Credit Risk Management and Credit Rating

7/28/2019 Credit Risk Management and Credit Rating

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UNIVERSITY OF THEPUNJAB

CREDITRISKMANAGEMENTANDCREDITRATING

SUBMITTED TO:

Ms. Sahar Butt

SUBMITTED BY:

Group:

Sana Javaid (BC09-070)

Saira Khan (BC09-067)

Sadia Khalid (BC09-069)

Sana Afzal (BC09-065)

Rabia Pervaiz (BC09-068)

Haffsa Idrees (BC09-061)

Class: B.Com. (Hons.)

Semester: 7

Section: A (Morning)

Subject Code: F2


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Table of ContentsINTRODUCTION ....................................................................................................................... 3

Credit risk Management: .............................................................................................. 3

Credit Rating: ............................................................................................................... 3

CREDIT RISK MANAGEMENT .................................................................................................. 3

Credit Risk .............................................................................................................................. 3

Types of Credit Risk ............................................................................................................ 4

Impact and Probability of Credit Risk .................................................................................. 4

Principles of Effective Credit Risk Management ..................................................................... 5

Credit Risk Management Process .......................................................................................... 6

CREDIT ANALYSIS ................................................................................................................ 7

Debt Service Coverage Ratio .............................................................................................. 7

CREDIT RISK ANALYSIS METRICS...................................................................................... 8

The Five Cs of Credit Analysis ............................................................................................ 8

BASIC TERMINOLOGIES ...................................................................................................... 9

CREDIT ASSESSMENT ..................................................................................................... 9

CREDIT CRUNCH .............................................................................................................. 9

CREDIT EXPOSURE .......................................................................................................... 9Credit rating ..............................................................................................................................10

Credit Rating Scale................................................................................................................10

Investment Grade ..............................................................................................................11

Speculative grade ..............................................................................................................11

International Short-term Credit Ratings ..................................................................................13

Credit Report ............................................................................................................................15

Credit Reporting ....................................................................................................................15

Working Of Credit Reporting Companies ...............................................................................15

Credit Rating Agency .............................................................................................................16

International Credit Rating Agencies ..................................................................................16

Local and International Credit Rating Agencies ..................................................................16

TOP 4 INTERNATIONAL CRS .............................................................................................18

1. MOODYS ...................................................................................................................18


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2. Standard & Poors ..........................................................................................................19

3. Fitch ...............................................................................................................................20

4. DBRS ..........................................................................................................................21

PACRA ..................................................................................................................................24

INTRODUCTION ...............................................................................................................24

PRODUCTS OFFERED: ....................................................................................................24

RATING MATRIX ...............................................................................................................25

RESEARCH .......................................................................................................................25

PACRAS RATING.............................................................................................................26

FUND STABILITY RATINGS .............................................................................................27


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Principles of Effective Credit Risk Managementv

The following are what are considered to be the nine principle components necessary to

conduct safe and sound lending activities and to ensure for an effective credit risk

management program:

1. Credit Risk Appetite - Establishing a well-defined credit risk appetite for your institution

is the critical first step toward an effective lending and credit risk management program.

2. Underwriting Criteria - Establishing equally well-defined underwriting criteria which

includes both quantitative (objective) and qualitative (subjective) factors and provides the

foundation upon which the institution can build a quality loan portfolio consistent with its

risk appetite.

3. Credit Analysis - Conducting a thorough and appropriate (i.e., CRE vs. C&I) analysis of

credit risk at the approval phase and throughout the life of a loan is critical to ensuring

that lending decisions are made according to the institutions risk appetite and

underwriting criteria. The analysis should include both quantitative (objective) and

qualitative (subjective) factors.

4. Credit Risk Rating Methodology - Adopting a clear and concise credit risk rating

methodology which similarly includes both quantitative (objective) and qualitative

(subjective) factors provides for the effective grading of credit risk across the loan

portfolio. It is also the basis upon which proactive and effective measurement,

monitoring, and control of credit risk exposure can be built.

5. Loan Review - In order to ensure that loans have been appropriately risk rated, aperiodic assessment of the credit risk of each loan should be performed. This review

should be independent from the lending area and be conducted with an appropriate

scope of coverage (in terms of both number of loans and outstanding balances) and

frequency.

6. Loan Monitoring/Management - Once a loan has been originated it becomes a living,

breathing organism of credit risk which must be proactively and appropriately monitored

throughout its life. Receipt and analysis of updated financial information on the borrower

and guarantors (if any), as well as the periodic assessment of collateral coverage, is key

for ensuring that the level of credit risk is effectively measured, monitored, and controlled

from origination through maturity.

7. Portfolio Monitoring and Reporting - Similarly to the measurement, monitoring, and

management of credit risk at the individual loan level, doing so at the portfolio level

provides for an aggregate perspective on overall credit risk across the portfolio,

particularly in terms of concentrations by loan, borrower, industry type,

product/commodity type, and/or geographical location, as well as the aggregate level of

exposure to related borrowers.


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8. Stress Testing - As the loan portfolio grows in terms of both number and variety, stress

testing on both a loan-by-loan basis and at the portfolio level becomes increasingly

important to measure the overall credit risk exposure inherent in the loan portfolio and

the potential increase or decrease due to changes in key factors (i.e., interest rates, cap

rates, net operating income, etc.).

9. Allowance for Loan and Lease Losses (ALLL) - A clearly defined loan loss reserve

methodology that is consistent with applicable regulatory guidelines and Generally

Accepted Accounting Principles (GAAP) is critical towards protecting the institution

from credit losses.

All of the above components should be incorporated into a comprehensive set of policies

and procedures covering all aspects of the lending and credit risk management program.

Credit Risk Management Process

It involves four major steps:

1) Risk Identification: It can be done by gathering data from

a) Balance sheets (Non-performing loans, capital, reserves, etc)

b) Call and thrift financial reports/ income statements

2) Risk Assessment: It can be done in three waysvi:

a) Quantitative Analysis: Ratio, peer and trend analysis

b) Qualitative Analysis: It can be done by analyzing

i) Holding company and systematic support

ii) Balance sheet and loan composition

iii) Ratings

iv) Stock price performance

c) Recent Developments: Review

i) Recent enforcement actions

ii) Management changes

iii) Acquisitions

iv) New market entries


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3) Risk Response Development: Decide on the available and applicable control measures

and hierarchy of control. The available measures for credit risk management could be to:

a) Eliminate

b) Mitigate

c) Transfer

d) Share

e) Accept

f) Contingency plan

4) Risk Response Control: Implement the control measure that has been decided upon

according to the nature, impact and probability of the credit risk.

CREDIT ANALYSISvii

Credit analysis is the method by which one calculates the credit-worthiness of a business or

organization. The audited financial statements of a large company might be analyzed when it

issues or has issued bonds or; a bank may analyze the financial statements of a small business

before making or renewing a commercial loan. The term refers to either case, whether the

business is large or small.

Credit analysis involves a wide variety of financial analysis techniques, including:

Ratio and trend analysis

Creation of projections

Detailed analysis of cash flows

Examination of collateral and other sources of repayment

Examination of credit history and management ability

Analysts attempt to predict the probability that a borrower will default on its debts, and also the

severity of losses in the event of default.

Debt Service Coverage Ratio

Before approving a commercial loan, a bank will look at all of these factors with the

primary emphasis being the cash flow of the borrower. A typical measurement of repayment

ability is the debt service coverage ratio. A credit analyst at a bank will measure the cash

generated by a business (before interest expense and excluding depreciation and any other

non-cash or extraordinary expenses). The debt service coverage ratio divides this cash flow


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How Credit Risk Analysis Inform s Lending Practices?

The importance of each metric can vary considerably from applicant to applicant. Not only do

they help a lender decide whether or not to issue credit, they also influence payment terms,

credit limit, and if there are additional assurances that need to be made.

BASIC TERMINOLOGIES

Certain terminologies must be considered before studying the credit risk management concept.

Some of them are as follows:

Credit assessment

Credit crunch

Credit exposure

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CREDIT ASSESSMENTYour credit is calculated as 'Good', 'Fair' or 'Needs Improvement'. A good credit assessment

means you should be able to qualify, within the limits of your income, for most loans. You are

also much more likely to receive the best interest rates available. If your credit is fair, you will

probably not have trouble qualifying for a loan, but you may not receive the best available

interest rate. If your credit rating needs improvement, you may have issues that could limit your

ability to qualify for many loans.

xCREDIT CRUNCH

It is an economic condition in which investment capital is difficult to obtain. Banks and investors

become wary of lending funds to corporations, which drives up the price of debt products for

borrowers.

Credit crunches are usually considered to be an extension of recessions. A credit crunch makes

it nearly impossible for companies to borrow because lenders are scared of bankruptcies or

defaults, which results in higher rates. The consequence is a prolonged recession (or slower

recovery), which occurs as a result of the shrinking credit supply.

xiCREDIT EXPOSURE

The total amount of credit extended to a borrower by a lender. The magnitude of credit

exposure indicates the extent to which the lender is exposed to the risk of loss in the event of

the borrower's default.

For example, if a bank has made short-term and long-term loans totaling $100 million to

company A, its credit exposure to company A is $100 million.

In general, a bank will seek to have greater credit exposure to its customers with the highest

credit rating, and less exposure to clients with a lower credit rating. If a customer encounters

unexpected financial problems, the bank may seek to reduce its credit exposure in order to

mitigate the risk of loss arising from a potential default.


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Credit rating

A credit rating evaluates the credit worthiness of a debtor, especiallya business (company) or a government. It is an evaluation made by a credit rating agency of thedebtor's ability to pay back the debt and the likelihood of default.[3]

Credit ratings are determined by credit ratings agencies. The credit rating represents thecredit rating agency's evaluation of qualitative and quantitative information for a company orgovernment; including non-public information obtained by the credit rating agencies analysts.

Credit ratings are not based on mathematical formulas. Instead, credit rating agenciesuse their judgment and experience in determining what public and private information should beconsidered in giving a rating to a particular company or government. The credit rating is used byindividuals and entities that purchase the bonds issued by companies and governments todetermine the likelihood that the government will pay its bond obligations.

A poor credit rating indicates a credit rating agency's opinion that the company orgovernment has a high risk of defaulting, based on the agency's analysis of the entity's history

and analysis of long term economic prospects.

Credit score

A credit score is a numerical expression based on a statistical analysis of a person'scredit files, to represent the creditworthiness of that person. A credit score is primarily basedon credit report information typically sourced from credit bureaus.

Lenders, such as banks and credit card companies, use credit scores to evaluate the

potential risk posed by lending money to consumers and to mitigate losses due to bad debt.Lenders use credit scores to determine who qualifies for a loan, at what interest rate, and whatcredit limits. Lenders also use credit scores to determine which customers are likely to bring inthe most revenue. The use of credit or identity scoring prior to authorizing access or grantingcredit is an implementation of a trusted system.

Credit scoring is not limited to banks. Other organizations, such as mobile phonecompanies, insurance companies, landlords, and government departments employ the sametechniques. Credit scoring also has a lot of overlap with data mining, which uses many similartechniques.

Credit Rating Scale

The credit rating of a corporation is a financial indicator to potential investorsof debt securities such as bonds. Credit rating is usually of a financial instrument such as abond, rather than the whole corporation. These are assigned by credit rating agencies suchas A. M. Best, Dun & Bradstreet, Standard & Poor's, Moody's or Fitch Ratings and have letterdesignations such as A, B, C. The Standard & Poor's rating scale is as follows, from excellent topoor: 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.


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International long-term credit ratings

International Long-Term Credit Ratings (LTCR) may also be referred to as Long-TermRatings. When assigned to most issuers, it is used as a benchmark measure of probability ofdefault and is formally described as an Issuer Default Rating (IDR). When applied to issues orsecurities, the LTCR may be higher or lower than the issuer rating (IDR) to reflect relative

differences in recovery expectations. The following rating scale applies to foreign currency andlocal currency ratings:

Investment Grade

AAAHighest credit quality. 'AAA' ratings denote the lowest expectation of credit risk.They are assigned only in case of exceptionally strong capacity for payment offinancial commitments. This capacity is highly unlikely to be adversely affectedby foreseeable events.

AAVery high credit quality. 'AA' ratings denote expectations of very low credit risk.

They indicate very strong capacity for payment of financial commitments. Thiscapacity is not significantly vulnerable to foreseeable events.

AHigh credit quality. 'A' ratings denote expectations of low credit risk. The capacityfor payment of financial commitments is considered strong. This capacity may,nevertheless, be more vulnerable to changes in circumstances or in economicconditions than is the case for higher ratings.

BBBGood credit quality. 'BBB' ratings indicate that there is currently expectation oflow credit risk. The capacity for payment of financial commitments is consideredadequate but adverse changes in circumstances and economic conditions aremore likely to impair this capacity. This is the lowest investment grade category.

Speculative grade

BB Speculative'BB' ratings indicate that there is a possibility of credit risk developing, particularlyas the result of adverse economic change over time; however, business orfinancial alternatives may be available to allow financial commitments to be met.Securities rated in this category are not investment grade.

B Highly speculativefor issuers and performing obligations, 'B' ratings indicate that significant creditrisk is present, but a limited margin of safety remains. Financial commitments are

currently being met; however, capacity for continued payment is contingent upona sustained, favorable business and economic environment.

For individual obligations, may indicate distressed or defaulted obligations withpotential for extremely high recoveries. Such obligations would possess aRecovery Rating of 'R1' (outstanding).


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CCCFor issuers and performing obligations, default is a real possibility. Capacity formeeting financial commitments is solely reliant upon sustained, favorablebusiness or economic conditions.

For individual obligations, may indicate distressed or defaulted obligations with

potential for average to superior levels of recovery. Differences in credit qualitymay be denoted by plus/minus distinctions. Such obligations typically wouldpossess a Recovery Rating of 'R2' (superior), or 'R3' (good) or 'R4' (average).

CCFor issuers and performing obligations, default of some kind appears probable.

For individual obligations, may indicate distressed or defaulted obligations with aRecovery Rating of 'R4' (average) or 'R5' (below average).

Grade CFor issuers and performing obligations, default is imminent.

For individual obligations, may indicate distressed or defaulted obligations withpotential for below-average to poor recoveries. Such obligations would possess aRecovery Rating of 'R6' (poor).

RDIndicates an entity that has failed to make due payments (within the applicablegrace period) on some but not all material financial obligations, but continues tohonor other classes of obligations.

DIt indicates an entity or sovereign that has defaulted on all of its financialobligations. Default generally is defined as one of the following:

Failure of an obligor to make timely payment of principal and/or interest underthe contractual terms of any financial obligation;

The bankruptcy filings, administration, receivership, liquidation or other winding-up or cessation of business of an obligor; or

The distressed or other coercive exchange of an obligation, where creditorswere offered securities with diminished structural or economic terms comparedwith the existing obligation.

Default ratings are not assigned prospectively; within this context, non-paymenton an instrument that contains a deferral feature or grace period will not be considered adefault until after the expiration of the deferral or grace period.

Issuers will be rated 'D' upon a default. Defaulted and distressed obligationstypically are rated along the continuum of 'C' to 'B' ratings categories, depending upon


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their recovery prospects and other relevant characteristics. Additionally, in structuredfinance transactions, where analysis indicates that an instrument is irrevocably impairedsuch that it is not expected to meet pay interest and/or principal in full in accordance withthe terms of the obligation's documentation during the life of the transaction, but whereno payment default in accordance with the terms of the documentation is imminent, theobligation may be rated in the 'B' or 'CCC-C' categories.

Default is determined by reference to the terms of the obligations' documentation.Fitch will assign default ratings where it has reasonably determined that payment hasnot been made on a material obligation in accordance with the requirements of theobligation's documentation, or where it believes that default ratings consistent withFitch's published definition of default are the most appropriate ratings to assign.

International Short-term Credit Ratings

The following ratings scale applies to foreign currency and local currency ratings. AShort-term rating has a time horizon of less than 13 months for most obligations, or up to three

years for US public finance, in line with industry standards, to reflect unique risk characteristicsof bond, tax, and revenue anticipation notes that are commonly issued with terms up to threeyears. Short-term ratings thus place greater emphasis on the liquidity necessary to meetfinancial commitments in a timely manner.

F1Highest credit quality. Indicates the strongest capacity for timely payment offinancial commitments; may have an added "+" to denote any exceptionallystrong credit feature.

F2Good credit quality. A satisfactory capacity for timely payment of financialcommitments, but the margin of safety is not as great as in the case of the higher

ratings. F3

Fair credit quality. The capacity for timely payment of financial commitments isadequate; however, near term adverse changes could result in a reduction to noninvestment grade.

BSpeculative. Minimal capacity for timely payment of financial commitments, plusvulnerability to near term adverse changes in financial and economic conditions.

CHigh default risk. Default is a real possibility. Capacity for meeting financialcommitments is solely reliant upon a sustained, favorable business andeconomic environment.

RDIndicates an entity that has defaulted on one or more of its financialcommitments, although it continues to meet other obligations.

DIndicates an entity or sovereign that has defaulted on all of its financialobligations.


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Credit ReportxiiA report containing detailed information on a person's credit history, including identifying

information, credit accounts and loans, bankruptcies and late payments, and recent inquiries. Itcan be obtained by prospective lenders with the borrower's permission, to determine his or

her credit worthinessCredit Reporting

Credit reporting is the process that credit reporting agencies, also called credit bureaus,use to inform banks and other businesses about your payment and spending habits via yourcredit report. Your credit report is maintained by companies known as credit reporting agenciesor credit bureaus. There are three major credit reporting agencies in the United StatesEquifax, Experian, and TransUnion.

Periodically, the companies you do business with send updates to the credit reportingagencies to let them know how youre doing on your financial obligations. For example, your

credit card issuer will update your account to include your account balance, credit limit, monthlypayment, recent payment history, and current status of your account.

Working Of Credit Reporting Companiesxiii

A credit report is such an important piece of information that every person who has

received credit is entitled to a free one each year. But what exactly is this document that wields

so much power? The credit reporting companies Trans Union, Equifax and Experian are thethree major companies that maintain credit reports. The credit reporting companies issue credit

reports to creditors, insurers and others as permitted under law.

Here's an example of how the system works:

When you apply for a new credit card, the creditor requests a copy of your financial history, or

credit report, from one or more of the credit reporting companies. The creditor may use your

credit report, a score, and other information you provide (such as income or debt information) to

determine whether to approve your application and what rates to offer. If you are issued a card,

the creditor reports that account to the credit reporting companies, and then updates it, including

your balance and payment activity, about every 30 days.

The credit reporting companies update your credit report as they receive new information from

creditors or lenders. Your credit profile change based on your financial activity. The next time

you apply for a credit card or loan, the process repeats.


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Credit Rating Agencyxiv

A credit rating agency (CRA) is a company that assigns credit ratings forissuers of

certain types ofdebt obligations as well as the debt instruments themselves. In some cases, the

servicers of the underlying debt are also given ratings.

In most cases, the issuers ofsecurities are companies, special purpose entities, state

and local governments, non-profit organizations, or national governments issuing debt-like

securities (i.e., bonds) that can be traded on a secondary market. A credit rating for an issuer

takes into consideration the issuer's credit worthiness (i.e., its ability to pay back a loan), and

affects the interest rate applied to the particular security being issued.

A company that issues credit scores for individual credit-worthiness is generally called

a credit bureau (US) orconsumer credit reporting agency (UK).

ESMA is exclusively responsible for the registration and supervision of Credit Rating

Agencies in the European Union. A full list of all CRA's currently registered in the EU, can befound via the menu.

In addition, ESMA also carries out policy work to prepare future legislation, such as

regulatory technical standards, and guidelines. This work is undertaken through the CRA

technical committee, which has representatives from all the national competent authorities.

International Credit Rating Agencies

Canadian bond rating service(BRS)

Dominion bond rating service(DBRS)

Duff and Phelps credit rating agency

Fitch IBCA Ital rating DCR SPA

Japan credit rating agency(JCRA)

Japan rating and investment information

Mikuni and co.

Moodys investor service

Standard and poors rating service

Thompson bank watch

Local and International Credit Rating Agencies

M. Best (U.S.) Baycorp Advantage (Australia) Bulgarian Credit Rating Agency (Bulgaria, European Union) Capital Intelligence (Cyprus) Capital Standards Rating (Kuwait) CARE Ratings (India) Credo line (Ukraine) Credit Rating Information and Services Limited(CRISL), (Bangladesh) CRISIL (India)
http://en.wikipedia.org/wiki/A._M._Besthttp://en.wikipedia.org/wiki/U.S.http://en.wikipedia.org/wiki/Baycorp_Advantagehttp://en.wikipedia.org/wiki/Australiahttp://en.wikipedia.org/w/index.php?title=Bulgarian_Credit_Rating_Agency&action=edit&redlink=1http://en.wikipedia.org/wiki/Bulgariahttp://en.wikipedia.org/wiki/European_Unionhttp://en.wikipedia.org/wiki/Cyprushttp://en.wikipedia.org/w/index.php?title=Capital_Standards_Rating&action=edit&redlink=1http://en.wikipedia.org/wiki/Kuwaithttp://en.wikipedia.org/w/index.php?title=CARE_Ratings&action=edit&redlink=1http://en.wikipedia.org/wiki/Credo_linehttp://en.wikipedia.org/wiki/Ukrainehttp://en.wikipedia.org/wiki/Credit_Rating_Information_and_Services_Limitedhttp://en.wikipedia.org/wiki/Bangladeshhttp://en.wikipedia.org/wiki/CRISILhttp://en.wikipedia.org/wiki/CRISILhttp://en.wikipedia.org/wiki/Bangladeshhttp://en.wikipedia.org/wiki/Credit_Rating_Information_and_Services_Limitedhttp://en.wikipedia.org/wiki/Ukrainehttp://en.wikipedia.org/wiki/Credo_linehttp://en.wikipedia.org/w/index.php?title=CARE_Ratings&action=edit&redlink=1http://en.wikipedia.org/wiki/Kuwaithttp://en.wikipedia.org/w/index.php?title=Capital_Standards_Rating&action=edit&redlink=1http://en.wikipedia.org/wiki/Cyprushttp://en.wikipedia.org/wiki/European_Unionhttp://en.wikipedia.org/wiki/Bulgariahttp://en.wikipedia.org/w/index.php?title=Bulgarian_Credit_Rating_Agency&action=edit&redlink=1http://en.wikipedia.org/wiki/Australiahttp://en.wikipedia.org/wiki/Baycorp_Advantagehttp://en.wikipedia.org/wiki/U.S.http://en.wikipedia.org/wiki/A._M._Best


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Dagong Global Credit Rating (People's Republic of China) Dominion Bond Rating Service (Canada) Duportl (UK) Egan-Jones Rating Company (U.S.) First Afghan Credit Risk Ratings (Afghanistan)FACRR First Report, (UK) Fitch Ratings (Dual-headquartered U.S./UK), 80% of which is owned

by FIMALAC, a French firm. Global Credit Ratings Co. (Africa) HR Ratings (Mexico) ICRA Limited (India) SMERA (India) Japan Credit Rating Agency, Ltd. (Japan) Kroll Bond Rating Agency (U.S.) Moody's Investors Service (U.S.) Muros Ratings (Russia alternative rating agency) Rapid Ratings International (U.S.)

Pakistan Credit Rating Agency Limited (Pakistan) Standard & Poor's (U.S.) UK Credit Info (U.K.) Weiss Ratings (U.S.) Onicra Credit Rating Agency of India Ltd (India)

The Big Three credit rating agencies are Standard & Poor's, Moody's Investor Service,

and Fitch Ratings. Moody's and S&P each control about 40 percent of the market. Third-ranked

Fitch Ratings, which has about a 14 percent market share, sometimes is used as an alternative

to one of the other majors.
http://en.wikipedia.org/wiki/Dagong_Global_Credit_Ratinghttp://en.wikipedia.org/wiki/People%27s_Republic_of_Chinahttp://en.wikipedia.org/wiki/Dominion_Bond_Rating_Servicehttp://en.wikipedia.org/wiki/Canadahttp://en.wikipedia.org/w/index.php?title=Duportl&action=edit&redlink=1http://en.wikipedia.org/wiki/UKhttp://en.wikipedia.org/wiki/Egan-Jones_Rating_Companyhttp://en.wikipedia.org/w/index.php?title=First_Afghan_Credit_Risk_Ratings&action=edit&redlink=1http://afghanriskratings.com/http://www.firstreport.co.uk/http://en.wikipedia.org/wiki/Fitch_Ratingshttp://en.wikipedia.org/wiki/UKhttp://en.wikipedia.org/wiki/FIMALAChttp://en.wikipedia.org/w/index.php?title=Global_Credit_Ratings_Co.&action=edit&redlink=1http://en.wikipedia.org/wiki/Africahttp://en.wikipedia.org/w/index.php?title=HR_Ratings&action=edit&redlink=1http://en.wikipedia.org/wiki/ICRA_Limitedhttp://en.wikipedia.org/wiki/SMERAhttp://en.wikipedia.org/wiki/Japan_Credit_Rating_Agency,_Ltd.http://en.wikipedia.org/wiki/Japanhttp://en.wikipedia.org/w/index.php?title=Kroll_Bond_Rating_Agency&action=edit&redlink=1http://en.wikipedia.org/wiki/Moody%27s_Investors_Servicehttp://en.wikipedia.org/wiki/Russiahttp://www.rapidratings.com/http://en.wikipedia.org/w/index.php?title=Pakistan_Credit_Rating_Agency_Limited&action=edit&redlink=1http://en.wikipedia.org/wiki/Standard_%26_Poor%27shttp://www.ukcreditinfo.co.uk/http://en.wikipedia.org/w/index.php?title=Weiss_Ratings&action=edit&redlink=1http://en.wikipedia.org/wiki/Standard_%26_Poor%27shttp://en.wikipedia.org/wiki/Moody%27shttp://en.wikipedia.org/wiki/Fitch_Ratingshttp://en.wikipedia.org/wiki/Fitch_Ratingshttp://en.wikipedia.org/wiki/Moody%27shttp://en.wikipedia.org/wiki/Standard_%26_Poor%27shttp://en.wikipedia.org/w/index.php?title=Weiss_Ratings&action=edit&redlink=1http://www.ukcreditinfo.co.uk/http://en.wikipedia.org/wiki/Standard_%26_Poor%27shttp://en.wikipedia.org/w/index.php?title=Pakistan_Credit_Rating_Agency_Limited&action=edit&redlink=1http://www.rapidratings.com/http://en.wikipedia.org/wiki/Russiahttp://en.wikipedia.org/wiki/Moody%27s_Investors_Servicehttp://en.wikipedia.org/w/index.php?title=Kroll_Bond_Rating_Agency&action=edit&redlink=1http://en.wikipedia.org/wiki/Japanhttp://en.wikipedia.org/wiki/Japan_Credit_Rating_Agency,_Ltd.http://en.wikipedia.org/wiki/SMERAhttp://en.wikipedia.org/wiki/ICRA_Limitedhttp://en.wikipedia.org/w/index.php?title=HR_Ratings&action=edit&redlink=1http://en.wikipedia.org/wiki/Africahttp://en.wikipedia.org/w/index.php?title=Global_Credit_Ratings_Co.&action=edit&redlink=1http://en.wikipedia.org/wiki/FIMALAChttp://en.wikipedia.org/wiki/UKhttp://en.wikipedia.org/wiki/Fitch_Ratingshttp://www.firstreport.co.uk/http://afghanriskratings.com/http://en.wikipedia.org/w/index.php?title=First_Afghan_Credit_Risk_Ratings&action=edit&redlink=1http://en.wikipedia.org/wiki/Egan-Jones_Rating_Companyhttp://en.wikipedia.org/wiki/UKhttp://en.wikipedia.org/w/index.php?title=Duportl&action=edit&redlink=1http://en.wikipedia.org/wiki/Canadahttp://en.wikipedia.org/wiki/Dominion_Bond_Rating_Servicehttp://en.wikipedia.org/wiki/People%27s_Republic_of_Chinahttp://en.wikipedia.org/wiki/Dagong_Global_Credit_Rating


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TOP 4 INTERNATIONAL CRS

Here is the list of Top 4 international Credit Rating Agencies of the world. These agencies areNationally Recognized Statistical Rating Organizations by the U.S. Securities and ExchangeCommission.

1. MOODYSxv

Moodys is the oldest credit rating agency. It is also the first rating agency to be recognized by

NRSRO in 1975. The company became public in 2000. It has been earning huge profits.

Average profit margin was 53% from 2000 to 2007. Structured finance products were its top

source of revenue by 2000.

MOODY'S RATING PROCESS

Meeting with managementThe Moody's analyst will discuss the meeting agenda with the issuer in advance of the

meeting, to ensure the issuer is aware of the type of information Moody's typically receives atsuch a meeting. The discussion at the rating meeting will generally focus on the subjects likeBackground and history of the company/entity , Industry/sector trends ,Management structure ,

Basic operating and competitive position , Corporate strategy and philosophy, Debt structure,Financial position and sources of liquidity.

Moody's Rating Committee

The role of the Moody's rating committee is to introduce as much objectivity into theprocess as possible by bringing an understanding of the relevant risk factors and viewpoints toeach and every analysis. Factors considered in determining the make-up of a rating committeemay include the size of the issue, the complexity of the credit, and the introduction of a newinstrument.

Rating Process Timeline

Moody's rating process, from the time of the preliminary discussion to the public releaseof the rating, takes approximately 60-90 days. However, Moody's is sensitive to issuers' needsand timing concerns, and will be as flexible and responsive as possible in order toaccommodate tighter financing schedules and other requirements.
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Rating Dissemination and Publication

Once the rating committee has made its decision, the issuer will be informed of therating and Moody's rationale. For a public rating, the new rating is distributed by press releasesimultaneously to the major financial media worldwide.

External Rating Appeals

There may be instances in which the issuer has new or additional information that wasnot available to Moodys for consideration by the rating committee in reaching its not -yet-published credit rating decision. In these circumstances, issuers may request that Moodysreconsider its decision based on this new or additional information, a process that is commonlyreferred to as an external appeal.

Right of Refusal of the Moody's Rating in Asia Pacific

Moody's provides first-time rating applicants with the ability to determine whether their

ratings will be made public, subject to certain limitations, in the event of a debt issuance by theapplicant in any of the international capital markets at a later date. If applicants choose not tohave their rating published, then both Moody's and the applicant will keep the rating confidential.Companies will not be permitted to disclose their Moody's rating on a selective basis.

Treatment of Confidential Information

Moody's recognizes that an issuer's trust in the confidential nature of the ratingrelationship is an essential component of the rating process. Confidential information will not bepublicly disclosed, but, if relevant, will be used in the formulation of the public rating opinion.

On-Going Relationship

The Moody's analyst will maintain regular contact with the issuer both electronically andvia the telephone, and will be available at all times to respond to an issuer's needs or questions

2. Standard & Poorsxvi

The agency is owned by Mc Graw-Hill Inc. It has been published any stock indices of theworld, most famous being S&P 500 index which is the most watched index in the world.McGraw-Hill reported a net profit margin of 12.6 percent for 2008. It has following ratingprocesses:
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1) Rating Issu ers & Issues

2) Typical Process for a New Corporate or Governm ent Rating

Contract

Pre evaluation. Management meeting.. Analysis. Rating committee. Notification. Publication

3) Rating Corpo rate and Go vernment Issuers & Issues

Request The Initial Rating Process The Analytical Team & Rating Committee Pre evaluation Management meeting. Analysis Committee evaluation Notification of issuer Publication.

5) Process for Rating Structured Finance Instruments - Key Differences Highl ight ed

Request Pre evaluation Analysis Rating Committees

3. Fitchxvii

Fitch is smallest among the top three agencies. It is a part of Fitch Group. It Was the thirdagency to become an NRSRO in 1975. From 1975 to 1992, four other agencies wererecognized as NRSROs and all subsequently merged with Fitch.

Analytical Team Input from Rated Entities The Committee Process Criteria Development Differences of Opinion
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Access to Confidential Information Surveillance of Ratings Rating Dissemination Product Range Timing of the Process Fees

4. DBRS xviii

DBRS is privately owned Canadian ratings agency has been the top ratings agency inCanada for 30 years. It became the fourth NRSRO in 2003. DBRS believes that it can competewith the big three but is not favored by authorities. The Rating Process Corporate andStructured Finance are:

CORPORATE RATING PROCESS

Initial Contact

In most cases, the organization is contacted by the issuer directly or by its

investment banker or dealer and requested to conduct a corporate rating.

Letter of Engagement

In order to formalize the rating assignment, the terms of the engagement areconfirmed.

Information on the Issuer

Relevant information about the issuer is obtained, and may be received from avariety of sources including third parties, for the purposes of conducting the rating

analysis.

Meeting with Management

An extensive meeting or series of meetings is generally conducted withmanagement regarding all relevant aspects of the issuers business.
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Draft Rating Report

Following analysis of the information obtained, typically a draft rating report isprepared.

Rating Committee

The analysis and draft rating report, if prepared and proposed rating is submittedto the Rating Committee, who will determine the rating.

Review by the Issuer

Rating Committee reviews the report to ensure that the factual information iscorrect and that these materials do not contain any confidential information.

Publishing

Except for private ratings, internal assessments and for certain private placementtransactions, the final rating report is externally published, accompanied by the pressrelease.

Surveillance

Ongoing surveillance of all its ratings (including public and certain private ratingsand internal assessments) is performed.

STRUCTURED FINANCE RATING PROCESS

Initial Contact

An initial meeting with the sponsor, usually the financial institution which will bestructuring transactions for third party clients or selling assets directly into the specialpurpose vehicle (SPV), will be held to discuss the structure of the SPV.

Letter of Engagement

In order to formalize the rating assignment, the terms of the engagement areconfirmed.

Information on the Sponsor

The organization evaluates the sponsors financial and operational capabilities


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Structural and Legal Review

The sponsor will provide constituting documents to allow review to ensure thatthe legal structure is consistent with the described purpose of the SPV.

Draft Rating Report

A pre-sale or rating report is typically drafted by the lead analyst that focuses onrating rationale and the structural features of the transaction, the roles performed byvarious parties as well as the structural risk mitigants or flexibilities that exist within thetransaction.

Rating Committee

The analysis, draft rating report, and proposed rating are submitted to the RatingCommittee, who will determine the rating.

Review by the Sponsor

Once Rating Committee approval is received, the sponsor is provided with acopy of the press release and draft rating report, if prepared, to review to ensure thatthe factual information is correct.

Publishing

Except for private ratings, internal assessments and for certain private placementtransactions, the press release and final rating report, if prepared, is externally

published.

Surveillance

Each sponsor of a SPV structure is generally required to provide periodicperformance reports, which provides an overview of the performance of the pool ofreceivables and the transaction and, if relevant, prompt notification of any covenanttrigger and a proposed course of action to remedy the situation.


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PACRA

INTRODUCTION

PACRA seeks to be an agent of change, developing insightful risk solutions,

transforming both the rating business and the industry in line with the best practices. Being the

first rating agency in Pakistan, PACRA carries the onus of leadership. PACRA is in the businessto evaluate the capacity and willingness of an obligor to honor its financial obligations. Its credit

rating opinion reflects an independent, professional and impartial assessment of the credit risk

associated with a particular debt instrument or an entity. By providing a measurement of risk,

this facilitates investors in making prudent investment decisions. T.E.A.M - Together Everyone

Achieves More. The Board of Directors of PACRA comprises seven professionals drawn from

diverse fields. All Directors, except the Managing Director, are Non-Executive, while three of

them are Independent. PACRA was established in 1994 as a joint venture.

PRODUCTS OFFERED:

ENTITY RATING:

Entity rating signifies the level of investment risk and the capacity and/or willingness of

an entity to meet its debt obligations. The risk level is indicated by the long and short

term ratings.

INSTRUMENT RATING:

Instrument rating covers all non-equity instruments including TFCs (long and short term),

Sukuks, and bonds. By indicating the risk profile of the instrument, the assigned rating

helps the issuer in deciding the terms of the instrument while guiding the potential

investors in investment decision.

INSURER FINANCIAL STRENGHT:

The insurer financial strength (IFS) rating represents an opinion of an issuers financial

strength and business continuity from a policy holder's prospective. IFS rating captures

the relative ability of the insurer to meet policy holders' obligations. However, the rating

provides no guarantee against default but offers a well researched opinion as to the

likelihood of the issuer to fail to fulfill its obligations towards policy holders.

PROJECT GRADING:

The Project Grading (PG) is an opinion on a specific project being managed by any real

estate entity.

ASSET MANAGER RATING:

AM Rating differs fundamentally from credit ratings, which refer to the ability to meet

debt obligations. The focus of AM rating is to gauge the fund management capability of

the asset manager, as reflected from its operating platform, human resource base and

the infrastructure that it has erected. AM rating gives a view on whether the asset


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manager meets or exceeds the overall investment management best practices, the

benchmarks and standards in all criteria under review.

RATING MATRIX

RESEARCHGathering facts and figures, examining with a critical eye and drawing insights from the

entire activity with the objective of forming a view research forms an integral part of PACRAs

rating process. The primary outcome of research is a sector study report. PACRA adds value by

identifying specific array of factors that lead to credit risk in a particular industry.

RATING MATRIX

Rating Matrix is a set of standardizedmethodologies and policies. Thesegovern the evolution of the rating

opinion from start to finish and lendconsistency to PACRAs ratings.

Rating Matrix is periodically updated

PACRASMETHODOLIGIES.

PACRA bases its ratingsanalysis and opinions

upon established criteriaand methodologies and

applies them in a uniformand consistent manner

PACRAS POLICIES

PACRAs Rating Policiesare comprehensive anddetailed descriptions of

PACRAs rating practicesand procedure


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FUND STABILITY RATINGS

JCR-VIS has revised its Fund Stability criteria. The key change in the methodology pertains

to interest rate sensitivity of a fund at different rating grades.

RATING METHODOLOGY:

Fund Stability Ratings (FSRs) measure the sensitivity of a funds Net Asset Value (NAV)and total return to changing market conditions, with particular emphasis on downside

risk.

Credit Risk CriteriaAsset Allocation % of NAV**

FSR Issue / Issuer Rating

AA A A A+ AA-A+

AAA Min. 85% Max. 15% - --

AA+ Min. 50% Max. 30%* -

-AA Min. 25% Max.15%* -

AA-MAX 10%

DURATION CRITERIA / MATURITY CRITERIA

Fund Rating Wtd. Avg. Duration

AAA 45 DAYS

AA+ 60 DAYS

AA 90 DAYSAA- 180 DAYS

A BAND 1 YEARFor example, JCR-VIS shows rating like this:

Recent Announcements Ratings/Action

Jubilee General Insurance Company Limited12/28/2012 IFSPress Release / History

AA+ Upgrade

OUTLOOK StableInterpretation:

Press release shows detailed publication on insurer financial strength. History shows its

history regarding financial strength, which is in above scenario is upgraded. AA+ =60 days of

maturity.


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SERVICES OFFERED

Entity Ratings of Corporations, NBFIs & FIs

Credit Ratings of Term Finance Certificates and long term issues

Bank Finance Ratings

Commercial Paper Ratings Lease, Housing Finance, Credit Card and other Corporate/ Consumer

Finance Receivables

Securitization Ratings

Equity Ratings including initial public Offerings and Right Offerings

Insurer Financial Strength Ratings

Project Finance Ratings

Mutual Funds Ratings

Musharaka/Modaraba issues Ratings

Grading of Construction Projects

JCR-VIS RATING PROCESS

Issuer/Client 1.Signs agreement for an initial rating2.Submits preliminary information materials

JCR-VIS 3. Conducts a preliminary study4. Submits a detailed questionnaire to the issuer/client

Issuer/Client 5. Provides detailed information in response to detailedquestionnaire6. Conducts pre due diligence meeting analysis7. Conducts due diligence meetings

(4-5 weeks)

JCR-VIS 8. Conducts post due diligence analysis9. Brief for internal rating committee meetings is prepared10. Sub Committee recommends preliminary/initial rating11. Rating Committee decides the preliminary/initial rating12. Discusses the rating rationales and rating issues with client13. Notifies issuer of the preliminary/initial rating, deliberates onappeals by client, if any

Issuer/Client 14. Consents to release of preliminary/initial rating to the public incase of non-mandatory ratings

JCR-VIS 15. Releases the preliminary/initial rating to the press( 2-3 weeks)


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REFERENCES

i http://www.creditriskmanager.com/glossary/business-credit-ratingshttp://www.risk.no/credrisk.htmPrinciples for the Management of Credit Risk (by Basel Committee on banking Supervision) Basel 2000ii

Credit Rating and the Impact on Capital Structure by Christian Kronwald (2009)iii Credit Risk+ A Credit Risk Management Framework by CREDIT SUISE|FIRST BOSTONiv http://www.riskglossary.com/link/credit_risk.htmv

9 COMPONENTS OF AN EFFECTIVE LENDING AND CREDIT RISK MANAGEMENT PROGRAM byJames C. Lacovara, MS, Managing Director, Credit Risk Management (ICS RISK ADVISORS)vi http://www.pmanetwork.com/investmentmanagement/creditriskmanagement/vii&viii http://en.wikipedia.org/wiki/Credit_analysisix http://www.bankrate.com/calculators/smart-spending/credit-risk-assessment-test-calculator.aspxx http://www.investopedia.com/terms/c/creditcrunch.asp#ixzz2G9Oimgilxi http://www.investopedia.com/terms/c/credit-exposure.asp#ixzz2G9PfLW2vxiihttp://www.investorwords.com/5490/credit_report.html#ixzz2G4nrwmpnxiii

http://unctad.org/en/Docs/osgdp20081_en.pdf

xiv http://en.wikipedia.org/wiki/Credit_rating_agency#List_of_credit_rating_agencies

xv http://www.moodys.com/ratings-process/How-to-Get-Rated/002001

xvi http://www.standardandpoors.com/aboutcreditratings/

xvii http://www.globalclearinghouse.org/infradev/assets%5C10/documents/Fitch%20-%20The%20Rating%20Process%20(2006).pdfxviii http://www.dbrs.com/research/236737/the-rating-process-corporate-and-structured-finance.pdf

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