Description
This is a PPT on what, why and how of credit rating. covers credit rating in detail.
CREDIT RATING
The WHATs, WHYs and HOWs of Credit Rating
What is CREDIT?
The provision of money or equivalent resources in some form of loan by one party to another party where that second party does not reimburse the first party immediately, thereby generating a debt, and instead arranges either to repay or return that money or resources at a later date. It is a form of deferred payment. The first party is called the giver or a creditor, also known as a lender, while the second party is called the receiver or a debtor, also known as a borrower.
2
• Credit rating estimates the credit worthiness of
– – – – an individual, a corporation, a security, or a country.
• Evaluation made by credit bureaus of a borrower’s overall credit history. • Also known as an evaluation of a potential borrower's ability to repay debt. • Typically, a credit rating tells a lender or investor the probability of the subject being able to pay back a loan. • A poor credit rating indicates a high risk of defaulting on a loan, and thus leads to high interest rates, or the refusal of a loan by the creditor.
What is CREDIT RATING?
3
A credit ratings company helps investors decide how risky it is to invest money in a certain country and/or security. • Credit scores for individuals are assigned by credit bureaus or consumer credit reporting agency. • Credit ratings for corporations and sovereign debt are assigned by credit rating agencies.
CREDIT RATING COMPANIES: AGENCIES v/s BUREAUS
4
• The largest commercial credit rating agencies (which tend to operate worldwide) are: Moody's, Standard and Poor's and Fitch Ratings.
• Have letter designations such as AAA, B, CC.
– The S&P's rating scale - from excellent to poor - is as follows: AAA, AA, A, BBB, BB, B, CCC, CC, C, D Anything lower than a BBB rating is considered a speculative or junk bond. – The Moody's rating system is similar in concept but the naming is a little different. It is as follows, from excellent to poor: AAA, Aa1, Aa2, Aa3, A1, A2, A3, Baa1, Baa2, Baa3, Ba1, Ba2, Ba3, B1, B2, B3, Caa1, Caa2, Caa3, Ca, C.
CREDIT RATING COMPANIES: International Firms
5
In India:
• Commercial credit rating agencies:
– Credit Rating and Information Services of India Ltd. (CRISIL)
– Fitch Ratings India Private Ltd. – Investment Information and Credit Rating Agency of India (ICRA) – Credit Analysis & Research Ltd. (CARE) – Brickwork Ratings India Pvt. Ltd (NEW)
• The credit bureaus for individuals
– Credit Information Bureau (India) Limited (CIBIL) – Credit Registration Office (CRO)
CREDIT RATING COMPANIES:
Indian Firms
6
VARIOUS DEFINITIONS
" A rating is an opinion on the future ability and legal obligation of the issuer to make timely payments of principal and interest on a specific fixed income security. The rating measures the probability that the issuer will default on the security over its life, which depending on the instrument may be a matter of days to 30 years or more. In addition, long term ratings incorporate an assessment of the expected monetary loss should a default occur." Moody’s
"Credit ratings help investors by providing an easily recognizable, simple tool that couples a possibly unknown issuer with an informative and meaningful symbol of credit quality." Standard and Poor’s
7
Personal | Corporation | Sovereign
TYPES OF CREDIT RATINGS
8
• It is an individual's credit score, along with his or her credit report
• It affects his or her ability to borrow money through financial institutions such as banks
• The factors which may influence a person's credit rating are:
– – – – – – ability to pay a loan interest amount of credit used saving patterns spending patterns debt
• In different parts of the world different personal credit rating systems exist.
PERSONAL CREDIT RATING
[1]
9
PERSONAL CREDIT RATING
Short term rating
[2]
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.
10
• Before anyone decides whether to invest into a debt security from a company, one must determine whether the prospective entity will be able to meet its obligations.
CORPORATE CREDIT RATING
• The credit rating agencies such as Standard & Poor's, Moody's or Fitch Ratings help with the same by providing an assessment of the credit worthiness of the companies. • The credit rating of a corporation is a financial indicator to potential investors of debt securities such as bonds.
11
• A sovereign creditCREDIT RATING rating is the credit rating [1] a of SOVEREIGN sovereign entity, i.e. a country.
• 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 into account:
– Political risk – Economic risk
12
• Reflects factors such as:
o o o o o o o country's economic status transparency in the capital market levels of public and private investment flows foreign direct investment foreign currency reserves political stability ability for a country's economy to remain stable despite political change
• Doorway into a country's investment atmosphere - sovereign rating is the first thing most institutional investors look at when making a decision to invest money abroad. • A country with a sovereign rating will get more attention than one without. So to attract foreign money, most countries will strive to obtain a sovereign rating and they will strive even more so to reach investment grade.
SOVEREIGN CREDIT RATING
[2]
13
Few others…
• • • • •
Bond/debenture rating Equity rating Preference share rating Commercial paper rating Fixed deposits rating
14
To the: Investors, Company, Brokers and Financial Intermediaries
BENEFITS OF RATINGS
15
• • • • • • •
Safeguards against bankruptcy Credibility of issuer Easy understandability of investment proposal Saving of resources Independence of investment decisions Choice of investments Benefits of rating surveillance
I.
To the investors
16
II. To the company
• • • • • •
Lower cost of borrowing Wider audience for borrowing Rating as marketing tool Reduction of cost in public issues Motivation for growth Unknown issuer
17
III. To the Brokers and Financial Intermediaries
• Helps in the process of planning, pricing, underwriting and placement of issues • Input for their monitoring of risk exposures
18
?
? ?
?
? ?
?
? ?
Biased rating and misrepresentations Static study Concealment of material information Rating is no guarantee for soundness of company Human bias Reflection of temporary adverse conditions Down grade Difference in rating of two agencies Conservative Rating
Disadvantages of Credit Rating
19
CREDIT RATING PROCESS
20
Capital structure Type of and Project Products share holding pattern
Nature Project of involvement of Company’s the promoter in the Size customers management
Background, Sector Location credibility, other details and businesses analysis
PARAMETERS TO BE CONSIDERED
Profile Financialof project Status of directors and key analysis personnel and existing in the facilities company
Promoter(s) Banking Sensitivity relationships analysis Pendingcosts Soft disputes in Gestation theperiodof law court
RBI’s even Breakdefaulter lists Purpose of analysis funding
Naturecosts Government Hard of banking arrangement consents
21
Safety levels Highest Safety High Safety Adequate Safety Moderate Safety Inadequate Safety
Long-term AAA AA A BBB BB
Short-Term P1 P2 P3 P4
High Risk
Substantial Risk Default Not Meaningful
B
C D NM NM P5
CRISIL Rating Symbols
22
doc_488779960.pptx
This is a PPT on what, why and how of credit rating. covers credit rating in detail.
CREDIT RATING
The WHATs, WHYs and HOWs of Credit Rating
What is CREDIT?
The provision of money or equivalent resources in some form of loan by one party to another party where that second party does not reimburse the first party immediately, thereby generating a debt, and instead arranges either to repay or return that money or resources at a later date. It is a form of deferred payment. The first party is called the giver or a creditor, also known as a lender, while the second party is called the receiver or a debtor, also known as a borrower.
2
• Credit rating estimates the credit worthiness of
– – – – an individual, a corporation, a security, or a country.
• Evaluation made by credit bureaus of a borrower’s overall credit history. • Also known as an evaluation of a potential borrower's ability to repay debt. • Typically, a credit rating tells a lender or investor the probability of the subject being able to pay back a loan. • A poor credit rating indicates a high risk of defaulting on a loan, and thus leads to high interest rates, or the refusal of a loan by the creditor.
What is CREDIT RATING?
3
A credit ratings company helps investors decide how risky it is to invest money in a certain country and/or security. • Credit scores for individuals are assigned by credit bureaus or consumer credit reporting agency. • Credit ratings for corporations and sovereign debt are assigned by credit rating agencies.
CREDIT RATING COMPANIES: AGENCIES v/s BUREAUS
4
• The largest commercial credit rating agencies (which tend to operate worldwide) are: Moody's, Standard and Poor's and Fitch Ratings.
• Have letter designations such as AAA, B, CC.
– The S&P's rating scale - from excellent to poor - is as follows: AAA, AA, A, BBB, BB, B, CCC, CC, C, D Anything lower than a BBB rating is considered a speculative or junk bond. – The Moody's rating system is similar in concept but the naming is a little different. It is as follows, from excellent to poor: AAA, Aa1, Aa2, Aa3, A1, A2, A3, Baa1, Baa2, Baa3, Ba1, Ba2, Ba3, B1, B2, B3, Caa1, Caa2, Caa3, Ca, C.
CREDIT RATING COMPANIES: International Firms
5
In India:
• Commercial credit rating agencies:
– Credit Rating and Information Services of India Ltd. (CRISIL)
– Fitch Ratings India Private Ltd. – Investment Information and Credit Rating Agency of India (ICRA) – Credit Analysis & Research Ltd. (CARE) – Brickwork Ratings India Pvt. Ltd (NEW)
• The credit bureaus for individuals
– Credit Information Bureau (India) Limited (CIBIL) – Credit Registration Office (CRO)
CREDIT RATING COMPANIES:
Indian Firms
6
VARIOUS DEFINITIONS
" A rating is an opinion on the future ability and legal obligation of the issuer to make timely payments of principal and interest on a specific fixed income security. The rating measures the probability that the issuer will default on the security over its life, which depending on the instrument may be a matter of days to 30 years or more. In addition, long term ratings incorporate an assessment of the expected monetary loss should a default occur." Moody’s
"Credit ratings help investors by providing an easily recognizable, simple tool that couples a possibly unknown issuer with an informative and meaningful symbol of credit quality." Standard and Poor’s
7
Personal | Corporation | Sovereign
TYPES OF CREDIT RATINGS
8
• It is an individual's credit score, along with his or her credit report
• It affects his or her ability to borrow money through financial institutions such as banks
• The factors which may influence a person's credit rating are:
– – – – – – ability to pay a loan interest amount of credit used saving patterns spending patterns debt
• In different parts of the world different personal credit rating systems exist.
PERSONAL CREDIT RATING
[1]
9
PERSONAL CREDIT RATING
Short term rating
[2]
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.
10
• Before anyone decides whether to invest into a debt security from a company, one must determine whether the prospective entity will be able to meet its obligations.
CORPORATE CREDIT RATING
• The credit rating agencies such as Standard & Poor's, Moody's or Fitch Ratings help with the same by providing an assessment of the credit worthiness of the companies. • The credit rating of a corporation is a financial indicator to potential investors of debt securities such as bonds.
11
• A sovereign creditCREDIT RATING rating is the credit rating [1] a of SOVEREIGN sovereign entity, i.e. a country.
• 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 into account:
– Political risk – Economic risk
12
• Reflects factors such as:
o o o o o o o country's economic status transparency in the capital market levels of public and private investment flows foreign direct investment foreign currency reserves political stability ability for a country's economy to remain stable despite political change
• Doorway into a country's investment atmosphere - sovereign rating is the first thing most institutional investors look at when making a decision to invest money abroad. • A country with a sovereign rating will get more attention than one without. So to attract foreign money, most countries will strive to obtain a sovereign rating and they will strive even more so to reach investment grade.
SOVEREIGN CREDIT RATING
[2]
13
Few others…
• • • • •
Bond/debenture rating Equity rating Preference share rating Commercial paper rating Fixed deposits rating
14
To the: Investors, Company, Brokers and Financial Intermediaries
BENEFITS OF RATINGS
15
• • • • • • •
Safeguards against bankruptcy Credibility of issuer Easy understandability of investment proposal Saving of resources Independence of investment decisions Choice of investments Benefits of rating surveillance
I.
To the investors
16
II. To the company
• • • • • •
Lower cost of borrowing Wider audience for borrowing Rating as marketing tool Reduction of cost in public issues Motivation for growth Unknown issuer
17
III. To the Brokers and Financial Intermediaries
• Helps in the process of planning, pricing, underwriting and placement of issues • Input for their monitoring of risk exposures
18
?
? ?
?
? ?
?
? ?
Biased rating and misrepresentations Static study Concealment of material information Rating is no guarantee for soundness of company Human bias Reflection of temporary adverse conditions Down grade Difference in rating of two agencies Conservative Rating
Disadvantages of Credit Rating
19
CREDIT RATING PROCESS
20
Capital structure Type of and Project Products share holding pattern
Nature Project of involvement of Company’s the promoter in the Size customers management
Background, Sector Location credibility, other details and businesses analysis
PARAMETERS TO BE CONSIDERED
Profile Financialof project Status of directors and key analysis personnel and existing in the facilities company
Promoter(s) Banking Sensitivity relationships analysis Pendingcosts Soft disputes in Gestation theperiodof law court
RBI’s even Breakdefaulter lists Purpose of analysis funding
Naturecosts Government Hard of banking arrangement consents
21
Safety levels Highest Safety High Safety Adequate Safety Moderate Safety Inadequate Safety
Long-term AAA AA A BBB BB
Short-Term P1 P2 P3 P4
High Risk
Substantial Risk Default Not Meaningful
B
C D NM NM P5
CRISIL Rating Symbols
22
doc_488779960.pptx