Credit rating agency

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Role of Credit Rating Agencies (‘CRA’) Team: Tejas Soman Shochis N Nikleshwar W Mayur T Yadnesh S Manish S

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

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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.

Evaluation of Risks

Business Risks

Financial Risks

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

THANK YOU