Credit rating agency
-
Upload
tejas-soman -
Category
Economy & Finance
-
view
85 -
download
1
Transcript of Credit rating agency
Role of Credit Rating Agencies (‘CRA’)
Team: Tejas SomanShochis NNikleshwar WMayur TYadnesh SManish S
MEANING
A credit rating evaluates the credit worthiness of a debtor,
especially an individual, business (company) or a government.
Credit Rating establishes a link between risk and return
The credit rating has an inverse relationship with the possibility of
debt default.
An investor uses the ratings to optimize his risk-return trade-off.
Helps to purchase the bonds issued by companies and
governments to determine the likelihood that the issuer will pay its
bond obligations
TYPES OF RATINGS
SOVEREIGN CREDIT RATING:
The sovereign credit rating indicates the risk level of the investingenvironment of a country
SHORT TERM RATING:
A short-term rating is a probability factor of a borrower going intodefault within a year.
LONG TERM RATINGS:
A long-term rating is a probability factor of a borrower going intodefault more than a year.
CORPORATE CREDIT RATINGS:
A short-term rating is a probability factor of an individual goinginto default within a year.
ROLE OF CRA
Maintenance of investors’ confidence in the market
Protect the interest of investors who can not understand merits
of the debt instruments of a company
Improves a healthy discipline on borrowers
Determine the interest costs for companies
Determine the eligibility of debt and other financial instruments
for the portfolios of certain institutional investors due to national
regulations that restrict investment in speculative-grade bonds
Continue...
ROLE OF CRA….
CRAs analyze public and non-public financial and accounting
data as well as information about economic and political factors
that may affect the ability and willingness of a government or firms
to meet their obligations in a timely manner
The most significant change in the recent relates to emphasis on
their accountability and more important, the caution in regulators'
use of ratings.
What a credit rating is not
A CRA does not reflect other types of risk, such as marketor liquidity risks, which may also affect the value of asecurity.
CRA does not a consider the price at which an investorpurchased a security, or the price at which the securitymay be sold.
One should not interpret a credit rating as investmentadvice and should not view it as a recommendation tobuy, sell, or hold securities.
A credit rating is not a guarantee that a financialobligation will be repaid. For example, an ‘AAA’ creditrating on a debt instrument does not mean the investorwill always be paid with absolute certainty—instrumentsrated at this level sometimes default.
Business
Risk
Country
Risk
Company
Position
Industry
Factors
Profitability
/ Peer Group
Comparisons
• Political • Economic• Industry – Specific factors• Foreign exchange
• Industry Trends• Industry Structure• Market Size• Growth Potential• Cyclicality• Bases of Competition• Changing Technology• Operating Risk• Regulatory Environment
• Competitive Factors• Market position• Keys to Success• Size• Diversification• Management
• Validation of “Company Position”
• Trends• Quality of Earnings
& Analytical adjustments• Peer Group Comparisons
Financial
Risk
Accounting
Cash Flow
Adequacy
Governance
Risk
Liquidity /
Short-term
Factors
• Accounting Regime • Reporting & Disclosure• Analytical adjustments
• Ownership• Board of directors• Management practices• Financial Strategy• Risk Tolerance• Accounting Practices• Internal controls
• Focus on debt service capability
• Analytical distinctions with profitability
• Cash flow measures / • ratios
• Operating sources & uses Of liquidity
• Other potential calls on Liquidity
• Debt Characteristics• Bank credit facilities
DEMERITS OF CREDIT RATING
Possibility of Bias Exist
Credit ratings are subjective
Improper Disclosure May Happen
Impact of Changing Environment
Problems for New Companies
Downgrading by Rating Agency