CREDIT RATING

Credit rating is an assessment of the credit worthiness of individuals, corporations, securities or a country.

It is an evaluation made by a credit rating agency of the debtor's ability to pay back the debt and the likelihood of default.

CREDIT RATING AGENCY

A credit ratings agency is a company that assigns credit ratings to institutions that issue debt obligations i.e. assets backed by receivables on loans, such as mortgage-backed securities.

INTERNATIONAL AGENCIES

The Big Three are: Moody's, Standard and Poor's and Fitch Ratings.

Some other agencies: Duff and Phelps Credit Rating Co.

(DCR) Japan Credit Rating Agency (JCR)

GRADING SYSTEMAGENCY GRADES

Standard and Poor’s AAA, AA, A, BBB, BB, B, CCC, CC, C

Moody’s

AAA, Aa1, Aa2, Aa3, A1, A2, A3, Baa1, Baa2, Baa3, Ba1, Ba2, Ba3, B1,B2,B3, Caa1, Caa2, Caa3, Ca,

C

INDIAN AGENCIES

1. CRISIL [Credit Rating and Information Services of India Ltd.]

2. ICRA [Investment Information and Credit Rating Agency of India]

3. CARE [Credit Analysis and Research Ltd.]

4. Duff and Phelps

42%

36%

18%

4%

Market Share

CRISILICRACAREDUFF & PHELPS

SOVEREIGN RATINGS

• The credit rating of a country or sovereign entity is known as sovereign rating.

• It takes into account factors such as: – 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

PROCESS

Receipt of the request.

Assignment to analytical

team.

Obtaining information.

Plant visits and meeting

with management.

Presentation of findings.

Rating committee meeting.

Communication of decision.

Dissemination to the public.

Monitoring for possible change.

METHODOLGY

I. BUSINESS RISK

ANALYSIS

Industry Risk

Market position of

the Company

Operating Efficiency

Legal Position

Size of business.

II. FINANCIAL RISK

Accounting quality

Profitability Cash Flow Analysis

Financial flexibilty

III. Management Evaluation

IV. Geographical analysis

V. Regulatory and Competitive

Environment

VI. Fundamental Analysis

B-SCHOOL RATINGS

Factual Survey

Perceptual Survey

Overall Score/Rankings

The questionnaires of the two surveys are based on the following parameters:

Learning Expe-rience; 30%

Living Expe-rience; 15%

Return on In-vestment; 25%

Brand Value; 20%

Future Orientation; 10%

AWARENESS DEFLATOR

To bring fairness to the rankings, an element was introduced called the "awareness deflator" in the perception survey. The 205 B-schools were divided into ten "panels" for the perception survey, with an average 20 institutes in each. Each panel was rated by 120 respondents, which are called "Base". The weights were assigned as follows:

No. of respondents

[Base]

Weights

40 or more 1

30-39 0.9

20-29 0.8

20 or less 0.7

INDIAN INSTITUTE OF MANAGEMENT [IIM-A] Overall Rank : 1

TOTAL: 1701.9

Perceptual Score: 878

Perceptual Rank: 1

Factual Score: 824

Factual Rank: 5

BASE: 83 AWARENESS WEIGHT: 1

Parameter Factual Score

Perceptual

Score

Total Rank by Paramet

er

•Learning Experience 220 282 502 6

Pedagogy 78 58 136

Internship 47 54 101

Quality of faculty 29 56 85

Innovative teaching method

50 29 79

Resource on learning 16 85 101

•Living Experience 139 76 215 4

Resource on living 50 25 75

Resource on recreation

46 25 71

Resource on personality

development

43 25 68

•Brand Value 200 195 395 1

Parameter Factual Score

Perceptual Score

Total Rank by Paramet

er

•Return on Investment

170 236 406 12

Overall value of money

50 142 192

Quality of Companies visiting

60 38 98

Quality of Placement

60 57 117

•Future Orientation 95 89 184 1

Creating Managers for tomorrow

50 45 95

Global Exposure 45 44 89

BENEFITS OF CREDIT RATING

I. To the InvestorsSafety of InvestmentRecognition of risk and returnsFreedom of investment decisionsWider choice of investmentsDependable credibility of issuerUnderstanding investment proposalsAdvantages of continuous monitoring

20

II. To the company

Easy to raise resourcesLower cost of borrowingReduction of cost in public issuesRating builds up imageMotivation for growthRecognition to unknown

companies

21

III. To the Brokers and Financial Intermediaries

Stock brokers have to make less efforts in persuading their clients to select an investment proposal

22

Disadvantages of Credit Rating

Non-disclosure of significant informationStatic studyRating is no guarantee for soundness of

companyHuman biasRating under unfavorable conditionsDifference in rating of two agencies

ROLE OF CREDIT RATING AGENCIES IN THE CRISIS

understating the risk involved with new, complex securities

Credit rating agencies were under scrutiny for giving investment-grade, "money safe" ratings to securitization transactions (CDOs and MBSs) based on subprime mortgage loans.