7ae9fCredit Ratings

8/4/2019 7ae9fCredit Ratings

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Amity Business School

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Credit Ratings




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Credit rating and procedures:

• Business Analysis: industry risk, with competition from others,demand and supply position,govt. policies etc. Marketing risk withcompetitive advantages or disadvantages, market share, selling anddistribution network, quality of customer service, operating efficiencyinvolved in location advantages, labour cooperation, cost efficiency,and operating margins and legal position as reflected in security

offered, trust deed and trustee’s reputation etc. • Financial analysis: Examining the accounting quality under the

methods of depreciation, income recognition, treatment of baddebts, contingent liabilities etc. Earnings protection, under projectionof future earnings, EPS, profitability ratios, proportion of interest togross profit and net profit etc, adequacy of cash flows, reflected in

working capital management, current ratio, inventory to sales, etcand financial flexibility, examined in terms of capital financing plans,flexibility in financing through alternative methods, planning methodsand their flexibility




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• Management Evaluation: This is examined in relation totrack record of promoters, managers and top executives,their qualification and experience, planning and controlsystems, capacity to adjust with flexibility, foresight tomeet adverse situations, goal setting, monitoring and

evaluation with a view to achieve goals.• Regulatory and competitive environment : This is

assessed in terms of the structure and regulatoryframework of the financial system, the efficiency ofoperations and regulatory authorities, trends in

regulation and deregulation and the reaction of thecompetitors to regulation etc.




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• Fundamental analysis: Under this head ,the company’s liquiditymanagement, capital structure, debt leverage, long term solvency,short term solvency, matching of cash inflows to outflows and ratioanalysis of the company. The assets quality, in terms of credit riskmanagement, receivable to current assets, systems of monitoringthe sector credit, individual customer risk and management of

problem credits. The company’s profitability and financial position isalso analyzed through study of historic profits, spread on fundsdeployment, revenue on non-fund based services, accretion toreserves, profit margins etc. Besides, the impact of interest tax ratechanges on company’s net profit is analyzed. The interest as aproportion to cash inflows or of gross profits is also used to examinethe interest burden and potential for future earnings and the impactof debt burden on them is analyzed.

• These and many more such fundamental factors in a company arealso analyzed




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ICRA’s Rating Process (An Overview)

Assign Rating Team

Receive Initial Information & Conduct Research

Meetings and Visits

Analysis and Report Preparation

Preview Meeting

Rating Meeting

Assign Rating

Acceptance

Surveillance

Communicate Rating and Rationale

Mandate

Fresh Inputs

/Clarifications

Request for Review

Non Acceptance

InitialStage

FactsFindings

&Analysis

RatingFinalization




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STRUCTURE OF CREDIT RISK

RATING SYSTEM




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CREDIT RISK

1. Internal

a. Business risk

i. Current market shareii. Market standing

iii. Operating efficiency

iv. Growth perspective

v. SWOT analysis

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b) Financial Risk

i. Past financial record

ii. Quality of past financial records (performance)

iii. Projected financialsiv. Financial structure

v. Cash flow position

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c) Management Risk

i. Management Track Record

ii. Repayment history of previous loans

iii. Quality of management

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d) Credit Facility Risk

i. Availability of security

ii. Past payment record

iii. Directors/corporate guarantee

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e) Project Risk

i. DSCR Adequacy

ii. Tenure of loan

iii. Asset Coverage Rationiv. Future cash flows

v. Financial leverage

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2. External

a) Industry Risk

i. Nature of industry

ii. Competition and other players in the industryiii. Industry prospects

iv. Industry SWOT

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CREDIT DERIVATIVE (ISDA)

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Unfunded credit derivative products include the following

products:

Single name Credit Default Swap (CDS)

Total Return Swap First to Default Credit Default Swap

Portfolio Credit Default Swap

Secured Loan Credit Default Swap

Credit Default Swap on Asset Backed Securities Credit Default Swaption (CDS)

Recovery Lock Transaction

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Credit Spread Option

CDS index products

Constant Maturity Credit Default Swap (CMCDS)

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Funded credit derivative products include the following

products:

Credit Linked Note (CLN)

Synthetic collaboration debt obligation (CDO)

Constant Proportion Debt Obligation (CPDO)

Synthetic constant Proportion Portfolio Insurance(Synthetic CPPI)

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ORIGIN

CREDIT RATING IN INDIA




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BENEFITS OF CREDIT RATING

• Low cost information

• Quick investment decision• Independent Investment decision

• Investors Protection




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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)

• Duff Phelps Credit Rating Pvt. Ltd. (DCR India)

• Onida Individual Credit Rating Agency ltd. (ONICRA)




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RATING METHODOLOGY

• Credit Rating Symbols

7ae9fCredit Ratings

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