CREDIT RATING
What is Credit Rating?
Credit Rating is a grade assigned to a business concern to denote the current
assessment of the credit worthiness of the concern, with respect to its future ability
to meet its obligations in re-payment of principal and interest. These grades
(ratings) are based on various factors such as a borrower's networth, payment
history, industry's future prospects, etc. However, there is no exact science to
rating a borrower's credit, and different lenders may assign different grades to the
same borrower.
Ratings by the Credit rating agencies is based on a quantitative study of the
financials of the company and qualitative factors such as management quality and
integrity, the strength of its brands, parent support etc. The main focus while
rating a company is to measure the relative ability and willingness of the issuer of
the instrument to meet its obligations on the due dates. Industry risk is another
factor which determines the cap for the ratings. For example, non-banking
financial companies rarely get high ratings because of the high risk tag attached to
this sector.
What are the different kinds of ratings?
Now a days ratings are assigned by the rating agencies for various types of
instruments. Assigning ratings to bonds (medium term, long term bonds) issued by
corporates and public sector undertakings is the most popular. Ratings are also
popular for fixed deposits, Commercial Papers, Certificate of Deposits, Debentures
(whether partly, fully or non-convertible) etc. Ratings for loans, future
receivables, mutual funds, earnings prospects of companies, claims paying ability
of insurance companies, or of marketers of LPG and kerosene, real estate
developers are also hitting the market.
Rating is for Instrument and Not company?
It should be remembered that rating is assigned to a specific instrument rather than
the company. Thus ratings on different instruments for the same company may
differ depending on the tenure of different instruments (generally longer the
duration, higher the risk, and thus lower the rating) and on the in-built protection
measures for that instrument (e.g. guaranteed by another party etc.) Thus, the top
rating given to an instrument of short term CP does not necessarily means that it is
safe to invest in 10 year debentures of the same company.
In India, the rating of an instrument is done only when the issuer requests for the
same. The issuer is required to pay fees for this service.
Moreover, it needs to be remembered that the rating is not a recommendation to
buy, hold or sell an instrument. Rating only indicates the current safety level of
investment in such a company. Rating can be changed by the rating agencies at
any point of time.
Rating Agencies :
CRISIL, CARE, ICRA, FITCH are the rating agencies in India. CRISIL is the
oldest rating agency in India and was originally promoted by ICICI. ICRA was
promoted by IFCI. CARE was promoted by IDBI.
RATING SCALES : Although different rating agencies sometime use different
symbols to indicate the rating, yet the following rating system used by CRISIL for
debentures / bonds (long term debt instruments) indicates the most popular rating
assignment system in India :-
High Investment Grades :-
AAA `AAA' rating indicates "highest safety" of timely payment of interest and
(Triple A) Highest degree of safety can change, yet such changes as can be envisaged are
Safety strong position of such issues.
AA 'AA' ratings indicate "high safety" of timely payment of interest and princ
(Double A) High marginally.
Safety
Investment Grades :-
A `A' rating indicate "adequate safety" of timely payment of interest and prin
Adequate Safety adversely affect such issues more than those in the higher rated categorie
BBB `BBB' rating indicate "sufficient safety" of timely payment of interest and p
(Triple B) Moderate circumstances are more likely to lead to a weakened capacity to pay inter
Safety higher rated categories.
Speculative Grades :-
BB `BB' rating indicate "inadequate safety" of timely payment of interest and
(Double B) Inadequate than other speculative grade debentures in the immediate future, the unce
Safety inadequate capacity to make timely interest and principal payments.
B `B' rating indicate "greater susceptibility to default"; while currently intere
High Risk business or economic conditions would lead to lack of ability or willingnes
C `C' rating indicate the presence of factors that make them "vulnerable to
Substantial Risk possible only if favourable circumstances continue.
D `D' rating indicate default and in arrears of interest or principal payments
In Default debentures are extremely speculative and returns from these debentures
liquidation.
Note : 1) The rating agencies also apply "+" (plus) or "-" (minus) signs for ratings
from AA to D. These signs reflect comparative standing within the category. The
‘+’ suffix denotes a relatively higher standing within the category while the ‘-’ rating indicates a
relatively lower standing within the category. Thus any instrument from the highest to the lowest grade
can have a ‘+’ or a ‘-’ suffix.
