Description
Describes credit ratings, need of credit rating, uses of credit ratings, different types of credit ratings, credit rating agencies. It also defines the process of arriving at the rating.
Presented by Dripto Sarkar (30147) Jaspreet Singh (30277) Parikshit Shukla (30153) Pranav Sheth (30152) Vineet Srivastava (30270)
CREDIT RATING
DEFINITION
?
?
? ?
Credit rating is essentially, the opinion of the rating agency on the relative ability and willingness of the issuer of a debt instrument to meet the debt service obligations as and when they arise. "credit rating agency" means a body corporate which is engaged in, or proposes to be engaged in, the business of rating of securities offered by way of public or rights issue; “issuer" means a person whose securities are proposed to be rated by a credit rating agency. "rating" means an opinion regarding securities, expressed in the form of standard symbols or in any other standardized manner, assigned by a credit rating agency and used by the issuer of such securities, to comply with a requirement specified by these regulations.
THE NEED
?
? ?
?
?
?
Credit rating is an opinion expressed by an independent professional organisation, after making a detailed study of all relevant factors. Such an opinion will be of great assistance to investors in making investment decisions. It also helps the issuers of debt instruments to price their issues correctly and to reach out to new investors. Regulators like Reserve Bank of India (RBI) and Securities & Exchange Board of India (SEBI) often use credit rating to determine eligibility criteria for some instruments. In general, credit rating is expected to improve quality consciousness in the market and establish, over a period of time, a more meaningful relationship between the quality of debt and the yield from it. Credit Rating is also a valuable input in establishing business relationships of various types.
USE OF CREDIT RATINGS: BOND ISSUER
Independent verification of their own credit worthiness ? Many larger CRA?S offer „ Credit Rating Advisory Services? that advices the issuer how to structure its bond offerings ? Issuers also use credit ratings in certain structured finance transactions
?
INVESTMENT BANKS & BROKERS
Investment banks and broker-dealers also use credit ratings in calculating their own risk portfolios (i.e., the collective risk of all of their investments). ? Larger banks and broker-dealers conduct their own risk calculations, but rely on CRA ratings as a "check" (and double-check or triple-check) against their own analyses
?
GOVERNMENT REGULATORS
Regulators use credit ratings as well, or permit these ratings to be used for regulatory purposes ? For eg: under the Basel II agreement of the Basel Committee on Banking Supervision, banking regulators can allow banks to use credit ratings from certain approved CRAs when calculating their net capital reserve requirements
?
GOVERNMENT REGULATORS (CONTD…)
CRA ratings are also used for other regulatory purposes as well. The U.S. SEC, for example, permits certain bond issuers to use a shortened prospectus form when issuing bonds if the issuer is older, has issued bonds before, and has a credit rating above a certain level ? Insurance regulators use credit ratings to ascertain the strength of the reserves held by insurance companies.
?
TYPES
?
There are 4 types of credit ratings
? Personal
Credit Ratings ? Corporate Credit Ratings ? Short Term Ratings ? Sovereign Credit Ratings
AGENCIES
Credit Rating Information Services of India Limited (CRISIL) ? Investment Information and Credit Rating Agency of India (ICRA) ? Credit Analysis & Research Limited (CARE) ? Duff & Phelps Credit Rating India Private Ltd. (DCR India renamed as FITCH) ? ONICRA Credit Rating Agency of India Ltd
?
PROCESS
Click here for the process map of credit rating agency ? The timeframe taken is usually 3-4 weeks but it can be done earlier depending upon the requirement
?
DOCUMENTS
? ? ? ?
?
?
SSI Registration Certificate Partnership Deed / Memorandum & Article of Association Authority letter to sign the application List of all partners / directors with their age, address, certified Net Worth / Income Tax returns, qualifications and experience Copy of the audited accounts for the last three years (where accounts for the last year have not been audited, provisional accounts duly certified by a Chartered Accountant, along with two years audited accounts, are to be submitted) In case of new project/expansion, copy of the project report containing a brief project profile, cost of project, source/means of finance
DOCUMENTS (CONTD…)
? ? ?
?
?
?
?
Brief write-up about the products manufactured, end users, marketing tie-up and orders in hand Details of subsidy, tax concession available to the applicant Quality certificates, export awards won, membership of any associations Any other information that would enable us to understand your business better Details about group companies (names, constitution, net worth, turnover etc.) Contact details of Bankers, key suppliers & key customers Insurance details of plant & machinery
MEETINGS
The interest of investors is best served if there is an open dialogue with the issuer. ? Discussions during a management meeting are wide-ranging, covering competitive position, strategy, financial policy, historical performance, and near- and long-term financial and business outlook. ? Rating teams focus on the issuer's business risk profile and strategies, in addition to reviewing all financial data.
?
RATING PREDICTION MODELS
Linear Regression
? ?
Usually measured in linear or notch space, (for instance with Aaa=1 and C=21) on various financial metrics. The result is a linear index with fixed coefficients which maps directly to rating space.
Ordered Probit
?
Relaxes the assumption of a linear rating scale by adding endogenously determined "break points" against which a similar fixed coefficient linear index is measured.
ABOVE MODELS ARE GENERALLY EASY TO COMPUTE AND IMPLEMENT. BUT STILL, BOTH MODELS RESULT IN FIXED COEFFICIENT LINEAR INDEXES OF THE UNDERLYING FACTORS
Simply stated, credit ratings are assumed to be a weighted average of individual metric implied ratings, but the weights are not constant – they are functions of the issuer„s leverage ratio.
DATA COLLECTION
?
?
? ? ? ? ? ?
?
Financial data are taken as reported from annual financial statements, and cover the 10 year span. The financial metrics considered are – Coverage (CV) Leverage (LV) Return on assets (ROA) Volatility adjusted leverage (vLV) Revenue stability (RS) Total assets (AT). the best possible three year average of the credit metrics is used to smooth out noisy fluctuations and better reveal the true financial condition of the issuer. interaction between coverage and assets. In the OLS and probit models, this is simply the product of the coverage ratio and asset level; in the new model, it is the geometric mean of the coverage- and assets-implied ratings. The second is the coefficient of variation of the last three years of leverage ratios.
THE RATING APPROACH
?
Specifically, each year's values to the standard normal distribution are mapped. Suppose there are n unique values of the metric for a particular fiscal year. We sort these values from low to high and associate them with the n element linear grid ranging from 1/n to 1-1/n. Each metric is mapped to an implied rating, and the final rating is an average of those. The weights are assumed to be a function of an issuer's leverage ratio. This leads to a total of 77 free parameters estimated with 6,100 issuer/years, as compared to 36 parameters for the simple linear regression and 51 for the ordered probit. Consider the problem of mapping a given (normalized) ratio to an implied rating. Since we assume a strictly monotonic relationship (specifically, that improved values lead to better ratings), all that is required is estimating the cutoff
?
?
?
THE RATING APPROACH (CONTD...)
?
An individual metric z would be mapped to an implied fractional rating by linearly interpolating between the nodes:
?
Given our normalization of the financial data, these nodes are standard deviations of the normal distribution. As an example, we might have the nodes {0.2 1.3} associated with ratings {11 14} for coverage. If an issuer has a normalized coverage ratio of 0.7, that would map to an implied rating of 12.4.
THE RATING APPROACH (CONTD…)
?
?
A notional "D“ rating is defined for individual metrics and assigned a value of 1 and similarly a notional "Aaaa" rating is defined and assigned a value of 25. We thus have nodes associated with the following ratings: {D = 1, C = 5, B3 = 6, Ba3 = 9, Baa3 = 12, A3 = 15, Aa3 = 18, Aaa = 21, Aaaa = 25}. We parameterize the weighting functions as follows. For each individual credit metric z, define wz as the exponential of a linear function of the issuer's leverage: Final weight is given by –
?
The above eqn. shows us the seventh weight……
THE SEVENTH WEIGHT
?
This extra weight is assigned to our seventh credit metric, the geometric mean of the coverage-implied rating and the assets-implied rating:
?
The interaction captured by RCVxAT approximates the fact that these two are not perfect substitutes: if either coverage or total assets is particularly low, simply increasing the other one will not perfectly compensate.
ADJUSTMENTS
While each of our six metrics is constrained to return the sample average rating on average, since our weights are not constant, our average weighted average rating will not generally equal the sample average rating (i.e., we will have non-zero average errors). Also, our seventh factor RCVxAT will not generally return the sample average rating, further biasing our results. We add a constant notching adjustment to correct for these.
?
A constant notching adjustment n simply to absorb rounding biases and give us a mean zero error in sample.
Adjustment for fiscal year with fixed effects n(t).
?
?
Adjustment for industry with fixed effects n(I).
Adjustment proportional to the volatility of leverage over the last three years.
?
THE FINAL RATING EQUATION
The above equation facilitates a well defined rating ranging from 5 ( C ) to 21 ( Aaa ) with well defined end points viz. 1 ( D ) and 25 ( Aaaa )
ASSIGNMENT OF RATING
After meeting the issuer's management, the analysts prepare a report detailing their assessment of the business risk, financial risk, and management risk associated with the issuer. ? The report is then presented to the rating committee at a rating committee meeting (RCM – issuer doesn?t participate) ? The rating committee then determines the rating.
?
SYMBOLS AND MEANINGS
CRISIL AAA AA A BBB BB B C D CARE CARE AAA Description Highest Safety High Safety Adequate Safety Moderate Safety Inadequate Safety High Risk Substantial Risk Default
CARE AA
CARE A CARE BBB CARE BB CARE B CARE C CARE D
COMMUNICATION OF RATING
On finalization of a rating at the rating committee meeting, the rating decision is communicated to the issuer. ? Thereafter, a document setting out the rationale supporting the rating is forwarded. ? It is up to the issuer then to accept the rating or not ? If the issuer accepts the rating, it sends a letter of acceptance to rating agency.
?
COMMUNICATION OF RATING (CONTD…)
?
?
?
?
If, on the other hand, the issuer disagrees, it can appeal for a fresh look at the rating assigned. In such a case, the issuer needs to submit additional facts/data or new information to the rating team, to be presented to the rating committee. The rating committee then discusses the information submitted; it may or may not decide to modify the rating, depending on the facts of the case. If the rating is not changed and the issuer continues
DISSEMINATION OF CREDIT RATINGS
?
?
?
?
?
To make its credit ratings public and the basis for such ratings generally available to the investing public without cost Public credit ratings (which constitute 99% of Standard & Poor's credit ratings in the United States) are disseminated via real-time posts on Standard & Poor's website. Through a wire feed to the news media as well as via subscription services such as Ratings Direct and Credit Wire. Worldwide press releases to wire services and subscription services such as RatingsDirect and CreditWire. The basis for credit rating changes are made public through press releases, the most important of which are posted on Standard & Poor's website.
SURVEILLANCE
?
?
?
?
After the rating has been assigned, the rating agency continues to monitor the performance of the issuer, and the economic environment in which the issuer operates. This surveillance ensures that the analysts are aware of current developments, so that they can review sensitive areas and learn about changes in an issuer's plans. Moreover, rating agency also conducts detailed management meetings with each issuer at least once a year. These meetings essentially focus on developments over the period since the last meeting, and the outlook for the coming year.
SUMMARY
Multi-member rating teams ? Multi-tier rating process ? All rating decisions taken by a rating committee comprising experienced, competent and reputed professionals ? Organisation-wide internal transparency, with each stage of the rating process for all ratings including the rating committee's discussions ? Rating methodologies and criteria that are clearly spelt out and published, and are consistently applied
?
ALUMINIUM INDUSTRY
?
In Crisil?s opinion, the key factors for rating the Aluminum Industry are
? Product
and Customer diversity ? Proximity to User Markets ? High Level of Integration and Effective Energy Cost Controls ? Quality and Economic Life of Bauxite Reserves
FMCG INDUSTRY
?
In Crisil?s opinion, the key factors for rating the FMCG sector are
? Wide
Product Mix and Strong Innovation Capabilities ? Brand Equity ? Price Protection ? Efficient Supply Chain Management
STEEL INDUSTRY
?
In Crisil?s opinion, the key factors for rating the Steel Industry are
? Globally
Competitive Cost Structure ? Presence of Captive Power Plant, Coal and Iron Mines ? Share of Value-added Products in Sales ? Diversity in Client Base
BANKING AND FINANCIAL INSTITUTIONS
?
In Crisil?s opinion, the key factors for rating the Banking and Fianncial Institutions are
? Market
?
Position – CRAMEL Model
Capital Adequacy ? Resource-raising Ability ? Asset Quality ? Management and Systems Evaluation ? Earnings Potential ? Liquidity/Asset Liability Management
LIFE INSURANCE SECTOR
First Credit Rating Agency in India to launch “Financial Strength Rating” for Insurance Companies - 1998 ? In Crisil?s opinion, the key factors for rating the Life Insurance sector are
?
? Pricing ? Underwriting
Policy ? Distribution Channel ? Reinsurance Policy ? Asset Management
CRITICISM:
Credit rating agencies do not downgrade companies promptly enough. For example, Enron's rating remained at investment grade four days before the company went bankrupt ? Large corporate rating agencies have been criticized for having too familiar a relationship with company management
?
CRITICISM (CONTD…)
The lowering of a credit score by a CRA can create a vicious cycle, as not only interest rates for that company would go up, but other contracts with financial institutions may be affected adversely. ? Credit Rating Agencies have made errors of judgement in rating structured products, particularly in assigning AAA ratings to structured debt, which in a large number of cases has subsequently been downgraded or defaulted
?
THANK YOU
doc_649402517.ppt
Describes credit ratings, need of credit rating, uses of credit ratings, different types of credit ratings, credit rating agencies. It also defines the process of arriving at the rating.
Presented by Dripto Sarkar (30147) Jaspreet Singh (30277) Parikshit Shukla (30153) Pranav Sheth (30152) Vineet Srivastava (30270)
CREDIT RATING
DEFINITION
?
?
? ?
Credit rating is essentially, the opinion of the rating agency on the relative ability and willingness of the issuer of a debt instrument to meet the debt service obligations as and when they arise. "credit rating agency" means a body corporate which is engaged in, or proposes to be engaged in, the business of rating of securities offered by way of public or rights issue; “issuer" means a person whose securities are proposed to be rated by a credit rating agency. "rating" means an opinion regarding securities, expressed in the form of standard symbols or in any other standardized manner, assigned by a credit rating agency and used by the issuer of such securities, to comply with a requirement specified by these regulations.
THE NEED
?
? ?
?
?
?
Credit rating is an opinion expressed by an independent professional organisation, after making a detailed study of all relevant factors. Such an opinion will be of great assistance to investors in making investment decisions. It also helps the issuers of debt instruments to price their issues correctly and to reach out to new investors. Regulators like Reserve Bank of India (RBI) and Securities & Exchange Board of India (SEBI) often use credit rating to determine eligibility criteria for some instruments. In general, credit rating is expected to improve quality consciousness in the market and establish, over a period of time, a more meaningful relationship between the quality of debt and the yield from it. Credit Rating is also a valuable input in establishing business relationships of various types.
USE OF CREDIT RATINGS: BOND ISSUER
Independent verification of their own credit worthiness ? Many larger CRA?S offer „ Credit Rating Advisory Services? that advices the issuer how to structure its bond offerings ? Issuers also use credit ratings in certain structured finance transactions
?
INVESTMENT BANKS & BROKERS
Investment banks and broker-dealers also use credit ratings in calculating their own risk portfolios (i.e., the collective risk of all of their investments). ? Larger banks and broker-dealers conduct their own risk calculations, but rely on CRA ratings as a "check" (and double-check or triple-check) against their own analyses
?
GOVERNMENT REGULATORS
Regulators use credit ratings as well, or permit these ratings to be used for regulatory purposes ? For eg: under the Basel II agreement of the Basel Committee on Banking Supervision, banking regulators can allow banks to use credit ratings from certain approved CRAs when calculating their net capital reserve requirements
?
GOVERNMENT REGULATORS (CONTD…)
CRA ratings are also used for other regulatory purposes as well. The U.S. SEC, for example, permits certain bond issuers to use a shortened prospectus form when issuing bonds if the issuer is older, has issued bonds before, and has a credit rating above a certain level ? Insurance regulators use credit ratings to ascertain the strength of the reserves held by insurance companies.
?
TYPES
?
There are 4 types of credit ratings
? Personal
Credit Ratings ? Corporate Credit Ratings ? Short Term Ratings ? Sovereign Credit Ratings
AGENCIES
Credit Rating Information Services of India Limited (CRISIL) ? Investment Information and Credit Rating Agency of India (ICRA) ? Credit Analysis & Research Limited (CARE) ? Duff & Phelps Credit Rating India Private Ltd. (DCR India renamed as FITCH) ? ONICRA Credit Rating Agency of India Ltd
?
PROCESS
Click here for the process map of credit rating agency ? The timeframe taken is usually 3-4 weeks but it can be done earlier depending upon the requirement
?
DOCUMENTS
? ? ? ?
?
?
SSI Registration Certificate Partnership Deed / Memorandum & Article of Association Authority letter to sign the application List of all partners / directors with their age, address, certified Net Worth / Income Tax returns, qualifications and experience Copy of the audited accounts for the last three years (where accounts for the last year have not been audited, provisional accounts duly certified by a Chartered Accountant, along with two years audited accounts, are to be submitted) In case of new project/expansion, copy of the project report containing a brief project profile, cost of project, source/means of finance
DOCUMENTS (CONTD…)
? ? ?
?
?
?
?
Brief write-up about the products manufactured, end users, marketing tie-up and orders in hand Details of subsidy, tax concession available to the applicant Quality certificates, export awards won, membership of any associations Any other information that would enable us to understand your business better Details about group companies (names, constitution, net worth, turnover etc.) Contact details of Bankers, key suppliers & key customers Insurance details of plant & machinery
MEETINGS
The interest of investors is best served if there is an open dialogue with the issuer. ? Discussions during a management meeting are wide-ranging, covering competitive position, strategy, financial policy, historical performance, and near- and long-term financial and business outlook. ? Rating teams focus on the issuer's business risk profile and strategies, in addition to reviewing all financial data.
?
RATING PREDICTION MODELS
Linear Regression
? ?
Usually measured in linear or notch space, (for instance with Aaa=1 and C=21) on various financial metrics. The result is a linear index with fixed coefficients which maps directly to rating space.
Ordered Probit
?
Relaxes the assumption of a linear rating scale by adding endogenously determined "break points" against which a similar fixed coefficient linear index is measured.
ABOVE MODELS ARE GENERALLY EASY TO COMPUTE AND IMPLEMENT. BUT STILL, BOTH MODELS RESULT IN FIXED COEFFICIENT LINEAR INDEXES OF THE UNDERLYING FACTORS
Simply stated, credit ratings are assumed to be a weighted average of individual metric implied ratings, but the weights are not constant – they are functions of the issuer„s leverage ratio.
DATA COLLECTION
?
?
? ? ? ? ? ?
?
Financial data are taken as reported from annual financial statements, and cover the 10 year span. The financial metrics considered are – Coverage (CV) Leverage (LV) Return on assets (ROA) Volatility adjusted leverage (vLV) Revenue stability (RS) Total assets (AT). the best possible three year average of the credit metrics is used to smooth out noisy fluctuations and better reveal the true financial condition of the issuer. interaction between coverage and assets. In the OLS and probit models, this is simply the product of the coverage ratio and asset level; in the new model, it is the geometric mean of the coverage- and assets-implied ratings. The second is the coefficient of variation of the last three years of leverage ratios.
THE RATING APPROACH
?
Specifically, each year's values to the standard normal distribution are mapped. Suppose there are n unique values of the metric for a particular fiscal year. We sort these values from low to high and associate them with the n element linear grid ranging from 1/n to 1-1/n. Each metric is mapped to an implied rating, and the final rating is an average of those. The weights are assumed to be a function of an issuer's leverage ratio. This leads to a total of 77 free parameters estimated with 6,100 issuer/years, as compared to 36 parameters for the simple linear regression and 51 for the ordered probit. Consider the problem of mapping a given (normalized) ratio to an implied rating. Since we assume a strictly monotonic relationship (specifically, that improved values lead to better ratings), all that is required is estimating the cutoff
?
?
?
THE RATING APPROACH (CONTD...)
?
An individual metric z would be mapped to an implied fractional rating by linearly interpolating between the nodes:
?
Given our normalization of the financial data, these nodes are standard deviations of the normal distribution. As an example, we might have the nodes {0.2 1.3} associated with ratings {11 14} for coverage. If an issuer has a normalized coverage ratio of 0.7, that would map to an implied rating of 12.4.
THE RATING APPROACH (CONTD…)
?
?
A notional "D“ rating is defined for individual metrics and assigned a value of 1 and similarly a notional "Aaaa" rating is defined and assigned a value of 25. We thus have nodes associated with the following ratings: {D = 1, C = 5, B3 = 6, Ba3 = 9, Baa3 = 12, A3 = 15, Aa3 = 18, Aaa = 21, Aaaa = 25}. We parameterize the weighting functions as follows. For each individual credit metric z, define wz as the exponential of a linear function of the issuer's leverage: Final weight is given by –
?
The above eqn. shows us the seventh weight……
THE SEVENTH WEIGHT
?
This extra weight is assigned to our seventh credit metric, the geometric mean of the coverage-implied rating and the assets-implied rating:
?
The interaction captured by RCVxAT approximates the fact that these two are not perfect substitutes: if either coverage or total assets is particularly low, simply increasing the other one will not perfectly compensate.
ADJUSTMENTS
While each of our six metrics is constrained to return the sample average rating on average, since our weights are not constant, our average weighted average rating will not generally equal the sample average rating (i.e., we will have non-zero average errors). Also, our seventh factor RCVxAT will not generally return the sample average rating, further biasing our results. We add a constant notching adjustment to correct for these.
?
A constant notching adjustment n simply to absorb rounding biases and give us a mean zero error in sample.
Adjustment for fiscal year with fixed effects n(t).
?
?
Adjustment for industry with fixed effects n(I).
Adjustment proportional to the volatility of leverage over the last three years.
?
THE FINAL RATING EQUATION
The above equation facilitates a well defined rating ranging from 5 ( C ) to 21 ( Aaa ) with well defined end points viz. 1 ( D ) and 25 ( Aaaa )
ASSIGNMENT OF RATING
After meeting the issuer's management, the analysts prepare a report detailing their assessment of the business risk, financial risk, and management risk associated with the issuer. ? The report is then presented to the rating committee at a rating committee meeting (RCM – issuer doesn?t participate) ? The rating committee then determines the rating.
?
SYMBOLS AND MEANINGS
CRISIL AAA AA A BBB BB B C D CARE CARE AAA Description Highest Safety High Safety Adequate Safety Moderate Safety Inadequate Safety High Risk Substantial Risk Default
CARE AA
CARE A CARE BBB CARE BB CARE B CARE C CARE D
COMMUNICATION OF RATING
On finalization of a rating at the rating committee meeting, the rating decision is communicated to the issuer. ? Thereafter, a document setting out the rationale supporting the rating is forwarded. ? It is up to the issuer then to accept the rating or not ? If the issuer accepts the rating, it sends a letter of acceptance to rating agency.
?
COMMUNICATION OF RATING (CONTD…)
?
?
?
?
If, on the other hand, the issuer disagrees, it can appeal for a fresh look at the rating assigned. In such a case, the issuer needs to submit additional facts/data or new information to the rating team, to be presented to the rating committee. The rating committee then discusses the information submitted; it may or may not decide to modify the rating, depending on the facts of the case. If the rating is not changed and the issuer continues
DISSEMINATION OF CREDIT RATINGS
?
?
?
?
?
To make its credit ratings public and the basis for such ratings generally available to the investing public without cost Public credit ratings (which constitute 99% of Standard & Poor's credit ratings in the United States) are disseminated via real-time posts on Standard & Poor's website. Through a wire feed to the news media as well as via subscription services such as Ratings Direct and Credit Wire. Worldwide press releases to wire services and subscription services such as RatingsDirect and CreditWire. The basis for credit rating changes are made public through press releases, the most important of which are posted on Standard & Poor's website.
SURVEILLANCE
?
?
?
?
After the rating has been assigned, the rating agency continues to monitor the performance of the issuer, and the economic environment in which the issuer operates. This surveillance ensures that the analysts are aware of current developments, so that they can review sensitive areas and learn about changes in an issuer's plans. Moreover, rating agency also conducts detailed management meetings with each issuer at least once a year. These meetings essentially focus on developments over the period since the last meeting, and the outlook for the coming year.
SUMMARY
Multi-member rating teams ? Multi-tier rating process ? All rating decisions taken by a rating committee comprising experienced, competent and reputed professionals ? Organisation-wide internal transparency, with each stage of the rating process for all ratings including the rating committee's discussions ? Rating methodologies and criteria that are clearly spelt out and published, and are consistently applied
?
ALUMINIUM INDUSTRY
?
In Crisil?s opinion, the key factors for rating the Aluminum Industry are
? Product
and Customer diversity ? Proximity to User Markets ? High Level of Integration and Effective Energy Cost Controls ? Quality and Economic Life of Bauxite Reserves
FMCG INDUSTRY
?
In Crisil?s opinion, the key factors for rating the FMCG sector are
? Wide
Product Mix and Strong Innovation Capabilities ? Brand Equity ? Price Protection ? Efficient Supply Chain Management
STEEL INDUSTRY
?
In Crisil?s opinion, the key factors for rating the Steel Industry are
? Globally
Competitive Cost Structure ? Presence of Captive Power Plant, Coal and Iron Mines ? Share of Value-added Products in Sales ? Diversity in Client Base
BANKING AND FINANCIAL INSTITUTIONS
?
In Crisil?s opinion, the key factors for rating the Banking and Fianncial Institutions are
? Market
?
Position – CRAMEL Model
Capital Adequacy ? Resource-raising Ability ? Asset Quality ? Management and Systems Evaluation ? Earnings Potential ? Liquidity/Asset Liability Management
LIFE INSURANCE SECTOR
First Credit Rating Agency in India to launch “Financial Strength Rating” for Insurance Companies - 1998 ? In Crisil?s opinion, the key factors for rating the Life Insurance sector are
?
? Pricing ? Underwriting
Policy ? Distribution Channel ? Reinsurance Policy ? Asset Management
CRITICISM:
Credit rating agencies do not downgrade companies promptly enough. For example, Enron's rating remained at investment grade four days before the company went bankrupt ? Large corporate rating agencies have been criticized for having too familiar a relationship with company management
?
CRITICISM (CONTD…)
The lowering of a credit score by a CRA can create a vicious cycle, as not only interest rates for that company would go up, but other contracts with financial institutions may be affected adversely. ? Credit Rating Agencies have made errors of judgement in rating structured products, particularly in assigning AAA ratings to structured debt, which in a large number of cases has subsequently been downgraded or defaulted
?
THANK YOU
doc_649402517.ppt