CREDIT RATING PRESENTED BY: SAGAR PATIL 88 VINAYAK ALASE 107

Transcription

1 CREDIT RATING PRESENTED BY: SAGAR PATIL 88 VINAYAK ALASE 107

2 WhAT IS CREDIT RATING An assessment of the credit worthiness of individuals and corporations. It is based upon the history of borrowing and repayment, as well as the availability of assets and extent of liabilities. Credit Rating is important since individuals and corporations with poor Credit Rating will have difficulty finding financing, and will most likely have to pay more due to the risk of default.

3 Types of credit Rating Corporate Credit Ratings Sovereign Credit Ratings Instrument Ratings

4 CORPORATE CREDIT RATINGS The credit rating of a corporation is a financial indicator to potential investors of debt securities such as bonds. Credit rating is usually of a financial instrument such as a bond, rather than the whole corporation and have letter designations such as A, B, C. The Standard & Poor's rating scale is as follows, from excellent to poor: AAA, AA+, AA, AA-, A+, A, A-, BBB+, BBB, BBB-, BB+, BB, BB-, B+, B, B-, CCC+, CCC, CCC-, CC, C, D. Anything lower than a BBB- rating is considered a speculative or junk bond.

5 SOVEREIGN CREDIT RATING A sovereign credit rating is the credit rating of a sovereign entity, i.e., a national government. The sovereign credit rating indicates the risk level of the investing environment of a country and is used by investors looking to invest abroad. It takes political risk into account. SHORT TERM RATING A short-term rating is a probability factor of an individual going into default within a year. This is in contrast to long-term rating which is evaluated over a long timeframe. In the past institutional investors preferred to consider long-term ratings. Nowadays, short-term ratings are commonly used.

6 Rating Process

7 Rating Methodology Economy Analysis: Economic indicators Business Analysis: prospects of the industry competitive factors affecting the industry market position in the industry operating efficiency legal position Financial Analysis: Accounting quality Adequacy of cash flow Financial flexibility

8 Management Analysis: Study of track record of management Capacity to overcome adverse situations Philosophy Strategies Personnel policies Performance of group companies Fundamental Analysis: Asset quality Profitability Interest and tax rate sensitivity

9 Credit rating agencies in India There are five credit rating agencies in India: Credit rating information service ltd.(crisil). Investment information and Credit Rating Agency of India(ICRA) Credit Analysis and Research(CARE). Onida Individual Credit Rating Agency.(ONICRA)

10 CRISIL CRISIL was incorporated in It is promoted by ICICI and UTI as a public limited company with its headquarters at Mumbai. CRISIL is a Standard & Poor s company. Its majority shareholder is Standard & Poor s, the world s foremost provider of independent credit ratings, indices, risk evaluation, investment research and data.

11 CRISIL S PROCESS

12 Credit Rating Symbols Debenture Rating Symbols High Investment Grades: AAA(triple A): Highest Safety AA (double A): High Safety Investment Grades: A: Adequate Safety BBB (triple B): Moderate Safety Speculative Grades: BB: Inadequate Safety B: High Risk C: Substantial Risk D: Default

13 ICRA ICRA Limited (formerly Investment Information and Credit Rating Agency of India Limited) was set up in 1991 by leading financial/investment institutions, commercial banks and financial services companies as an independent and professional Investment Information and Credit Rating Agency. The international Credit Rating Agency Moody s Investors Service is ICRA s largest shareholder. The participation of Moody s is supported by a Technical Services Agreement, which entails Moody s providing certain high-value technical services to ICRA

14 Credit rating Symbols Long term Debentures Bonds and Preference shares-rating Symbols LAAA: Highest Safety LAA: High Safety LA: Adequate Safety LBBB: Moderate Safety LBB: Inadequate Safety LB: Risk prone LC: Substantial Risk LD: Default, Extremely speculative

15 ONICRA Onicara Credit Rating Agency of India Limited: (Incorporated in 1993) is an established player in the individual credit assessment and scoring services space in the Indian market. It is the first in India to launch commercial services and provide individual credit rating and reporting services to the Indian financial market. ONICRA has been acknowledged as pioneers of Individual Credit Rating in the Economic Survey of India issued by Ministry of Finance, Government of India and its services have been hailed by the financial sector and in the media.

16 CARE Credit Analysis & Research Ltd. (CARE Ratings) is a full service rating company that offers a wide range of rating and grading services across sectors. CARE has an unparallel depth of expertise. CARE Ratings methodologies are in line with the best international practices. CARE Ratings has completed over 3850 rating assignments having aggregate value of about Rs 8071 billion (as at December 2007), since its inception in April CARE is recognised by Securities and Exchange Board of India (Sebi), Government of India (GoI) and Reserve Bank of India (RBI) etc

17 Credit Rating Symbols Long term debt instruments-rating Symbols CARE AAA: Highest Safety CARE AA: High Safety CARE A: Adequate Safety CARE BB: Inadequate Safety CARE B: High Risk For medium term debt instruments CARE AAA: Highest Safety CARE AA: High Safety CARE A: Adequate Safety CARE BB: Inadequate Safety CARE C: High Risk

18 Who uses Credit Rating? Investors- In absence of credit rating system, risk evaluation depends on name recognition. Credit rating helps investors in selecting appropriate instrument from broad spectrum of investment options. Banks use ratings of other banks for decisions regarding interbank lending, swap agreements, etc. Credit rating agencies also provides services like industry reports, corporate reports, seminars and open access to the analysts of the agencies. Regulators- Restrict entry to market of new issues rated bellow a particular grade. Prohibit investors from purchasing or holding of instruments rated bellow a particular level.

19 Who uses Credit Rating?(..Cont) Issuers- Compared to unrated securities, issuers of rated securities have access to much wider investor base & more faith is placed. Investor confidence enables issuers of highly rated instruments to access market even under adverse market conditions. Intermediaries- Merchant bankers use rating for planning, pricing, underwriting, placement. Brokers and dealers in securities use rating as an input for their monitoring of risk exposures.

20 Major Agencies Renowned Globally Moody investors services (MOODY S) Standard and poor s corporation (S&P) Duff and Phelps credit rating co. (DCR) Japan credit rating agencies (JCR)

21 DISADVANTAGES OF CREDIT RATING Biased rating and misrepresentation Concealment of material information No guarantee for soundness of the company Human bias Reflection of temporary conditions Present rating may change (down grade) Differences in rating of two agencies

22 SEBI Issued Guidelines to Credit Rating Agencies CRAs should maintain records of the rating committee. Information about the historical default rates of their rating categories. CRAs should ensure that its analysts do not participate in any kind of marketing and business development. CRAs while rating structured finance products, are barred from providing consultancy or advisory services regarding the design of the structured finance instrument.

23 THANK YOU