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CREDIT RATING AGENCY

o A credit rating assesses the credit worthiness of an individual, corporation, or even a country. o A credit rating tells the probability of the subject being able to pay back a loan. o A poor credit rating indicates a high risk of defaulting on a loan, and thus leads to high interest rates.

IMPORTANCE OF CREDIT RATING

o An investor uses rating to asses risk

o For common investor

o For corporate issuer

o More over every investor dont possess the requisite skills of credit evaluation

WHAT DO CRA RATE?

o Debenture o State o Bank o Equities o Sovereign funds, etc.

DEFINITION OF CREDIT RATINGS

LIST OF COUNTRIES BY CREDIT RATING BY S&P

Country Australia Brazil China Germany Greece India Japan Russia South Africa Rating AAA BBB AA AAA CC BBBAABBB BBB+ Outlook Stable Stable Stable Stable Negative Stable Negative Stable Stable

United Kingdom United States

AAA AA+

Stable Negative

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CRISIL
oCRISIL was set up by financial institution on January 19,1988. oassessment of all the major state governments and more than 100 urban local bodies in the country. o ThFirst and the largest credit rating agency in India o 4th Largest Rating Agency in the World

o Affiliation with Standard & Poors (USA)

o The first to rate a state government in India Gujarat o The first municipal bond rating in Asia Ahmedabad

Credit is also includes:

o 5 municipal corporations o 2 Water and Sewerage Service providers

CRISILS RATING SCALE

Rating Sym bol AAA AA A BBB BB B C D Definition Highest Safety High Safety Adequate Safety Moderate Safety Inadequate Safety High Risk Substantial Risk Default Speculative Grades Investm ent Grades

METHODOLOGY FOR RATING CREDIT

o BUSINESS RISK o FINANCIAL RISK o MANAGEMENT EVALUATION o BUSINESS ENVIROMENT ANALYSIS

CRISIL OFFERINGS
Bonds/ LT instruments CPs/ ST instruments Structured Finance

Bank Loan Ratings

CRISIL OFFERINGS
o SME Ratings o Real Estate Ratings National Developer rating Real Estate star rating o Business School Gradings

REAL ESTATE RATING LIST

Company Name ABAD Builders
Skyline Builders

Industry Name Real Estate Development

Real Estate Development

Rating DA3+
DA2

Prestige Estates Projects Limited

Real Estate Development

DA2+

Sobha Developers Ltd.

Real Estate Development

DA3

SME RATING LIST

Sr. No Name City Rating Assigned Date Assigned* Constitution

A A Autotech Private Limited

Gurgaon

SME 1

17-Jun-11

Private Limited

A K Engineers

Kolkata

SME 4

12-May-11

Proprietorship

3
4 5

Balaji Construction
Dharav Enterprise Bajaj Electronics

Ajmer
Mumbai Hyderabad

SME 3
SME 5 SME 2

26-Aug-11
26-Aug-11 27-Dec-10

Others
Others Proprietorship

BOND / LONG TERM RATINGS

Company Name Instrument Category Rating Assigned
A B Chem (India) Letter of Credit Limit CRISIL A4+

I Blue Minerals Private Limited

Term Loan Facilities

CRISIL D

D D International Private Limited

Cash Credit Limit

CRISIL B+

IAC Electricals Pvt Ltd

Cash Credit Limit

CRISIL BBB-

Natraj Proteins Ltd

Working Capital Demand Loan

CRISIL BB+

PROGRESS
o Its inception till march 2,2005,crisil has so far completed rating of issues 824 companies consisting of various types of debt instruments of companies both in public & the private sectors. o Credit rating analysis is relatively a new development in India. It is expected that establishment of crisil will provide a strong impetus to the systematic risk evaluation of specified corporate instruments as well as the companies issuing them.

ICRA
Originally incorporated as Investment Information and Credit Rating Agency of India Limited

THE ICRA FACTOR

o Facilitating Efficiency in Business
o The Research Factor o Committed to the development of Capital Market

OUR PRODUCTS AND SERVICES ARE DESIGNED TO

o Providing information and guidance o Enhance the ability of borrowers/issuers to access the money market and the capital market o Assist the regulators in promoting transparency in the financial markets; and o Provide intermediaries with a tool to improve efficiency in the funds raising process.

RANGE OF SERVICES
o Rating Service
Rates Rupee denominated debt instruments

Corporate Governance Rating

Stakeholder Value and Governance Rating Credit Risk Rating of Debt Mutual Funds Rating of Claims Paying Ability of Insurance Companies Project Finance Rating, and Line of Credit Rating

ICRA Indonesia (ICRAIndo)

Rupiah-denominated debt instruments ICRA Lanka Limited (ICRALanka)

o Grading Service
Initial Public Offers (IPOs) Microfinance Institutions (MFIs) Construction Entities Real Estate Developers and Projects Healthcare Entities & Maritime Training Institutes

o Consulting Service
ICRA Management Consulting Services Limited (IMaCS)
Strategy & Risk Management Regulation & Reform Transaction Advisory Development Consulting & Process Re-engineering.

LIMITATIONS OF ICRA RATING

o ICRA ratings convey only the relative credit risk. o Are only an opinion on the relative ranking of credit risk. o ICRA categories group debt obligations with similar but not necessarily identical credit risks o ICRA ratings are not always constant and are subject to change. o For assigning ratings, ICRA relies on information made available to it by the issuer company o ICRA ratings are not to be construed as recommendation to buy, sell, or deal in the rated instruments

RATING SCALE
o IrAAA --- Lowest Credit Risk o IrAA o IrA --- Low Credit Risk --- Average Credit Risk

o IrBBB --- Higher Than Average Credit Risk

o IrBB o IrB o IrC --- High Credit Risk --- Very High Credit Risk --- Extremely High Credit Risk

METHODOLOGY FOR CREDIT RATING

CORPORATE CREDIT RATING

BUSINESS RISK
Industry Risk Competitive Position Management Quality New project Risk

FINANCIAL RISK
Financial Position Profitability Capital Structure Financial Flexibility Future Cash Flow Adequacy

BANK CREDIT RATING

BUSINESS RISK
Operating and Regulatory Environment Ownership Structure and Govt. Support Governance Structure Franchise Management, Risk positioning, Systems and Strategy

FINANCIAL RISK
Asset Quality Diversity of funding and Liquidity Profitability Capital Adequacy

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GLOBAL IMPACT
o US subprime crisis o downgrading Us o Euro crisis

US SUBPRIME CRISIS
o Overview
o Rating Mistakes AAA rating to MBS & CDO Conflict of Interests Over optimism about housing market Little knowledge of the individual borrower

ACTIONS DURING CRISIS

o S & P downgraded 902 MBS & CDO o Moodys Downgraded 83% of MSB & CDOs originally rated AAA

US SUBPRIME CRISIS
o The Financial Crisis Inquiry Commission reported in January 2011 that: "The three credit rating agencies were key enablers of the financial meltdown. The mortgage-related securities at the heart of the crisis could not have been marketed and sold without their seal of approval

US DOWNGRADING
o o o o US downgraded from AAA to AA+ Debt Increased debt ceiling by $ 2.1 trillion Political fight

EURO CRISIS
o Downgraded Greece, Spain, Ireland, o Criticized for late reaction o accelerated Euro problem

CRA-CRITICISM
o LACK OF TRANSPERENCY IN RATING PROCESS o FLAWS IN RATING PROCESS Doubtful assessment of financial documents and others as such Rating assigned within two weeks on urgency of companys request Incompetent rating staff

o FAMILIAR RELATION WITH COMPANY MANAGEMENT o ENGAGES BLACKMAIL TACTICS o CRAS DO NOT DOWNGRADE COMPANIES PROMPTLY ENOUGH o ISSUERS PAY BUSSINESS MODEL

EU - REGULATION ON CRA
o European Securities And Markets Authority (ESMA) Amendments Yearly publication of transparency report Rating analyst should not have ownership interest in entity Investigatory powers demand any document or data , conduct onsite inspections , imposing fines and penalties Lead analyst should not be involved in rating for more than 4 years Ratings from two different CRA for structured finance products

TRUST-WOZRTHINESS
o Impact on the markets o Many blame agencies for triggering financial crisis o Country or company may pay CRA to rank it o Downgrades put further strain on government