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Credit Rating

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Credit ratings are an evaluation of a debtor's ability to repay debt and likelihood of default. Credit rating agencies assign ratings to institutions that issue debt. The big three international agencies are Moody's, S&P, and Fitch. Credit ratings benefit investors by indicating risk and returns, companies by lowering borrowing costs, and financial intermediaries by aiding investment decisions. However, ratings may be inaccurate and not guarantee soundness. During the financial crisis, agencies were criticized for overrating complex securities based on risky subprime mortgages.

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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 SYSTEM AGENCY GRADES Standard and Poor’s AAA, AA, A, BBB, BB, B, CCC, CC, C AAA, Aa1, Aa2, Aa3, A1, A2, A3, Baa1, Baa2, Baa3, Ba1, Ba2, Ba3, Moody’s B1,B2,B3, Caa1, Caa2, Caa3, Ca, C
INDIAN AGENCIES 1. CRISIL [Credit Rating Market Share and Information Services of India Ltd.] 4% 2. ICRA [Investment CRISIL Information and Credit 18% Rating Agency of 42% ICRA India] CARE 3. CARE [Credit Analysis 36% and Research Ltd.] DUFF & PHELPS 4. Duff and 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 Rating Receipt of the Communication committee request. of decision. meeting. Assignment to Presentation Dissemination analytical of findings. to the public. team. Plant visits and Monitoring for Obtaining meeting with possible information. management. change.
METHODOLGY Operating Efficiency Market Legal position of Position the Company I. BUSINESS Size of Industry Risk RISK business. ANALYSIS
Cash Flow Profitability Analysis Accounting Financial quality flexibilty II. FINANCIAL RISK
III. Management Evaluation IV. Geographical analysis V. Regulatory and Competitive Environment VI. Fundamental Analysis
B-SCHOOL RATINGS Factual Survey Overall Score/Rankings Perceptual Survey
The questionnaires of the two surveys are based on the following parameters: Future Orientation, 10% Brand Learning Value, 20% Experience, 30% Return on Investment, 25% Living Experience, 15%
Credit Rating
AWARENESS DEFLATOR To bring fairness to the No. of Weights rankings, an element was respondents introduced called the [Base] "awareness deflator" in the perception survey. 40 or more 1 The 205 B-schools were divided into ten "panels" 30-39 0.9 for the perception survey, with an average 20 institutes in each. 20-29 0.8 Each panel was rated by 120 respondents, which are called "Base". The 20 or less 0.7 weights were assigned as follows:
INDIAN INSTITUTE OF MANAGEMENT [IIM-A] Overall Rank : 1 TOTAL: 1701.9 Perceptual Score: Perceptual Rank: 1 Factual Score: Factual Rank: 5 878 824 BASE: 83 AWARENESS WEIGHT: 1
Parameter Factual Perceptua Total Rank by Score l Score Parameter •Learning Experience 220 282 502 6 Pedagogy 78 58 136 Internship 47 54 101 Quality of faculty 29 56 85 Innovative teaching 50 29 79 method 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 43 25 68 development •Brand Value 200 195 395 1
Parameter Factual Perceptual Total Rank by Score Score Parameter •Return on 170 236 406 12 Investment Overall value of 50 142 192 money Quality of 60 38 98 Companies visiting Quality of Placement 60 57 117 •Future Orientation 95 89 184 1 Creating Managers 50 45 95 for tomorrow Global Exposure 45 44 89
BENEFITS OF CREDIT RATING I. To the Investors Safety of Investment Recognition of risk and returns Freedom of investment decisions Wider choice of investments Dependable credibility of issuer Understanding investment proposals Advantages of continuous monitoring
II. To the company Easy to raise resources Lower cost of borrowing Reduction of cost in public issues Rating builds up image Motivation for growth Recognition to unknown companies 20
III. To the Brokers and Financial Intermediaries Stock brokers have to make less efforts in persuading their clients to select an investment proposal 21
Disadvantages of Credit Rating  Non-disclosure of significant information  Static study  Rating is no guarantee for soundness of company  Human bias  Rating under unfavorable conditions  Difference in rating of two agencies 22
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.

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Credit Rating

  • 2. 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.
  • 3. 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.
  • 4. 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)
  • 5. GRADING SYSTEM AGENCY GRADES Standard and Poor’s AAA, AA, A, BBB, BB, B, CCC, CC, C AAA, Aa1, Aa2, Aa3, A1, A2, A3, Baa1, Baa2, Baa3, Ba1, Ba2, Ba3, Moody’s B1,B2,B3, Caa1, Caa2, Caa3, Ca, C
  • 6. INDIAN AGENCIES 1. CRISIL [Credit Rating Market Share and Information Services of India Ltd.] 4% 2. ICRA [Investment CRISIL Information and Credit 18% Rating Agency of 42% ICRA India] CARE 3. CARE [Credit Analysis 36% and Research Ltd.] DUFF & PHELPS 4. Duff and Phelps
  • 7. 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
  • 8. PROCESS Rating Receipt of the Communication committee request. of decision. meeting. Assignment to Presentation Dissemination analytical of findings. to the public. team. Plant visits and Monitoring for Obtaining meeting with possible information. management. change.
  • 9. METHODOLGY Operating Efficiency Market Legal position of Position the Company I. BUSINESS Size of Industry Risk RISK business. ANALYSIS
  • 10. Cash Flow Profitability Analysis Accounting Financial quality flexibilty II. FINANCIAL RISK
  • 11. III. Management Evaluation IV. Geographical analysis V. Regulatory and Competitive Environment VI. Fundamental Analysis
  • 12. B-SCHOOL RATINGS Factual Survey Overall Score/Rankings Perceptual Survey
  • 13. The questionnaires of the two surveys are based on the following parameters: Future Orientation, 10% Brand Learning Value, 20% Experience, 30% Return on Investment, 25% Living Experience, 15%
  • 15. AWARENESS DEFLATOR To bring fairness to the No. of Weights rankings, an element was respondents introduced called the [Base] "awareness deflator" in the perception survey. 40 or more 1 The 205 B-schools were divided into ten "panels" 30-39 0.9 for the perception survey, with an average 20 institutes in each. 20-29 0.8 Each panel was rated by 120 respondents, which are called "Base". The 20 or less 0.7 weights were assigned as follows:
  • 16. INDIAN INSTITUTE OF MANAGEMENT [IIM-A] Overall Rank : 1 TOTAL: 1701.9 Perceptual Score: Perceptual Rank: 1 Factual Score: Factual Rank: 5 878 824 BASE: 83 AWARENESS WEIGHT: 1
  • 17. Parameter Factual Perceptua Total Rank by Score l Score Parameter •Learning Experience 220 282 502 6 Pedagogy 78 58 136 Internship 47 54 101 Quality of faculty 29 56 85 Innovative teaching 50 29 79 method 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 43 25 68 development •Brand Value 200 195 395 1
  • 18. Parameter Factual Perceptual Total Rank by Score Score Parameter •Return on 170 236 406 12 Investment Overall value of 50 142 192 money Quality of 60 38 98 Companies visiting Quality of Placement 60 57 117 •Future Orientation 95 89 184 1 Creating Managers 50 45 95 for tomorrow Global Exposure 45 44 89
  • 19. BENEFITS OF CREDIT RATING I. To the Investors Safety of Investment Recognition of risk and returns Freedom of investment decisions Wider choice of investments Dependable credibility of issuer Understanding investment proposals Advantages of continuous monitoring
  • 20. II. To the company Easy to raise resources Lower cost of borrowing Reduction of cost in public issues Rating builds up image Motivation for growth Recognition to unknown companies 20
  • 21. III. To the Brokers and Financial Intermediaries Stock brokers have to make less efforts in persuading their clients to select an investment proposal 21
  • 22. Disadvantages of Credit Rating  Non-disclosure of significant information  Static study  Rating is no guarantee for soundness of company  Human bias  Rating under unfavorable conditions  Difference in rating of two agencies 22
  • 23. 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.