rating to reduce its risk exposure.
2.An ONICRA has tie ups with various financial firms like Home loans companies on fee bases which depend upon the quantity of work.
3.After getting work ONICRA start its work of assessing creditworthiness of the customers of its clients.
There are 3 vital parameters are studied for Individual:
1.Potential:
1.1 Personal Strength-In individual credit rating personal strength is very important parameter based on the followings
1.1.1 Qualification:Credit rating agency has to identify the individual educationalqualifications,higher the qualifications higher would be the rating.
1.1.2 Occupation:Agency also has to identified and verify the individual occupation and were he/she is working.
1.2 Stability-Stability in the occupation and job is also one of the important parameters for credit rating agencies,It is judge on the followings:
1.2.1 Job Tenure:Agencies has to identify and verify the tenure of the job,higher the tenure higher would be the credit rating.
1.2.2 Duration of stay in presence place of resedence:it is also one of the important parameters to show the stability of the individual.
2.Capability:A personal capabilities are inportant factors in individual ratings,which are followings
2.1 Income:It is one of the important parameters for raing agencies to identify the creditworthiness of the individual.
2.2 Future Job prospects:Credit rating has to identify the individual future job prospects to judge the capabilities of paying debts in future.
3.Strength-The are some strength of individual has to identify like:
3.1 Financial Assets:It is one of the imortant parameters of the rating of individual to shows the financial strength of the individual.
3.2 Discipline:There should be the decipline of payment of past debt is also identify by the individual.
3.3 Willingness to pay:Rating agencies also identify the willingness to pay the debt by the individual in present .
There are 3 vital Transaction parameters:
1.Risk:There are some risk involved in individual transactions parameters are follows
1.1 Security:Rating agency identify if there is any assets possess to the individual.
1.2 Ownership of the assets:If there is any assets shown by the individual then the ownership has to identify.
1.3 Control over the end use of funds:Rating agency has to identify the controller of the end use of funds provided by its client in the form of debt.
1.4 Collaterals:There should be the proper searching/ identification of collateral kept by the individual.
1.5 Exposure:There should be the proper analyses of how much exposure alloted to the individual.
2.Modes of payments:There are some methods payments analyses of individual by credit rating agencies are follows
2.1 Direct deduction from salary
2.2 Post dated cheques
2.3 Automated debiting of bank account
2.4 Payments on due date
2.5 Payments on demand
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