ACKNOWLEDGMENT

This Project is the result of dedicated effort as well as proper guidance of our professor. So before we explain our project, we would like to add on a few heartfelt words for our professor who gave us unending support and guidance. We would like to thank Prof. Shivshankar Panigrahi for giving us the opportunity to undertake this study. This information is true and original to the best of our knowledge.

Certificate
This is to certify that the below mentioned students of B.Com, Financial Markets (Semester VI) have successfully completed the project report on : CREDIT RATINGS as part of their curriculum in 2011-2012.

Name Smita Banerjee Kimberly Braganza Pooja Sawant

Roll No. 02 05 33

_________________________ (Prof. Shivshankar Panigrahi)

SR. NO. TOPIC

1. 2. 3. 4. 5. 6. 8. 9. 10. 11.

Introduction

INDEX

PAGE No.

4. 5. 8. 12. 14. 23. 25. 27. 31.

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Sovereign credit ratings Corporate credit ratings Indian Scenario, Credit Rating and Risk Management CRISIL- Instruments Relevant Regulators Limitations When Credit Rating of U.S.A. Was Downgraded When Credit Rating of U.S.A. Was Downgraded Conclusion

33.

INTRODUCTION TO CREDIT RATING

A credit rating evaluates the credit worthiness of an issuer of specific types of debt, specifically, debt issued by a business enterprise such as a corporation or a government. It is an evaluation made by a credit rating agency of the debt issuers likelihood of default.[3] Credit ratings are determined by credit ratings agencies. The credit rating represents the credit rating agency's evaluation of qualitative and quantitative information for a company or government; including nonpublic information obtained by the credit rating agencies analysts. Credit ratings are not only based on mathematical formulas. Instead, credit rating agencies use their judgment and experience in determining what public and private information should be considered in giving a rating to a particular company or government. The credit rating is used by individuals and entities that purchase the bonds issued by companies and governments to determine the likelihood that the government will pay its bond obligations. A poor credit rating indicates a credit rating agency's opinion that the company or government has a high risk of defaulting, based on the agency's analysis of the
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entity's history and analysis of long term economic prospects.

SOVEREIGN CREDIT RATING

A sovereign credit rating is the credit rating of a sovereign entity, i.e., a national government. The sovereign credit rating indicates the risk level of the investing environment of a country and is used by investors looking to invest abroad. It takes political risk into account. The table shows the ten least-risky countries for investment as of June 2011. Ratings are further broken down into components including political risk, economic risk. Euromoney's bi-annual country risk index monitors the political and economic stability of 185 sovereign countries. Results focus foremost on economics, specifically sovereign default risk and/or payment default risk for exporters (a.k.a. "trade credit" risk). A. M. Best defines "country risk" as the risk that countryspecific factors could adversely affect an insurer's ability to meet its financial obligations.

A sovereign default is the failure or the government of a sovereign state to its debt in full.

refusal of pay back

It may be accompanied by a formal declaration of a government not to pay (repudiation) or only partially pay its debts (due receivables), or the de facto cessation of due payments.

Least risky countries, Score out of 100 Source: Euromoney Country risk June 2011 Ran Previou Country k s 1 1 Norway Luxembour g Switzerlan d Denmark Overall score 92.44

90.86

90.20

89.07
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5 6 7 8

3 12 5 7

Sweden Singapore Finland Canada Netherland s Germany

88.72 87.65 87.31 87.24

9 10

6 13

86.97 85.73

World Countries by Standard & Poor's Foreign Rating

CORPORATE CREDIT RATING

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A corporate credit rating is credit rating of a corporation, the financial indicator to potential investors of debt securities such as bonds. Credit rating is usually of a financial instrument such as a bond, rather than the whole corporation. These are assigned by credit rating agencies such as A. M. Best, Dun & Bradstreet, Standard & Poor's, Moody's or Fitch Ratings and have letter designations such as A, B, C. * The Standard & Poor's rating scale is as follows, from excellent to poor: AAA, AA+, AA, AA-, A+, A, A-, BBB+, BBB, BBB-, BB+, BB, BB-, B+, B, B-, CCC+, CCC, CCC-, CC, C, D. * Anything lower than a BBB- rating is considered a speculative or junk bond. * The Moody's rating system is similar in concept but the naming is a little different. It is as follows, from excellent to poor: Aaa, Aa1, Aa2, Aa3, A1, A2, A3, Baa1, Baa2, Baa3, Ba1, Ba2, Ba3, B1, B2, B3, Caa1, Caa2, Caa3, Ca, C. * A. M. Best rates from excellent to poor in the following manner: A++, A+, A, A-, B++, B+, B, B-, C++, C+, C, C-, D, E, F, and S.

Corporate credit ratings of Moodys, S&P and Fitch

Moody's
LongTerm ShortTerm

S&P
LongTerm ShortTerm

Fitch
LongTerm ShortTerm

Grade

Aaa Aa1 Aa2 P-1 Aa3 A1 A2 A3 P-2 Baa1 Baa2 P-3

AAA AA+ A-1+ AA AAA+ A-1 A AA-2 BBB+ BBB A-3

AAA AA+ F1+ AA AAA+ F1 A AF2 BBB+ BBB F3

Prime

High grade

Upper medium grade

Lower medium grade

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Baa3 Ba1 Ba2 Ba3 B1 B2 B3 Caa1 Not prime

BBBBB+ BB BBB B+ B BCCC+ C

BBBBB+ BB BBB B+ B BCCC C Substantial risks Extremely speculative In default with little prospect for Highly speculative Non-investment grade speculative

Caa2 Caa3 Ca

CCC CCCCC

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C C D / DDD / recovery In default

Systemic Importance of Rating and Rating Agencies

An INDIAN SCENARIO

In India, credit ratings started with the setting up of The Credit Rating Information Services of India (now CRISIL Limited) in 1987. CRISIL was promoted by premier financial institutions like ICICI, HDFC, UTI, SBI, LIC and Asian Development Bank. Now CRISIL is an S&P company with a majority shareholding. Apart from CRISIL four more rating agencies have been registered by SEBI in India. These are ICRA, promoted by IFCI and now controlled by Moodys, CARE promoted by IDBI, Fitch India, a 100% subsidiary of Fitch, and a new born Brickworks. In India, CRAs that rate capital market instruments are governed by Securities and Exchange Board of India (Credit Rating Agencies) Regulations, 1999. The regulation provides detailed requirements that a rating agency needs to fulfill to be registered with SEBI.

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Given the systemic superstructure position that the CRAs have come to occupy as information and insight gate keepers, they play an important role in the development of modern capital markets. Their importance to various stakeholders: Investors, Issuers, Banks, and Regulators. ( USE OF CREDIT RATING TO REGULATORS )
Regulatorstypically banking regulators and capital market regulatorsuse credit ratings, for regulatory purposes. For example, under the Basel II capital framework of the Basel Committee on Banking Supervision, banking regulators can accredit credit rating agencies based on specified criteria. The ratings assigned by these accredited External Credit Assessment Institutions or ECAIs are used to assign risk weights to various bank exposures in calculating capital charge for credit risk. Further, some regulators (such as IRDA and PFRDA) have incorporated ratings into the investment guidelines for the entities they regulate. Rating thus provides an additional layer of comfort to the regulators in their assessment of product risks and overall systemic risks.

Following are the CRAs registered with SEBI.

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CRISIL
CRISIL is the largest credit rating agency in India. CRISIL pioneered ratings in India more than 20 years ago, and is today the undisputed business leader, with the largest number of rated entities and rating products. CRISIL's rating experience covers more than 46,496 entities, including 24,850 small and medium enterprises (SMEs). As on December 31, 2011, we had more than 16644 ratings (including over 8000 SMEs) outstanding. They are a global analytical company providing ratings, research, and risk and policy advisory services. They are India's leading ratings agency and are also the provider of high-end research to the world's largest banks and leading corporations. Their defining trait is the ability to convert data and information into expert judgments and forecasts across a wide range of domains, with deep expertise and complete objectivity. Their majority shareholder is Standard and Poor's. Standard & Poor's, a part of The McGraw-Hill Companies, is the world's foremost provider of credit ratings
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Credit Ratings
A CRISIL rating reflects CRISIL's current opinion on the relative likelihood of timely payment of interest and principal on the rated obligation. It is an unbiased, objective, and independent opinion as to the issuer's capacity to meet its financial obligations. CRISIL's credit ratings are An opinion on probability of default on the rated obligation Forward looking Specific to the obligation being rated

CRISIL rates a wide range of entities for long-term and short-term debt obligations, which include:

Industrial companies Banks Non-banking financial companies (NBFCs)

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Infrastructure entities Microfinance institutions Insurance companies Mutual funds State governments Urban local bodies

A.

Bond/Long-term ratings - Credit Ratings

CRISIL's long-term ratings reflect CRISIL's current opinion on the relative safety of timely payment of interest and principal on the rated financial obligations which have an originally contracted maturity of more than one year. The long-term debt obligations typically rated by CRISIL include:

Non-convertible debentures/Bonds/Preference shares Fixed deposits Loans Structured debt

B.

Commercial paper/Short-term instruments - Credit Ratings

CRISIL's short-term ratings reflect CRISIL's current opinion as to the relative safety of timely payment of
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interest and principal on the rated financial obligations, which have an originally contracted maturity of less than one year. The short-term debt obligations typically rated by CRISIL include: Non-convertible debentures Inter corporate deposits Commercial papers/certificates of deposits/shortterm debt Fixed deposits Loans and Structured debt C. Bank Loan Ratings (Basel II)

A bank loan rating indicates the degree of risk regarding timely payment of the bank facility being rated; the facility includes principal and interest, if any, on the principal. CRISIL commenced rating bank loans post the Reserve Bank of India's guidelines on capital adequacy for banks, in 2007. The Basel II guidelines, as they are called, require banks to provide capital on the credit exposure as per credit ratings assigned by approved external credit assessment institutions (ECAIs), such as CRISIL. Basel II is a recommendatory framework for banking supervision, issued by the Basel Committee on Banking
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Supervision in June 2004. The objective of Basel II is to bring about international convergence of capital measurement and standards in the banking system. The revised framework for capital adequacy has been effective from March 31, 2008, for all Indian banks with an operational presence outside India (12 public sector banks and five private sector banks) and for all foreign banks operating in India. It has been applicable to all other commercial banks (except local area banks and regional rural banks) from March 31, 2009. CRISIL rates the maximum number of companies for their bank loans in India. It has, so far, assigned ratings to the bank facilities of more than 8383 entities as on December 31, 2011, representing over 50 per cent of all the companies which have their bank loans rated in India. CRISIL has rated bank facilities of all types: term loans, project loans, corporate loans, general purpose loans, working capital demand loans, cash credit facilities, and non-fund-based facilities, such as letters of credit and bank guarantees. CRISIL bank loan ratings cover companies of all sizes with bank facilities ranging from Rs.50 million to Rs.500 billion.

The break-up of ratings according to size of bank facilities is given below :

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CRISIL's bank loan coverage is pan-Indian, as can be seen below:

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Some of the highlights of CRISIL's bank loan rating operations, underlining its superior capabilities as a rating agency of choice, are as follows:

A direct presence in 65 major industrial centers across India to handhold first-time rating clients The largest and most experienced team of rating analysts A qualified team of industry analysts and economists that contributes to a large knowledge base State-of-the-art automated workflow with dedicated support-services teams Regular presentations and interaction with industry associations, regulators, and decision makers

D.

SME Ratings
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CRISIL pioneered the concept of ratings for the SME sector in India, and, presently, within a span of just five years, has the largest number of ratings on the SME sector in the world. As on December 31, 2011, we had more than 16644 ratings (including over 8000 SMEs) outstanding. CRISIL's SME ratings are affordable and tailor-made services designed for SMEs. Credit evaluation in the SME sector needs a specialized approach, as the issues and drivers of credit quality are different from those applicable for large companies. Understanding this distinction, CRISIL introduced the concept of SME credit ratings in India, designed exclusively for small enterprises, in 2005. Under SME Ratings, CRISIL has five distinct offerings:

CRISIL SME Ratings NSIC-CRISIL Performance and Credit Ratings for Small Scale Industries (SSIs) CRISIL 360 degree CRISIL Verified CRISIL Solar Energy Gradings

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E.

CRISIL Real Estate Ratings

Housing and real estate form the backbone of the country's infrastructure, and are critical drivers of economic development. With government policies emphasizing faster economic growth, the real estate sector is attracting large investments from both domestic and foreign investors. Investors and customers, however, need to exercise caution in their exposure, as the sector is largely unorganised. Given the risk factors and volatility inherent in the real estate business, it is critical to judge the performance ability of developers to deliver good quality projects. Towards this end, CRISIL provides third-party opinion through two specialised products: National Developer Ratings Real Estate Star Ratings

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F.

Other Ratings

Broker Quality Gradings Financial Strength Ratings Fund Ratings GVC Ratings Maritime Gradings MFI Gradings Project Credit Ratings

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Recovery Risk Ratings

Relevant Regulators
The list of various products, and the relevant regulators, are as noted below: 1. Mandatory 2. Non-Mandatory Products / Instruments requiring mandatory rating before issuance

25

Products that are not mandated or covered

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Limitations of credit ratings

Specifically, a credit rating, in the words of the CRAs, is: Not a recommendation to buy, hold or sell any shares, bonds, debentures or other instruments issued by the rated entity, or derivatives thereof. A rating is one of the many inputs that is used by investors to make an investment decision. Not Intended to measure many other factors that debt investors must consider in relation to risk such as yield offered, liquidity risk, pre-payment risk, interest rate risk, taxation aspects, risk of secondary market loss, exchange loss risk, etc. Not a general-purpose credit or performance evaluation of the rated entity, unless otherwise specified. The rating is usually specific to the instrument and is not the rating of the issuer.

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 Not an opinion on associate, affiliate or group companies of the rated entity, or on promoters, directors or officers of the rated entity. Not a statutory or non-statutory audit of the rated entity.

Not an indication of compliance or otherwise with legal or statutory requirements Not a guarantee against default of the rated instrument. Even the highest-rated instrument faces some risk of default, although the risks associated with this are lower than lower-rated instruments.

Credit Ratings are typically ordinal in nature for example we know that a rating of BB has a higher likelihood of default than BBB, but we do not know how much higher.

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IMPACT OF A RATING CHANGE

Standard & Poor's Publication date: 05-Aug-2011 20:13:14 EST :

United States of America Long-Term Rating Lowered To 'AA+' Due To Political Risks, Rising Debt Burden; Outlook Negative.

We have lowered our long-term sovereign credit rating on the United States of America to 'AA+' from 'AAA' and affirmed the 'A-1+' short-term rating. We have also removed both the short- and longterm ratings from CreditWatch negative. The downgrade reflects our opinion that the fiscal consolidation plan that Congress and the Administration recently agreed to falls short of what, in our view, would be necessary to stabilize the government's medium-term debt dynamics. More broadly, the downgrade reflects our view that the effectiveness, stability, and predictability of American policymaking and political institutions
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have weakened at a time of ongoing fiscal and economic challenges to a degree more than we envisioned when we assigned a negative outlook to the rating on April 18, 2011.

Since then, we have changed our view of the difficulties in bridging the gulf between the political parties over fiscal policy, which makes us pessimistic about the capacity of Congress and the Administration to be able to leverage their agreement this week into a broader fiscal consolidation plan that stabilizes the government's debt dynamics any time soon. The outlook on the long-term rating is negative. We could lower the long-term rating to 'AA' within the next two years if we see that less reduction in spending than agreed to, higher interest rates, or new fiscal pressures during the period result in a higher general government debt trajectory than we currently assume in our base case.

Consequences of a U.S. Credit Downgrade

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Even though the U.S. has just increased its cap on borrowing and thus avoided default, a credit downgrade from the coveted AAA status down to AA is still possible. Not only would Uncle Sam have to pay higher borrowing rates, but you would, too, because many interest rates are pegged to U.S. Treasuries.

Among the consequences:

Higher mortgage rates: Estimated increase: up .25%-1% As if lending standards werent tight enough, some borrowers may find it even more difficult to get approved for a mortgage (thus, further depressing an already weak housing market). Already own? Looking to refinance? Consider locking in rates sooner rather than later. Spike in credit card rates Estimated increase: up 1% First, the good news: The CARD Act prevents interest rate hikes retroactively on existing balances. This protection does not extend to new charges, however. Thats where youd get hit. All the issuer is required to
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do is give you 45 days notice prior to raising rates, which currently average 14.08%. Private student loans will cost more Estimated increase: up .25%-1% Just to put this into perspective: if you are paying off an existing student loan say, $25,000 at 10% interest over 10 years you could see payments rise from about $330 a month to $344, with an extra $1,680 in interest costs over the life of the loan. New private student loans would be even costlier.

Car loans will be more expensive Estimated increase: up .25%-.50 Considering the five-year note for a new car loan is around 4% and the average amount financed on a new car is $27,173, even a 1% rise in rates would only mean a difference of about $12/ month. Even so, thats $144 a year that wed rather have in our pockets. Jobs will be even harder to come by Companies are sitting on record stockpiles of cash some $1.9 trillion -and yet they have been reluctant to hire for any number of reasons, from not being convinced that the consumer is ready to spend freely again to their desire to work their existing staff to the
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bone (Why not squeeze three jobs out of one worker? Whats an employee going to do in this market quit???). Now, theyll have another excuse: higher borrowing costs

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Moody's, S&Ps and Fitch downgrade Greece to lowest rating 03-MARCH 2012

The rating agency Moody's on Friday cut the sovereign credit rating of Greece to the lowest level, saying the country's default risk was high. Moody's downgraded Greece long term sovereign credit rating from "Ca" to "C", the lowest credit rating level on its bond scale, meaning the debt is in default. The rating decision "was prompted by the recently announced debt exchange proposals for Greece, which imply expected losses to investors in excess of 70 percent, which is consistent with Moody's criteria for a C rating," said a report issued on its website. "Moody's decision not to assign an outlook to the rating is based on the very high likelihood of a default by the Greek government on its bonds and the fact that C is the lowest rating on Moody's rating scale," according to the rating agency.
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In a similar move on Monday, Standard & Poor's cut Greece's "CC" long-term and "C" short-term sovereign credit ratings to "selective default"(SD), after the debtladen country launched a bond swap plan to ease its debt burden last week. Greece formally launched the bond swap program a week ago, under which, bondholders are to take losses of 53.5 percent on the nominal value of their Greek bonds, with actual losses put at around 75 percent. Greece has suffered from debt problems for years. It had been relying on bailout funds from International organizations since May 2010. However, the first round rescue funds were not enough to prevent the country from defaulting, European leaders had agreed to provide a second bailout funds, totaling 130 billion euros. In order to receive the funds, Greece has to undergo fiscal austerity, which had already faced strong opposition from Greek civilians. Moody' s said the debt swap will incur "substantial economic losses" on private creditors' holdings of the Greek government debt. Also, Fitch downgrades Greece to "C" from "CCC" Moreover, the statement said it now considered that a Greek debt default was "highly likely in the near term."
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37

CONCLUSION
A credit rating is a formal assessment of a corporation, autonomous governments, individuals, conglomerates or even a country. Credit rating is evaluated on the basis of financial transactions carried in the past and assets and liabilities at present. Credit rating allows a lender or a credit granter to evaluate the ability of the borrower top repay a loan. In case of personal credit rating, the financial statistics of an individual is studied by a credit rating agency. Credit rating is very important. You need to manage a healthy credit score, especially if you are planning to borrow a loan or buy a real estate or an automobile. A low credit rating is considered as a sign of a high risk of non-payment of debt. Credit rating has the power to qualify you for more credit card offers or rule you out for many credit card offers. Moreover, credit ratings are used to ascertain the amount of a utility or leasing a deposit. It is also used to adjust insurance premium. The ratings are
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also important to substantiate eligibility for employment.

an

individual's

Moody's, Standard and Poor's and Fitch are leading global credit rating agencies. In India these are Crisil, Icra and CARE.

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