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TRODUCTIONObjective:The objective of this study is to find out (a) the need of
credit rating (b) how the credit rating agencies function (c) the limitations of
credit rating. An analysis of credit rating is also included in the study.CREDIT
RATING-An IntroductionThe role of financial markets in a market economy is that of
an efficient
intermediator, mediating between savers and investors, mobilizing
capital on hand and efficiently allocating them between competing uses on the
other. Such an allocative role hinges crucially on the availability of reliable
information.The doctrine of efficient market allocation in fact has as its
bedrock, what economists label perfect information. An investor in search of
investment avenues has recourse to various sources of information- offer documents
of the issuer(s), research reports of market intermediaries, media reports etc. In
addition to these sources, Credit Rating Agencies have come to occupy a pivotal
role as information providers, particularly for credit related opinions in respect
of debt instruments; a role that has been strengthened by the perception that
their opinions are independent, objective, well researched and credible.The impetus
for the growth of Credit Rating came from the high levels of default in the US
Capital markets after the Great Depression. Further impetus for growth came when
regulatory agencies began to stipulate that institutions such as Government Pension
Funds and Insurance Companies could not buy securities rated below a particular
grade. Merchant bankers, underwriters and other intermediaries involved in the debt
market also found rating useful for planning and pricing the placement of debt
instruments. The other factors leading to the growing importance of the credit
rating system in many parts of the world over the last two decades areThe
increasing role of capital and money markets consequent to
disintermediation;
Increasing securitization of borrowing and lending consequent to
disintermediation;Globalisation of the credit market; The continuing growth of
information technology;The growth of confidence in the efficiency of the market
mechanism: andThe withdrawal of Government safety nets and the trend towards
privatization.It was this growing demand on rating services that enabled credit
rating agencies to charge issuers for their services. This was much in variance
with the mode of financing used hitherto-with no fees charged to the issuers, a
credit rating agency used to provide rating information through the sale of their
publication and other materials.Historical perspective: The OriginsThe origins of
credit rating can be traced to the 1840s. Following the financial crisis of 1837,
Louis Tappan established the first mercantile credit agency in New York in 1841.
The agency rated the ability of merchants to pay their financial obligations. It
was subsequently acquired by Robert Dun and its first rating guide was published in
1859. Another similar agency was set up by John Bradstreet in 1849, which published
a ratings book in 1857. These two agencies were merged together to form Dun &
Bradstreet in 1933, which became the owner of Moodys Investors Service in 1962.
The history of Moodys Investors Service, and in 1909 published his Manual of
Railroad Securities. This was followed by the rating of utility and industrial
bonds in 1914, and the rating of bonds issued by U.S cities and other
municipalities in the early 1920s.Further expansion of the credit rating industry
took place in 1916, when the Poors Publishing Company published its first ratings,
followed by the Standard Statistics Company in 1922, and Fitch Publishing Company
in 1924. The Standard Statistics Company and the Poors Publishing company merged
in 1941 to form Standard & Poors.Credit Rating: The ConceptRatings, usually
expressed in alphabetical or alphanumeric symbols, are a simple and easily
understood tool enabling the investor to differentiate between debt instruments on
the basis of their underlying credit quality. The credit rating is thus a symbolic
indicator of the current opinion of the relative capability of the issuer to

service its debt obligation in a timely fashion, with specific reference to the
instrument being rated. It is focused on communicating to the investors , the
relative ranking of the default loss probability for a given fixed income
investment, in comparison with other rated instruments.A rating is specific to a
debt instrument and is intended as a grade, an analysis of the credit risk
associated with the particular instrument. It is based upon the relative capability
and willingness of the issuer of the instrument to service the debt
obligations( both principal and interest) as per the terms of the contract. Thus a
rating is neither a general purpose evaluation of the issuer, nor an overall
assessment of the credit risk likely to be involved in all the debts contracted or
to be contracted by such entity.The primary objective of rating is to provide
guidance to investors/ creditors in determining a credit risk associated with a
debt instrument/credit obligation. It does not amount to a recommendation to buy,
hold or sell an instrument as at does not take into consideration factors such as
market prices, personal risk preferences and other considerations which may
influence an investment decision. The rating process is itself based on certain
givens. The agency, for instance, does not perform an audit . Instead It is
required to rely on information provided by the issuer and collected by analysts
from different sources, including interactions in-person with various entities.
Consequently, the agency does not guarantee the completeness or accuracy of the
information on which the rating is based.The Use of Credit RatingBy InvestorsFor
the investor, the rating is an information service , communicating the relative
ranking of the default loss probability for a given fixed income investment in
comparison with other rated instruments. In the absence of a credit rating
system , the risk perception of a common investor vis--vis debt instruments
largely depends on his/her familiarity with the names of the promoters or the
collaborators. Such name recognition, often used to evaluate credit quality in
the underdeveloped markets can not be an effective surrogate for systematic risk
evaluation ; it suffers from a number of avoidable limitations it is not true that
every venture promoted by a well known name will be successful and free from
default risk. Nor is it true that every venture promoted by a relatively lesser
known entity is disproportionately risk prone. While on one hand , name
recognition restricts the options available to the investor, on the other it
denies relatively lesser known entrepreneurs access to a wider investor base. What
is therefore required for efficient allocation of resources is systematic risk
evaluation. It is rarely, if ever, feasible for the corporate issuer of debt
instrument to offer every prospective investor the opportunity to undertake a
detailed risk evaluation. A professional credit rating agency is equipped with the
required skills, the competence and the credibility, all of which eliminates, or at
least minimizes, the role of name recognition and replaces it with well
researched and scientifically analysed opinions as to the relative ranking of
different debt instruments in terms of their credit quality. A rating provided by a
professional credit rating agency is of significance not just for the
individual/small investor but also for an organized institutional investor. Rating
for them provides a low cost supplement to their own in-house appraisal system.
Large investors may use credit rating spectrum of investment options. Such
investors could use the information provided by rating changes, by carefully
watching upgrades and downgrades and altering their portfolio mix by operating in
the secondary market. Banks in some developed countries use the ratings of other
banks and financial intermediaries for their decisions regarding inter-bank
lending, swap agreements and other counter-party risks. By IssuersThe benefit of
credit rating for issuers stems from the faith placed by the market on the
opinions of the rating provided and the widespread use of ratings as a guide for
investment decisions. The issuers of rated securities are likely to have access to
a much wider investor base as compared to unrated securities , as a large section
of investors not having the required resources an skills to analyse each and every
investment opportunity would prefer to rely on the opinion of a rating agency.
The opinion of a rating agency enjoying investor confidence could enable the
issuers of highly rated instruments to access the market even under adverse market

conditions. Credit rating provides a basis for determining the additional

return( over and above a risk free return) which investors must get in order to be
compensated for the additional risk that they bear. They could be a useful
benchmark for issue pricing.The differential in pricing would lead to significant
cost savings for highly rated instruments.By IntermediariesRating is a useful tool
for merchant bankers
and other capital market intermediaries in the process of planning, pricing,
underwriting and placement of issues. The intermediaries, like brokers and dealers
in securities, could use rating as an input for their monitoring of risk exposures.
Regulators in some countries specify capital adequacy rules linked to credit rating
of securities in a portfolio.By RegulatorsRegulatory authorities worldwide have
promoted the use of Credit Rating by issuing mandatory requirements for issuers.
Specific rules, for instance restrict entry to the market of new issues rated
below a particular grade, stipulate different margin requirements for mortgage of
rated and unrated instrument and prohibit institutional investors from purchasing
or holding of instruments rated below a particular level.In India , credit rating
has been made mandatory for issuance of the following instruments: as per the
requirements of SEBI, public issue of debentures and
bonds
convertible/redeemable beyond a period of 18 months
need credit rating;as
per the guidelines of RBI, one of the conditions for issuance of
CP in India
is that the issue must have a rating not below the P2
grade from CRISIL/A2
grade from ICRA/PR2 from CARE;as per the guidelines of RBI , NBFCs having net owned
funds of
more than Rs. 2 crore must get their fixed deposit programmes
rated by 31st March 1995 and the NBFCs having net owned
funds of more than
Rs 50 lacs(but less than 2 crore) must get their
fixed deposit programme rated
by 31st March 1996. The minimum
rating required by the NBFCs to be eligible
to raise fixed deposits
are FA(-) from CRISIL/ MA(-) from ICRA/BBB from CARE.
Similar
regulations have been introduced by National Housing Bank(NHB)
for housing finance companies also;there is a proposal for making the rating of
fixed deposit
programmes of limited companies, other than NBFCs also
mandatory, by amendment of the Companies Act,1956.Code of Conduct for Credit Rating
AgenciesSEBI (Credit Rating Agencies) REGULATIONS,1999)A credit rating agency in
the conduct of its business shall observe
high standards of integrity and
fairness in all its dealings with its
clients.A credit rating agency shall
fulfill its obligations in an ethical
manner.A credit rating agency shall
render at all times high standards of
service, exercise due diligence, ensure
proper care and exercise
independent professional judgment. It shall wherever
necessary,
disclose to the clients, possible sources of conflict of duties
and
interests, while providing unbiased services.A credit rating agency shall
avoid any conflict of interest of any
member of its rating committee
participating in the rating analysis.
Any potential conflict of interest shall
be disclosed to the client.A credit rating agency shall not indulge in unfair
competition nor
shall they wean away client of any other rating agency on
assurance of higher rating.A credit rating agency shall not make any exaggerated
statement,
whether oral or written, to the client about its qualification or
its
capability to render certain services or its achievements in regard
to services rendered to other clients.A credit rating agency shall always endeavour
to ensure that all
professional dealings ate effected in a prompt and
efficient
manner.A credit rating agency shall not divulge to other clients,
press or
any other party any confidential information about its clients, which
has come to its knowledge, without making disclosure to the concerned person of the
rated company/client.A credit rating agency shall not make untrue statement
furnished
to the Board or to public or to stock exchange.
A credit rating
agency shall not generally and particularly in
respect of issue of securities
rated by it be party tocreation of false market;passing of price sensitive
information to brokers, members
of the stock exchanges, other players in the
capital market
or to any other person or take any other action which is
unethical or unfair to the investors. A credit rating agency shall maintain an
arms length relationship
between its credit rating activity and any other

activity.A credit rating agency shall abide by the provisions of the Act,
regulations and circulars which may be applicable and relevant to
the
activities carried on by the credit rating agency.Source: Notification No. S.O .
547(E), dated 7-7-1999,issued by SEBI

METHODOLOGYObjective:The main objective of this study is to find out how the Credit
Rating Agencies function, how they rate the instruments. The factors, which matter
in the rating process is also included in this study.The secondary objective of
this study is to find out the challenges being faced by the rating agencies and
what is being done to face it. Research Design:Descriptive Research is used in this
study. The nature of this study is such that it eradicates the necessary of doing
primary research. Research has been done from secondary sources of information.
Secondary sources of information:Credit Rating manuals from ICRAICRA Information
brochuresChartered Financial Analyst magazinesICFAI Reader magazine
www.icraindia.comwww.crisil.comwww.businessstandard.com

CREDIT RATING AGENCIES IN INDIAThe rating coverage in India is not too old,
beginning 1987 when the first rating agency, CRISIL was established. At present
there are three main rating agencies CRISIL(Credit Rating and Information Services
of India Ltd.),ICRA Ltd. (Investment Information and Credit Rating Agency of India
Limited) and CARE(Credit Analysis and Research). The fourth rating agency is a JV
between Duff & Phelps, US and Alliance Capital Limited , Calcutta.CRISIL:It was
promoted by ICICI, nationalized and foreign banks and insurance companies in 1987.
it went public in 1992 and is the only listed credit rating agency in India. In
1996 it entered into a strategic alliance with Standard & Poors to extend its
credit rating services to borrowers from the overseas market. The services offered
are broadly classified as Rating, Information services , Infrastructure services
and consulting. Rating services cover rating of Debt instruments-long, medium and
short term, securitised assets and builders. Information services offer corporate
research reports and the CRISIL 500 index. The Infrastructure and consultancy
division provide assistance on specific sectors such as power, telecom and
infrastructure financing.ICRA:It was promoted by IFCI and 21 other shareholders
comprising nationalized and foreign banks and insurance companies. Established in
1991 , it is the second rating agency in India. The services offered can be broadly
classified as Rating services , Advisory services and Investment Information
services. The rating services comprise rating of debt instruments and credit
assessment. The Advisory services include strategic counseling, general assessment
such as restructuring exercise and sector specific services such as for power,
telecom, ports, municipal ratings , etc. The information or the research desk
provides research reports on specific industries, sectors and corporates. The
Information services also include equity related services, viz, Equity Grading and
Equity Assessment. In 1996, ICRA entered into a strategic alliance with Financial
Proforma Inc. , a Moodys subsidiary to offer services on Risk Management Training
and software: Moodys and ICRA has entered into a memorandum, of understanding to
support these efforts.CARE:It was set up in 1992, promoted by IDBI jointly with
other financial institutions, nationalized and private sector finance companies.
The services offered cover rating of Debt instruments and sector specific industry
reports from the research desk and equity research.Market share #EMBED
Excel.Chart.8 \s###

ICRA - A Detailed Study Ministry of Finance, Department of Economic Affairs , vide

its letter No. 1(120) SE/89, dated the 19th Sept. 1990 accorded approval for the
establishment of a second Credit Rating and Information Agency in the country to
meet the requirements of companies based in North.The approval was granted subject
to the following conditions viz .The Agency shall be self-supporting after a
maximum period of 2
years and accordingly shall not require any subvention
thereafter
from IFCI;The agency should be managerially independent.The major
shareholders are:- Moodys Investment Company India private Ltd., IFCI Ltd., SBI,
LIC, UTI, PNB, GIC, Central Bank of India, Union Bank of India, Allahabad Bank,
United Bank of India, Indian Bank, Canara Bank, Andhra Bank , Export-Import Bank of
India, UCO Bank HDFC Ltd., Infrastructure Leasing and Financial Services Ltd.,
Vysya Bank.The main objective of ICRA like any other Credit Rating Agency is to
assess the credit instrument and award it a grade consonant to the risk associated
with such instrument. ICRAs main objectives include providing guidance to the
investors/creditors in determining the credit risk associated with a particular
debt instrument or credit obligation and reflecting independent, professional and
impartial assessment of such instruments/obligations. The ratings done by ICRA are
not recommendations to buy or sell securities but culminate symbolic indicator of
the current opinion of the relative capability of timely servicing of the debts and
obligations.RANGE OF SERVICESThe services offered by Credit Rating Agencies are as
follows:-Rating servicerating of bonds, debentures, Commercial Paper(CP),
certificates of deposit(CD), claim paying ability of
insurance companies,
corporate governance, structured obligations.Information serviceprovides
sector/industry specific
studies/publications, corporate reports and
mandate based
studies customized research. Grading servicesincludes grading
of Construction Entities, Real
Estate Developers & Projects and Mutual Fund
schemes.Advisory servicesit offers wide ranging management advisory
services
covering the areas of Strategy practice, Risk
Management practice, Regulatory
practice and Transaction
practice.
RATING
SERVICECredit RatingThe ICRA
rating is a symbolic indicator of the current and prospective opinion on the
relative capability of the corporate entity concerned to timely service debts and
obligations with reference to the instrument rated. The rating is based on an
analysis of the information and clarifications obtained from the entity , as also
other sources considered reliable by ICRA. The independence and professional
approach of ICRA ensure reliable, consistent and unbiased ratings. Ratings
facilitate investors to factor credit risk in their investment decisions. ICRA
rates long-term, medium-term and short-term debt instruments. ICRA offers its
rating services to a wide range of issuers including:Manufacturing companiesBanks
and financial institutionsPower companiesService companiesMunicipal and other local
bodiesNon-banking financial service companies.Structured Finance RatingStructured
finance ratings (SFRs) are based on the estimation of the expected loss to the
investor on the rated instrument, under various possible scenarios. The expected
loss is defined as the product of probability of default and severity of loss, once
the default has occurred. An SFR symbol indicates the relative level of expected
loss for that instrument, with the risk of loss being similar as in the case of a
corporate credit rating of the same level. However, an SFR may be different from
the credit rating of the issuer as in many cases the transaction is structured as
an off-balance sheet item. ICRAs four major SFR products are listed below. ICRA
employs a specific methodology for each of its SFR products. The methodology is
based on ICRAs understanding of that particular asset class and the structured and
legal issues associated with the transaction involved.Asset Backed
Securitization(ABS) - ABS refers to the securitisation of a diversified pool of
assets, which may include financial assets like automobile loans, commercial
vehicle loans, consumer durable loans or any other non-financial class of assets
that are identifiable and separable from the operations of the issuer and whose
risk of loss is measurable.Mortgage Backed Securitisation (MBS) An MBS has
diversified housing loans as the underlying asset for the transaction.
Collateralised Debt Obligation (CDO) A CDO transaction has a pool of corporate
loans, bonds or any other debt security, including structured debt, as the

underlying asset.Future Flow Transaction (FFT) FFTs involve devising a structure

where specified sources of future cash flows are identified are earmarked for
servicing investors. Some examples of such sources are property tax revenues of
municipal corporations, power receivables of bulk consumers and property lease
rentals. FFTs are not completed de-linked from the credit risk of the issuer, but
the structure, through preferential tapping of cash flows of the issuer can achieve
a rating that is higher than the issuers credit rating.The BenefitsAn issuer can
derive multiple advantages from structured finance products like lowering the cost
of funds, accessing new markets and investors on the strength of a higher rating
vis--vis a stand-alone corporate credit rating, improving capital adequacy,
reducing asset-liability mismatches and increasing specialization. Claims Paying
Ability Rating (for Insurance companies)ICRAs claims paying ability ratings (CPRs)
for insurance companies are an opinion on the ability of the insurers concerned to
honour policy-holder claims and obligations on time. In other words a CPR is ICRAs
opinion on the financial strength of the insurer, from a policy-holders
perspective. Following deregulation, a paradigm shift is expected in the domestic
insurance sector as newer players and products enter the market. Given this
scenario, ICRA expects its CPRs to be an important input influencing the customers
choice of insurance companies and products. ICRAs rating process involves analysis
of an insurers business fundamentals and its competitive position and focuses
primarily on the insurers franchise value, its management, organizational
structure/ownership and underwriting and investment strategies. Besides, the
analysis includes an assessment of an insurance companys profitability, liquidity,
operational and financial leverage, capital adequacy and asset / liability
management method.Corporate Governance Rating ICRAs Corporate Governance
Rating(CGR) provides a current opinion on the level to which an organization
accepts and agrees to codes and guidelines of corporate governance practices that
serve the interests of stakeholders such as shareholders, customers, creditors,
bankers, employees, government and society at large. The aspects examined during a
CGR exercise include: ownership structure; financial stakeholder relation;
financial transparency & information disclosure; and Board structure & process. A
CGR , carrying the ICRA stamp, helps the corporate entity concerned in raising
funds; listing on stock exchanges; dealings with third parties like creditors;
providing comfort to regulators; improving image/credibility; improving its
valuation; and bettering its corporate governance practices through benchmarking.
GRADING SERVICESThe grading services of ICRA include
---Grading of Construction
Entities
---Grading of Mutual Fund SchemesGrading of Construction EntitiesThe
unique grading methodology developed by ICRA, along with the Construction
Development Industry Council(CIDC) encompasses all the entities in a construction
project, the contractor, the consultant, the project owner and the project itself.
The service of grading, by providing an independent opinion on the quality of the
entity graded , is designed to enhance the lenders confidence in financing
construction sector participants.Grading of Mutual Fund SchemesICRAs grading of
Mutual Funds seeks to address the perceived need among investors and intermediaries
for an informed, reliable and independent opinion on the performance and risks
associated with investing in individual Mutual Fund Schemes. Specifically the
gradings are opinions on the relative past-performance of Mutual-Fund schemes and
the various factors that can influence their future performance.ICRA Mutual Fund
Grading services include:Performance GradingCredit Risk GradingMarket Risk Grading
ADVISORY SERVICESRISK MANAGEMENT PRACTICEThe Risk Management Practice advises
clients on efficient management of credit risks, market risks, and operational
risks. ICRAs clients include commercial banks, financial institutions, multilateral agencies, non-banking finance companies, project financiers, equity
investors, venture capital firms, insurance firms and manufacturing firms. For
manufacturing and service companies, ICRA Advisory offers consultancy in risk
management, planning and control.Counterparty risk assessment: ICRA Advisory has
developed Counterparty Risk Assessment(CPRA) to assess risks that counterparties
are exposed to in the course of buying and selling of goods and services in all
kinds of marketplaces. CPRA is a relative measure of counterpartys ability to

honour the terms of trade. ICRA Advisory offers CPRA as an on-line plug and play
model for e-marketplaces/Virtual Private networks, and as an off-line facility for
organizations desiring to assess counter party risks of buyers/dealers and
suppliers.Credit RiskRegulatory complianceProcesses/systems for credit risk
managementInternal risk rating systemsCredit monitoring systems(including
MIS)Moodys software for credit risk managementOrganization design for risk
managementPortfolio managementIndustry and corporate reportsCredit risk culture
assessmentMarket riskRegulatory complianceAsset-liability managementInterest
rate/liquidity/currency risksHedging strategiesTransfer pricingSoftware for ALM
Integrating ALM with overall planningTraining for Risk managementAnalyzing
financial statements-basic/advancedCredit risk management-middle/senior executives
Understanding ALMCustomized training for bankersOperating RiskDiagnostic analysis
of risk for a companySystems for risk measurementRisk mitigation strategiesInternal
control and corporate governanceREGULATORY PRACTICEICRA advisory Services focuses
on issues concerned with economic aspects of regulation. Instances of the
regulatory practice would be assisting in policy formulation with regard to pricing
of public goods, competition, efficient market making mechanisms, consumer
protection and fair trade practices , subsidies and public-private partnership
structures. Clients of regulatory practice are Governments, regulatory authorities
and municipalities who formulate economic and financial policies. ICRA also work
with corporate entities in formulating their strategies in dealing with regulatory
issues.ICRA advisory Services has worked on several consulting projects concerning
regulatory issues in the areas of power, water, public sector, banking and urban
infrastructure.Functional AreasTariff setting for public goods and servicesEconomic
developmentDevelopment of regulationsFiscal management policiesPrivatization
policiesInstitutional strengtheningDetermining of subsidiesEvaluation of contracts
& agreements

RATING
PROCESSRating is an interactive process with a prospective approach. It
involves series of steps. The main points are described below:Rating request:
Ratings in India are initiated by a formal request (or mandate) from the
prospective issuer. This mandate spells out the terms of the rating assignment.
Important issues that are covered include: binding the credit rating agency to
maintain confidentiality, the right to the issuer to accept or not to accept the
rating and binds the issuer to provide information required by the credit rating
agency for rating and subsequent surveillance.Rating team: The team usually
comprises two members. The
composition of the team is based on the expertise
and skills required for evaluating the business of the issuer.(c )Information
requirements: Issuers are provided a list of information requirements and the
broad framework for discussions. The requirements are derived from the experience
of the issuers business and broadly conform to all the aspects which have a bearing
on the rating.(d)Secondary information: The credit rating agency also draws on the
secondary sources of information including its own research division. The credit
rating agency also has a panel of industry experts who
provide guidance on
specific issues to the rating team. The secondary sources generally provide data
and trends including policies about the industry.(e)Management meetings and plant
visits: Rating involves
assessment of number of qualitative factors with a view
to estimate the future earnings of the issuer. This requires intensive interactions
with issuers management specifically relating to plans, future outlook,
competitive position and funding policies.Plant visits facilitate understanding of
the production process, assess the state of equipment and main facilitates,
evaluate the quality of technical personnel and form and opinion on the key
variables that influence level, quality and cost of production. These visits also
help in assessing the progress of projects under implementations.(f)Preview
meeting: After completing the analysis, the findings are discussed at length in the
internal committee, comprising senior analysts of the credit rating agency. All the
issues having a bearing on the rating are identified. At this stage, an opinion on
the rating is also formed.(g)Rating committee meeting: This is the final authority
for assigning ratings. A brief presentation about the issuers business and the
management is made by the rating team. All the issues identified during discussions
in the internal committee are discussed. The rating committee also considers the
recommendations of the internal committee for the rating. Finally a rating is
assigned and all the issues, which influence the rating, are clearly spelt out.
(h)Rating communication: The assigned rating along with the key issues is
communicated to the issuers top management for acceptance. The ratings which are
not accepted are either rejected or reviewed. The rejected ratings are not
disclosed and complete confidentiality is maintained.(i)Rating reviews: If the
rating is not accepted to the issuer , he has a right to appeal for a review of the
rating. These reviews are usually taken up only if the issuer provides fresh
inputs on the issues that were considered for assigning the rating. Issuers
response is presented to the Rating Committee. If the inputs are convincing, the
Committee can revise the initial rating decision.(j)Surveillance: It is
obligatory on the part of the credit rating agency to monitor the accepted ratings
over the tenure of the rated instrument. As has been mentioned earlier, the issuer
is bound by the mandate letter to provide information to the credit rating agency.
The ratings are generally reviewed every year, unless the circumstances of the
case warrant an early review. In a surveillance review the initial rating could be
retained or revised(upgrade or downgrade) . The various factors that are evaluated
in assigning the ratings have been explained under rating framework.ICRAs Rating
Process
An Overview####
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Initial Stage
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Fact findings and
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Rating Finalisation
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RATING FRAMEWORKThe basic objective of rating is to provide an opinion on the

relative credit risk (or default risk) associated with the instrument being rated.
This in a nutshell includes, estimating the cash generation capacity of the issuer
through operations (primary cash flows) vis--vis its requirements for servicing
obligations over the tenure of the instrument. Additionally , an assessment is also
made of the available marketable securities(secondary cash flows) which can be
liquidated if require d, to supplement the primary cash flow may be noted that
secondary cash flows have a greater bearing in the short term ratings , while the
long term ratings are generally entirely based on the adequacy of primary cash
flows.All the factors whish have a bearing on future cash generation and claims
that require servicing are considered to assign ratings. These factors can be
conceptually classified into business risk and financial risk drivers.Business risk
driversIndustry characteristicMarket positionOperational efficiencyNew projects
Management qualityFinancial risk driversFunding policiesFinancial flexibility
Industry characteristics: This is the most important factor in credit risk
assessment. It is a key determinant of the level and volatility in earnings of any
business. Other factors remaining the same , industry risk determines the cap for
ratings. Some of the factors that are analyzed include:Demand factorsDrivers &
potentialNature of productNature of demand-seasonal, cyclicalBargaining position of
customersState of competitionExisting & expected capacitiesIntensity of competition
Entry barriers for new entrantsExit barriersThreat of substitutesEnvironmental
factorsRole of the industry in the economyExtent of government regulation
Government policies-current and future directionBargaining position of suppliers
Availability of raw materialDependence on a particular supplierThreat of forward
integrationSwitching costsFor credit risk evaluation , stable businesses(low
industry risk) with lower level of cash generation are viewed more favorably
compared to business with higher cash generation potential but relatively higher
degree of volatility. It needs to be mentioned that with the opening up of the
Indian economy, it is also critical to establish international competitiveness both
at the industry and unit level.Market position : All the factors influencing the
relative competitive position of the issuer are examined in detail. Some of these
factors include positioning of the products , perceived quality of products or
brand equity, proximity to the markets, distribution network and relationship with
the customers. In markets where competiveness is largely determined by costs, the
market position is determined by the units operational efficiency. The result of
these factors is reflected in the ability of the issuer to maintain/ improve its
market share and command differential in pricing. It may be mentioned that the
issuers whose market share is declining, generally do not get favourable long term
ratings.Operational efficiency : In a competitive market , it is critical for any
business unit to control its costs at all levels. This assumes greater importance
in commodity or me too businesses, where low cost producers almost always have
an edge. Cost of production to a large extent is influenced by:Location of the
production unitsAccess to raw materialsScale of operationsQuality of technology
Level of integrationExperienceAbility of the unit to efficiently use of its
resourcesA comparison with the peers is done to determine the relative efficiency
of the unit. Some of the indicators for measuring production efficiency are:resource productivity, material usage and energy consumption. Collection efficiency
and inventory levels are important indicators of both the market position and
operational efficiency.New project risks : The scale and nature of new projects
can significantly influence the risk profile of any issuer. Unrelated
diversifications into new products are invariably assessed in greater detail.The
main risks from new projects are:-Time and cost overruns, even non-completion in
an extreme case, during construction phase; financing tie-up; operational risks;
and market risk.Besides clearly establishing the rationale of new projects, the
protective factors that are assessed include: track record of the management in
project implementation, experience and quality of the project implementation team,
experience and track record of technology supplier, implementation schedule, status
of the project, project cost comparisons, financing arrangements, tie-up of raw
material sources , composition of operations team and market outlook and plans.

Management quality : The importance of this factor can not be overemphasized. When
the business conditions are adverse , it is the strength of management that
provides resilience. A detailed discussion is held with the management to
understand its objectives, plans & strategies, competitive position and views about
the past performance and future outlook of the business.These discussions provide
insights into the quality of the management. It also helps in establishing
managements priorities. A review of the organization structure and information
system is done to assess whether it aligns with the managements plans and
priorities. The interactions with key operating personnel help in determining the
quality of the management. Issues like dependence on a particular individual and
succession planning are also addressed.Funding policies :This determines the level
of financial risk. Managements views on its funding policies are discussed in
detail. These discussions are generally focused on the following issues:Future
funding requirementsLevel of leveragingViews on retaining shareholding control
Target returns for shareholdersViews on interest ratesCurrency exposures including
policies to control the currency riskAsset-liability tenure matchingFinancial
flexibility : While the primary source for servicing obligations is the cash
generated from operations, an assessment is also made of the ability of the issuer
to draw on other sources, both internal(secondary cash flows) and external, during
periods of stress.These sources include: availability of liquid investments,
unutilized lines of credit, financial strength of group companies, market
reputation, relationship with financial institutions and banks, investors
perceptions and experience of tapping funds from different sources.Past financial
performance : The impact of the various drivers is reflected in the actual
performance of the issuer. Thus , while the focus of rating exercise is to
determine the future cash flow adequacy for servicing debt obligations, a detailed
review of the past financial statements is critical for better understanding of the
influence of all the business and financial risk factors. Evaluation of the
existing financial position is also important for determining the sources of
secondary cash flows and claims that may have to be serviced in future.Accounting
quality : Consistent and fair accounting policies are a pre-requisite for
financial evaluation and peer group comparisons. It may be mentioned that
accounting quality is also an important indicator of the management quality. Rating
analysts review the accounting policies, notes to accounts and auditors comments in
detail. Wherever necessary, rating analysts adjust the financial statements to
reflect the correct position. Over a period of time the focus of financial analysis
at the credit rating agency has shifted towards evaluation of cash flow statements
as cash flows to a large extent offset the impact of financial engineering.
Indicators of financial performance: Financial indicators over the last few years
are analyzed and performance of the issuer is compared with its peers. Comparison
with peers is important for better understanding of the industry trends and
determining the relative position of the issuer. Some of the important indicators
that are analyzed are presented below:Profitability : A traditional indicator of
success or failure of any business endeavor has been its ability to add to its
wealth or generate profits. A few important indicators are trends in:Return on
capital employedReturn on net worthGross operating marginsHigher profitability
implies greater cushion to debt holders. Profitability also determines the market
perception which has a bearing on the support of share holders and other lenders.
This support can be an important factor during stress. Gearing or level of
leveraging : This is an important determinant of the financial risk. Some important
indicators are:Total debt as a % of net worthLong term debt as a % of net worth
Total outside liabilities as a% of total assetsIt needs to be emphasized that
business risk is a prime driver, while gearing has a secondary role in determining
the overall rating.Coverage ratios : Considered to be of primary importance to the
debt holders. The important ratios are:Interest coverage ratio(OPBIT/Interest)Debt
service coverage ratioNet cash accruals as a % of total debtThe level of these
ratios reflects the result of business risk drivers and the funding policies.
Generally speaking, higher the level of coverage, higher is the rating. However as
mentioned earlier , business with lower level of coverage can get higher ratings if

the earnings are steady.Liquidity position : The indicators of liquidity positions

are , the levels of:InventoryReceivablesPayablesThe state of competition , issuers
market position & policies , relationship with customers and suppliers arte the
important factors that impact the above levels. Comparison with peers on these
indicators helps to determine
the relative position of the issuer in the industry. The funding profile with
respect to matching of asset liability tenures also has an important bearing on
the liquidity position.Cash flow analysis : Cash is required to service
obligations. Thus, any financial evaluation would be incomplete if cash flow
analysis is not carried out. Cash flows reflect the sources from which cash is
generated and it is deployed. Cash flows offset the impact of diverse accounting
policies and hence facilitate peer comparison.Future cash flow adequacy : The
ultimate objective of the rating is to determine the adequacy of cash generation to
service obligations. Number of assumptions based on the future outlook of the
business is made to draw projections of financial statements. Invariably, the
financial projections are carried out for a number of scenarios incorporating a
range of possibilities in the set of assumptions for the key cash flow drivers. A
few important drivers are expectations of growth , selling prices, input costs,
working capital requirements, value of currencies.

Rating Scale by ICRALong-Term including DebenturesLAAA#:#Highest safety.

Indicates fundamentally strong position. Risk factors are negligible. There
may be circumstances adversely affecting the degree of safety but such
circumstances, as may be visualized are not likely to affect the timely
payment of principal and interest as per terms.##LAA+ LAA LAA -##High safety.
Risk factors are modest and may vary slightly. the protective factors are strong
and the prospect of timely Payment of principal and interest as per terms under
adverse circumstances, as may be visualized, differs from LAAA only
marginally.##LA+ LALA-##Adequate safety. Risk factors are more variable and
greater in periods of economic stress. The protective factors are average and any
adverse change in circumstances, as may
be visualized, may alter the
fundamental strength and affect the timely payment of principal and
interest as per terms##LBBB+ LBBBLBBB-#:#Moderate safety. Considerable
variability in risk factors. The protective factors are below average.
Adverse changes in business /economic circumstances are likely to affect the
timely payment of principal and interest as per terms##LBB+ LBBLBB##Inadequate safety. The timely payment of interest and principal is more likely to
be affected by present or prospective changes in business/economic circumstances.
The protective factors fluctuate in case of changes in economy/business
conditions.##LB+ LBLB-#:#Risk-prone. Risk factors indicate that obligations may not
be met when due. The protective Factors are narrow. Adverse changes in business/
economic conditions could result in inability/unwillingness to service debts on
time as per terms.##LC+ LCLC-#:#Substantial risk. There are inherent elements of
risk and timely servicing of debts/obligations could be possible only in case of
continued existence of favourable Circumstances.##LD#:#Default. Extremely
speculative. Either already in default in Payment of interest and/or principal as
per terms or expected to default. Recovery is likely only on liquidation or reorganisation.##Medium-Term including Fixed Deposit ProgrammesMAAA#:#Highest
Safety. The prospect of timely servicing of the Interest and principal as per terms
is the best.##MAA+ MAAMAA-#:#High safety. The prospect of timely servicing of the
interest and principal as per terms is high, but not as high as in MAAA
rating.##MA+ MAMA-#:#Adequate safety. The prospect of timely servicing of the
interest and principal as per terms is adequate. However, debt servicing may be
affected by adverse changes in the business/economic conditions.##MB+ MBMB#:#Inadequate safety. The timely payment of interest and principal is more likely
to be affected by future uncertainties.##MC+ MCMC-#:#Risk prone. Susceptibility to
default is high. Adverse changes in business/economic conditions could result in
inability/unwillingness to service debts on time and as per terms.##MD#:#Default.
Either already in default or expected to default.##Short-Term Commercial Paper A1+
A1#:#Highest safety. The prospect of timely payment of debt/ obligation is the
best.##A2+ A2#:#High safety. The relative safety is marginally lower than in A1
rating.##A3+ A3#:#Adequate safety. The prospect of timely payment of interest and
installment is adequate, but any adverse change in business/economic conditions may
affect the fundamental strength.##A4+ A4#:#Risk prone. The degree of safety is
low . likely to default in case of adverse changes in business/economic
conditions.##A5#:#Default. Either already in default or expected to default.##

RATING OF STRUCTURED OBLIGATIONStructured Obligation (SO) or Structured Finance is

a term that is applied to a wider variety of debt instruments wherein the repayment
of principal and interest is backed by:

Cash flows from sense financial assets and/or Credit enhancement from a third
party.

The process of converting financial assets (loans, receivables, etc.) into tradable
securities is generally referred to as securitization and the securities thus
created are referred to as asset backed securities(AIS).A cash flow structure is
the one in which some or all of the cash flows generated by the identified assets
are dedicated for the payment of principal and interest. The cash flows to the
investors are secured primarily by cash flows from the specific pool of assets.
Credit Enhancement is a form of protection against collateral losses. Examples
include-letter of credit, guarantee, cash reserve account, over collateralization,
etc.A structured obligation can be considered as variation of conventional secured
debt instrument wherein the credit quality of debt obligation is backed by a lien
on identified assets or credit support from third party. In conventional debt
instruments the income/profits made by the company remain the primary source of
debt servicing. However, in the case of structured obligations, a repayment
mechanism is devised in such a way that the debt servicing is taken over by a
specific pool of assets or by a third party which acts as a credit support
provider.Advantages of securitisation The main advantages of securitisation for
companies holding financial assets are listed below:Increased Liquidity: relatively
illiquid assets are converted into tradable securities.Risk Diversification:
securitisation allows the issuer to manage its credit exposure to a particular
borrower/sectors and thus helps in risk diversification of asset portfolios.Higher
Credit Quality: the structure of the instrument can be tailored in such a manner
that a desired credit rating, which is higher than the rating of company holding
the assets is achieved.Asset Liability Management: securitisation offers an
efficient way of tenure matching of assets and liabilities.Funding Sources:
securitisation allows the issuer to find alternate sources of funding and also
raise funds at low costs with improved credit rating.CASH FLOW STRUCTURE
#####
loan
repayments
Transfer of
Payment for
assets
assets
###
loan##
repayments ##
###
Principal
&
Issues
Interest
Payment
Securities
payments
for
Securities
###The Steps in Securitisation Transaction
Step1: Origination-Lender (Banks, NBFCs, etc.) makes a loan to a
borrower for purchase of an asset(car, property, etc.)Step2: Pooling-Large number
of homogenous loans are aggregated or
packaged into a pool. The
maturities and interest rates of pooled loans
are generally the same.
Step3: Sales/Transfer Sale (or transfer ) of assets from originator to an entity
that is generically referred to as a Special Purpose Vehicle or SPV. An SPV may
be a trust, a special purpose bankruptcy remote company or a public sector entity.
Step4: Credit Enhancement-Protection against the failure of borrower to make
interest and principal payments on the loans. Examples include letter of credit,
financial guarantee from a third party, cash collateral or over-collateralisation.
Step5: Issue of ABS SPV issues securities to investors and the proceeds from the
issuance are used to pay the originator for the pool of loans.
Some Conditions
for Securitisation A structured obligation is highly beneficial for issuers who are
in a position to structure appropriate levels of credit protection so that they
achieve the desired credit rating. The conditions under which a securitisation
transaction is highly suited for issuers are:the availability of clearly
identifiable and homogenous pool of assets;relatively predictable stream of cash
flows from the identified assets;a positive interest rate spread which is defined
as the difference between interest earned on the assets and the interest plus
servicing costs of security;the presence of full credit support in the structure.
Rating MethodologyCredit ratings plays a very important role in the issuance of
structured debt instruments. The structure of the instruments is generally quite
complex which makes the task of assigning the credit risk extremely difficult for
lay investors. Credit ratings provide a simple and objective assessment of default

risk in the form of a symbolic indicator which is easy to comprehend. The framework
used for assessing the risk of default involves assessment of three types of riskcredit risk, structured risk and legal risk.Credit Risk: It is the risk of default
by the borrower. It refers to the uncertainty regarding the extent to which the
borrowers of underlying assets backing the security will pay as per terms of
contract. The factors considered in assessment of credit risk are:credit risk
characteristics of the underlying pool of assets;key factors that influence the
incentive and ability of borrowing to pay off their loans;pool selection process;
future performance of the selected pool;Structured Risk: It refers to the manner in
which the transaction is structured to direct the payment stream from the
collateral or support provides to the investors. Assessment of structural risk
includes the following factors:analysis of credit support provider;evaluation of
the size of enhancement and the change in size over time, trigger events;analysis
of liquidity facilitates in structures wherein cash inflows do not match the
payments to the investors;third party risk which is the risk of non-performance of
the various parties such as receiving and paying agent, trustees, etc who are
involved in the transaction;Legal Risk: It refers to the risk of potential
insolvency of the issuer or other parties involved in securitisation transaction.
Assessment of legal risk includes:Evaluation of the manner in which the rights of
the assets are transferred to investors.Legal enforceability of cash flows
structure under various ScenariosCompliance with various laws and regulationsThus
credit rating of a structured obligation is a forward-looking measure of relative
safety level of the structural transaction against credit loss that may occur over
the life of the instrument.

RATING INADEQUACIESRating agencies by making information widely available at a low

cost have increased market efficiency radically over the last few decades. However,
in the credit rating business, unlike any other business, the issuers of
information do not pay for it. It is so because though investors, financial
intermediaries and other end users use the results of the rating agencies, they
actually do not pay for it. The issuer of the financial instruments whose
information is disclosed by the rating agency actually pays it . this is the
basic source of revenue of the rating agencies. This aspect makes the rating
business a different animal. The potential for conflict of interest facing rating
agencies is thus inherent. Diversification:Traditionally, the agencies used to
gather and analyse all sorts of pertinent financial and non-financial information.
Then they used to utilize it to provide a rating of the intrinsic value or quality
of a security. This was considered as a convenient way for investors to judge
quality and make investment decisions. However, they were not the only source of
information. Market based ratings provided by market analysts outside the purview
of the rating agencies, also performed about as well as the agency ratings. This
eventually posed challenges to the rating agencies and emerged as a potential
threat. Rating agencies sell information and survive, based on their ability to
accumulate and retain reputation capital. However , once regulation is passed that
makes it mandatory for a company to incorporate ratings, rating agencies begin to
sell not only information but also valuable property rights associated with
compliance of regulation. This again accentuates the possibility of the rating
agencies to exploit the regulation. Though the rating agencies will never force
any company to buy their information, the companies will always try to oblige the
rating agencies by buying them. As the sale of these products generates revenues
the rating agencies will not be willing to lose them. There lies the potential
conflict of interest. If the companies buy the services of the rating agencies ,
irrespective of the quality aspect, then the reward they expect is definitely a
better rating. Both CRISIL, ICRA have diversified into the consultancy business,
after perceiving the potential threat and partly foreseeing the saturation of the
market for new rating business. Presently both the rating giants provide a well
diversified portfolio of risk-consultancy services. Over the past two decades.
The risk consultancy services of Moodys has become a leading provider to
investors, financial analysts and other end-users in managing the risk in
portfolios of credit exposures to both private and public companies. It allows
credit risk professionals to employ Moodys ratings and credit history experience
to better measure and manage credit risk, to price credit risk, to identify
industry and geographic concentrations , and to measure the impact of the
prospective purchases or sale of debt within a portfolio context. The
international practice is being replicated in India on an increasing basis by ICRA
and CRISIL given the fact that Moodys and S&P hold stakes in each of them
respectively.In the aftermath of the Enron debacle , allegations have been raised
against the rating agencies for not being prompt in identifying the Enron debacle.
It has been opined by various people that had the rating agencies been quick in
envisaging the companys bankruptcy, many investors would have saved themselves
from burning their hands. Holier than thou approachThe rating agencies defending
themselves, say that their job is to portray the true picture of the riskiness
associated with a bond and its likelihood of default in the long run. The
possibility of the rating agencies being jittery of revealing shoddy financial
statements hiding actual transaction cannot be ruled out. With Enron , it is
possible that they thought it better to think twice before having the courage to
say that the emperor is not wearing any clothes. And that took time to downgrade
the company.CONCLUSIONCredit Rating in India is a concept with not too long a
history. Given its significance as an information provider and facilitator for the
efficient allocation of resources by the financial market, credit rating services
will continue to occupy a place of significance in our growing economy. The success
of the system will ultimately hinge on the presentation of credibility and
integrity by the concerned agencies.The rating agencies faces a lot of challenges
specially after the Enron debacle. Allegations have already been raised against

the rating agencies for not doing their job. As the credit rating agencies have to
maintain their own reputation for their survival, it becomes imperative to them to
remain extremely alert to the developments both in the market and within companies.
Mr. Clifford Griep, Chief Credit Officer, S&P says Many changes are underway,
including publishing commentary more frequently so that the markets hear from us
after routine events such as earning calls and management changes. According to
him , the forward looking commentary will enable the investor to identify credit
cliff situations and the change in the credit worthiness of companies over a
period of time. The fast changing economic scenario, increased global competition,
high volatility among investment grade credits and securities price behavior has
fueled the demand for a more complete and rigorous surveillance and commentary from
rating agencies. However , the flipside of prompt down(or up) gradation by the
rating agencies henceforth , will increase the volatility in the stock prices, to a
grate extent. It may also lead to a loss of long-term focus of credit rating.
Another issue that asks for introspection is how the credit rating agencies account
for off-balance sheet deals and the degree of financial disclosure of the company
they rate.The rating agencies must put more focus on the information related to
the off-balance sheet transactions. Clearly, lesser the transparency in financial
disclosure, more is the possibility of surprises to investors. The rating agencies
should more promptly identify companies trying to suppress financial information.

BIBLIOGRAPHYVerma J.C/ Credit Rating(Practice & Procedure), New Delhi, Bharat

Publishing House.SEBI Manual, TaxmannCredit Rating, ICRA , Risky Conflicts,
Chartered Financial Analyst, Rating-Knotty issues, Chartered Financial Analyst,
www. icraindia.comwww.crisil.comwww.businessstandard.com

PREFACEThis study was undertaken to understand the functioning of credit rating

agencies, their role and impact in the capital market in India. Credit Rating
agencies , worldwide has evolved over the years. It was started by rating the
ability of merchants to pay their financial obligations and that of Railroad
Securities. Nowadays the items that are rated include debt, instruments issued by
manufacturing companies, commercial banks, NBFCs, FIs, PSUs and municipalities;
structured obligation; Corporate Governance; Claim paying ability of Insurance
Companies; Construction Entities; Real Estate Developers & Projects; and Mutual
Fund Schemes.Credit Rating is a boon for the common investors in terms of
information which are not always accessible to them and also for the issuers as it
helps them to build a credibility and helps them to raise funds from the market at
a cheaper rate.

CONTENTS

Introduction
--Objective
--Historical Origin
--Concept of Credit Rating
--Use
--SEBI Regulations
Methodology
Credit Rating Agencies in India
ICRA
-Range of services
Rating Process
Rating Framework
Rating of Structured
obligations
Rating Inadequacies
ConclusionAnnexure
Bibliography

ANNEXURE
Source: InternetCredit
Ratings and AnalysisA credit rating is an assessment by a third party of the
creditworthiness of an issuer of financial securities. It tells investors the
likelihood of default, or non-payment, by the issuer of its financial obligations.
____________________________________________What is credit rating??? How is it
generally done?A credit rating assesses the credit worthiness of an individual,
corporation, or even a country. Credit ratings are calculated from financial
history and current assets and liabilities. Typically, a credit rating tells a
lender or investor the probability of the subject being able to pay back a loan.
However, in recent years, credit ratings have also been used to adjust insurance
premiums, determine employment eligibility, and establish the amount of a utility
or leasing deposit.##A poor credit rating indicates a high risk of defaulting on a
loan, and thus leads to high interest rates, or the refusal of a loan by the
creditor.#Personal credit ratings##In countries such as the United States, an
individual's credit history is compiled and maintained by companies called credit
bureaus. In the United States, credit worthiness is usually determined through a
statistical analysis of the available credit data. A common form of this analysis
is a 3-digit credit score provided by independent financial service companies such
as the FICO credit score. (The term, a registered trademark, comes from Fair Isaac
Corporation, which pioneered the credit rating concept in the late 1950s.)##An
individual's credit score, along with his or her credit report, affects his or her
ability to borrow money through financial institutions such as banks.##In Canada,
the most common ratings are the North American Standard Account Ratings, also known
as the "R" ratings, which have a range between R0 and R9. R0 refers to a new
account; R1 refers to on-time payments; R9 refers to bad debt.##The factors which
may influence a person's credit rating are:##* ability to pay a loan#* interest#*
amount of credit used#* saving patterns##Corporate credit rating or#Bond credit
rating##The credit rating of a corporation is a financial indicator to potential
investors of debt securities such as bonds. These are assigned by credit rating
agencies such as Standard & Poor's or Fitch Ratings and have letter designations
such as AAA, B, CC.##Credit rating is done by a credit rating agency..check out
info about that also##A credit rating agency (CRA) is a company that assigns credit
ratings for issuers of certain types of debt obligations. In most cases, these
issuers are companies, cities, non-profit organizations, or national governments
issuing debt-like securities that can be traded on a secondary market. A credit
rating measures credit worthiness, the ability to pay back a loan, and affects the
interest rate applied to loans. (A company that issues credit scores for individual
credit-worthiness is generally called a credit bureau or consumer credit reporting
agency.)##Interest rates are not the same for everyone, but instead are based on
risk-based pricing, a form of price discrimination based on the different expected
costs of different borrowers, as set out in their credit rating. There exist more
than 100 rating agencies worldwide.#Credit rating agencies for corporations#* A. M.
Best (U.S.)#* Baycorp Advantage (Australia)#* Dominion Bond Rating Service
(Canada)#* Fitch Ratings (U.S.)#* Moody's (U.S.)#* Standard & Poor's (U.S.)#*
Pacific Credit Rating (Peru)##Uses of ratings by credit rating agencies##Credit
ratings are used by investors, issuers, investment banks, broker-dealers, and by
governments. For investors, credit rating agencies increase the range of investment
alternatives and provide independent, easy-to-use measurements of relative credit
risk; this generally increases the efficiency of the market, lowering costs for
both borrowers and lenders. This in turn increases the total supply of risk capital
in the economy, leading to stronger growth. It also opens the capital markets to
categories of borrower who might otherwise be shut out altogether: small
governments, startup companies, hospitals and universities.##Ratings use by bond
issuers##Issuers rely on credit ratings as an independent verification of their own
credit-worthiness. In most cases, a significant bond issuance must have at least
one rating from a respected CRA for the issuance to be successful (without such a
rating, the issuance may be undersubscribed or the price offered by investors too
low for the issuer's purposes). Recent studies by the Bond Market Association note
that many institutional investors now prefer that a debt issuance have at least

three ratings. Issuers also use credit ratings in certain structured finance
transactions. For example, a company with a very high credit rating wishing to
undertake a particularly risky research project could create a legally separate
entity with certain assets that would own and conduct the research work. This
"special purpose entity" would then assume all of the research risk and issue its
own debt securities to finance the research. The SPE's credit rating likely would
be very low and the issuer would have to pay a high rate of return on the bonds
issued. However, this risk would not lower the parent company's overall credit
rating because the SPE would be a legally separate entity. Conversely, a company
with a low credit rating might be able to borrow on better terms if it were to form
an SPE and transfer significant assets to that subsidiary and issue secured debt
securities. That way, if the venture were to fail, the lenders would have recourse
to the assets owned by the SPE. This would lower the interest rate the SPE would
need to pay as part of the debt offering.##The same issuer also may have different
credit ratings for different bonds. This difference results from the bond's
structure, how it is secured, and the degree to which the bond is subordinated to
other debt. Many larger CRAs offer "credit rating advisory services" that
essentially advise an issuer on how to structure its bond offerings and SPEs so as
to achieve a given credit rating for a certain debt tranche. This creates a
potential conflict of interest, of course, as the CRA may feel obligated to provide
the issuer with that given rating if the issuer followed its advice on structuring
the offering. Some CRAs avoid this conflict by refusing to rate debt offerings for
which its advisory services were sought.##Ratings use by investment banks and
broker-dealers##Investment banks and broker-dealers also use credit ratings in
calculating their own risk portfolios (i.e., the collective risk of all of their
investments). Larger banks and broker-dealers conduct their own risk calculations,
but rely on CRA ratings as a "check" (and double-check or triple-check) against
their own analyses.##Ratings use by government regulators##Regulators use credit
ratings as well, or permit these ratings to be used for regulatory purposes. For
example, under the Basel II agreement of the Basel Committee on Banking
Supervision, banking regulators can allow banks to use credit ratings from certain
approved CRAs (called "ECAIs" or "External Credit Assessment Institutions") when
calculating their net capital reserve requirements. In the United States, the
Securities and Exchange Commission (SEC) permits investment banks and brokerdealers to use credit ratings from "Nationally Recognized Statistical Rating
Organizations" (or "NRSROs") for similar purposes. The idea is that banks and other
financial institutions should not need to keep in reserve the same amount of
capital to protect the institution against (for example) a run on the bank, if the
financial institution is heavily invested in highly liquid and very "safe"
securities (such as U.S. government bonds or short-term commercial paper from very
stable companies).##CRA ratings are also used for other regulatory purposes as
well. The U.S. SEC, for example, permits certain bond issuers to use a shorten
prospectus form when issuing bonds if the issuer is older, has issued bonds before,
and has a credit rating above a certain level. SEC regulations also require that
money market funds (mutual funds that mimic the safety and liquidity of a bank
savings deposit, but without FDIC insurance) comprise only securities with a very
high rating from an NRSRO. Likewise, insurance regulators use credit ratings to
ascertain the strength of the reserves held by insurance companies.
_________________________________________________________What Is A Corporate Credit
Rating?#by Reem Heakal Before you decide whether to invest into a # HYPERLINK
"http://www.investopedia.com/terms/d/debtsecurity.asp" ##debt security# from a
company or foreign country, you must determine whether the prospective entity will
be able to meet its obligations. A ratings company can help you do this. Providing
independent objective assessments of the credit worthiness of companies and
countries, a # HYPERLINK "http://www.investopedia.com/terms/c/creditrating.asp"
##credit ratings# company helps investors decide how risky it is to invest money in
a certain country and/or security. ##Credit in the Investment World #As investment
opportunities become more global and diverse, it is difficult to decide not only
which companies but also which countries are good investment opportunities. There

are advantages to investing in foreign markets, but the risks associated with
sending money abroad are considerably higher than those associated with investing
in your own domestic market. It is important to gain insight into different
investment environments but also to understand the risks and advantages these
environments pose. Measuring the ability and willingness of an entity - which could
be a person, a corporation, a
security or a country - to keep its financial commitments or its debt, credit
ratings are essential tools for helping you make some investment decisions. ##The
Raters #There are three top agencies that deal in credit ratings for the investment
world. These are: # HYPERLINK "http://www.investopedia.com/offsite.asp?
URL=http://www.moodys.com/cust/default.asp" ##Moody's#, # HYPERLINK
"http://www.investopedia.com/offsite.asp?
URL=http://www2.standardandpoors.com/NASApp/cs/ContentServer?
pagename=sp/Page/HomePg" ##Standard and Poor's# (S&P's) and # HYPERLINK
"http://www.investopedia.com/offsite.asp?URL=http://www.fitchratings.com/" ##Fitch
IBCA#. Each of these agencies aim to provide a rating system to help investors
determine the risk associated with investing in a specific company, investing
instrument or market. ##Ratings can be assigned to short-term and long-term debt
obligations as well as securities, loans, # HYPERLINK
"http://www.investopedia.com/terms/p/preferredstock.asp" ##preferred stock#and
insurance companies. Long-term credit ratings tend to be more indicative of a
country's investment surroundings and/or a company's ability to honor its debt
responsibilities. ##For a government or company it is sometimes easier to pay back
local-currency obligations than it is to pay foreign-currency obligations. The
ratings therefore assess an entity's ability to pay debts in both foreign and local
currencies. A lack of foreign reserves, for example, may warrant a lower rating for
those obligations a country made in foreign currency. ##It is important to note
that ratings are not equal to or the same as # HYPERLINK
"http://www.investopedia.com/terms/b/buy.asp" ##buy#, # HYPERLINK
"http://www.investopedia.com/terms/s/sell.asp" ##sell#or # HYPERLINK
"http://www.investopedia.com/terms/h/hold.asp" ##hold# recommendations. Ratings are
rather a measure of an entity's ability and willingness to repay debt. ##The
Ratings Are In #The ratings lie on a spectrum ranging between highest credit
quality on one end and # HYPERLINK
"http://www.investopedia.com/terms/d/default2.asp" ##default# or "# HYPERLINK
"http://www.investopedia.com/terms/j/junkbond.asp" ##junk#" on the other. Longterm
credit ratings are denoted with a letter: a triple A (# HYPERLINK
"http://www.investopedia.com/terms/a/aaa.asp" ##AAA#) is the highest credit
quality, and C or D (depending on the agency issuing the rating) is the lowest or
junk quality. Within this spectrum there are different degrees of each rating,
which are, depending on the agency, sometimes denoted by a plus or negative sign or
a number. ##Thus, for Fitch IBCA, a "AAA" rating signifies the highest investment
grade and means that there is very low credit risk. "AA" represents very high
credit quality; "A" means high credit quality, and "BBB" is good credit quality.
These ratings are considered to be # HYPERLINK
"http://www.investopedia.com/terms/i/investmentgrade.asp" ##investment grade#,
which means that the security or the entity being rated carries a level of quality
that many institutions require when considering overseas investments. ##Ratings
that fall under "BBB" are considered to be speculative or junk. Thus for Moody's a
Ba2 would be a speculative grade rating while for S&P's, a "D" denotes default of
junk bond status. ##Here is a chart that gives an overview of the different ratings
symbols that Moody's and Standard and Poor's issue: Bond Rating Grade Risk Moody's
Standard & Poor's AaaAAAInvestmentLowest RiskAa AAInvestmentLow RiskAAInvestmentLow
RiskBaaBBBInvestmentMedium RiskBa, BBB, BJunkHigh RiskCaa/Ca/CCCC/CC/CJunkHighest
RiskCDJunk# HYPERLINK "http://www.investopedia.com/terms/d/default2.asp" ##In
Default# ###Sovereign Credit Ratings #As previously mentioned, a rating can refer
to an entity's specific financial obligation or to its general creditworthiness. A
sovereign credit rating provides the latter as it signifies a country's overall
ability to provide a secure investment environment. This rating reflects factors

such as a country's economic status, transparency in the capital market, levels of

public and private investment flows, foreign direct investment, foreign currency
reserves, political stability, or the ability for a country's economy to remain
stable despite political change. ##Because it is the doorway into a country's
investment atmosphere, the sovereign rating is the first thing most institutional
investors will look at when making a decision to invest money abroad. This rating
gives the investor an immediate understanding of the level of risk associated with
investing in the country. A country with a sovereign rating will therefore get more
attention than one without. So to attract foreign money, most countries will strive
to obtain a sovereign rating and they will strive even more so to reach investment
grade. In most circumstances, a country's sovereign credit rating will be its upper
limit of credit ratings. ##Conclusion #A credit rating is a useful tool not only
for the investor, but also for the entities looking for investors. An investment
grade rating can put a security, company or country on the global radar, attracting
foreign money and boosting a nation's economy. Indeed, for emerging market
economies, the credit rating is key to showing their worthiness of money from
foreign investors. And because the credit rating acts to facilitate investments,
many countries and companies will strive to maintain and improve their ratings,
hence ensuring a stable political environment and a more transparent capital
market. by Reem HeakalSome FAQs about Credit RatingWhat is credit rating?##Credit
rating is, essentially, the opinion of the rating agency on the relative ability
and willingness of the issuer of a debt instrument to meet the debt service
obligations as and when they arise.####Why do rating agencies use symbols like AAA,
AA, rather than give marks or descriptive credit opinion?##The great advantage of
rating symbols is their simplicity, which facilitates universal understanding.
Rating companies also publish explanations for their symbols used as well as the
rationale for the ratings assigned by them, to facilitate deeper
understanding.####Why is credit rating necessary at all?##Credit rating is an
opinion expressed by an independent professional organisation, after making a
detailed study of all relevant factors. Such an opinion will be of great assistance
to investors in making investment decisions. It also helps the issuers of debt
instruments to price their issues correctly and to reach out to new investors.
Regulators like Reserve Bank of India (RBI) and Securities & Exchange Board of
India (SEBI) often use credit rating to determine eligibility criteria for some
instruments. For example, the RBI has stipulated a minimum credit rating by an
approved agency for issue of Commercial Paper. In general, credit rating is
expected to improve quality consciousness in the market and establish, over a
period of time, a more meaningful relationship between the quality of debt and the
yield from it. Credit Rating is also a valuable input in establishing business
relationships of various types.####Does credit rating constitute an advice to the
investors to buy?##It does not. The reason is that some factors, which are of
significance to an investor in arriving at an investment decision, are not taken
into account by rating agencies. These include reasonableness of the issue price or
the coupon rate, secondary market liquidity and pre-payment risk. Further,
different investors have different views regarding the level of risk to be taken
and rating agencies can only express their views on the relative credit
risk.####What kind of responsibility or accountability will attach to a rating
agency if an investor, who makes his investment decision on the basis of its
rating, incurs a loss on the investment?##A credit rating is a professional opinion
given after studying all available information at a particular point of time.
Nevertheless, such opinions may prove wrong in the context of subsequent events.
Further, there is no privity of contract between an investor and a rating agency
and the investor is free to accept or reject the opinion of the agency.
Nevertheless, rating is essentially an investor service and a rating agency is
expected to maintain the highest possible level of analytical competence and
integrity. In the long run, the credibility of a rating agency has to be built,
brick by brick, on the quality of its services.####Do rating companies undertake
unsolicited ratings?##Not in India, at least not yet. There is however, a good case
for undertaking unsolicited ratings. It will be relevant to mention here that any

rating based entirely on published information has serious limitations and the
success of a rating agency will depend, to a great extent, on its ability to access
privileged information. Co-operation from the issuers as well as their willingness
to share even confidential information are important pre-requisites. On its part,
the rating agency has a great responsibility to ensure confidentiality of the
sensitive information that comes into its possession during the rating
process.####How reliable and consistent is the rating process? How do rating
agencies eliminate the subjective element in rating?##To answer the second question
first, it is neither possible nor even desirable, to totally eliminate the
subjective element. Rating does not come out of a pre-determined mathematical
formula, which fixes the relevant variables as well as the weights attached to each
one of them. Rating agencies do a great amount of number crunching, but the final
outcome also takes into account factors like quality of management, corporate
strategy, economic outlook and international environment. To ensure consistency
and reliability, a number of qualified professionals are involved in the rating
process. The Rating Committee, which assigns the final rating, consists of
professionals with impeccable credentials. Rating agencies also ensure that the
rating process is insulated from any possible conflicts of interest.####Is it
customary to have the same issue rated by more than one rating agency? Do the
ratings for the same instrument vary from agency to agency?##The answer to both the
questions is yes. In the well-developed capital markets, debt issues are, more
often than not, rated by more than one agency. And, it is only natural that the
opinions given by two or more agencies will vary, in some cases. But it will be
very unusual if such differences are very wide. For example, a debt issue may be
rated DOUBLE A PLUS by one agency and DOUBLE A or DOUBLE A MINUS by another. It
will indeed be unusual if one agency assigns a rating of DOUBLE A while another
gives a TRIPLE B.####Why do rating agencies monitor the issues already rated?##A
rating is an opinion given on the basis of information available at a particular
point of time. As time goes by, many things change, affecting the debt servicing
capabilities of the issuer, one way or the other. It is, therefore, essential that
as a part of their investor service, rating agencies monitor all outstanding debt
issues rated by them. In the context of emerging developments, the rating agencies
often put issues under credit watch and upgrade or downgrade the ratings as and
when necessary. Normally, such action is taken after intensive interaction with the
issuers.####Do issuers have a right of appeal against a rating assigned?##Yes. In a
situation where an issuer is unhappy with the rating assigned, he may request for a
review, furnishing additional information, if any, considered relevant. The rating
agency will, then, undertake a review and thereafter indicate its final decision.
Unless the rating agency had overlooked critical information at the first stage,
(which is unlikely), chances of the rating being changed on appeal are rare.####How
much time does rating take?##The rating process is a fairly detailed exercise. It
involves, among other things, analysis of published financial information, visits
to the issuers office and works, intensive discussion with the senior executives
of issuer, discussions with auditors, bankers, etc. It also involves an in-depth
study of the industry itself and a degree of environment scanning. All this takes
time and a rating agency may take three to four weeks or more to arrive at a
decision, subject to availability of all the solicited information. It is of
paramount importance to rating companies to ensure that they do not, in any way,
compromise on the quality of their analysis, under pressure from issuers for quick
results. Issuers would also be well advised to approach the rating agencies
sufficiently in advance so that issue schedules can be adhered to.####Is it
possible that not satisfied with the rating assigned by one rating agency, an
issuer approaches another, in the hope of getting a better result?##It is possible,
but rating companies do not and should not indulge in competitive generosity. Any
attempt by issuers to play one agency against another will have to be discouraged
by all the rating companies. It may, however, be pointed out here that two rating
companies may, and often do, arrive at different conclusions on the same issue.
This is only natural, as perceptions differ.####Who rates the rating companies?
##Informed public opinion will be the touchstone on which the rating companies have

to be assessed and the success of a rating agency should be measured by the quality
of the services offered, consistency and integrity.####Is the rating assigned for
an instrument or for the Issuer Company?##Both. Rating of instruments would
consider instruments specific characteristics like maturity, credit reinforcements
specific to the issue etc. Issuer ratings consider the overall debt management
capability of an issuer on a medium term perspective, typically three to five
years. While issuer ratings are more often than not, one time assessments of credit
quality, instrument ratings are monitored over the life of the instrument.####Why
are equity shares not rated?##By definition, credit rating is an opinion on the
issuers capacity to service debt. In the case of equity, there is no pre-determined
servicing obligation, as equity is in the nature of venture capital. So, credit
rating in the conventional sense does not apply to equity shares. However, of late,
credit rating agencies offer grading of IPOs which take into account the
fundamentals of the issuer.####If a rating is downgraded, how would it "benefit"
(or compensate ) the investor?##A credit rating is a professional opinion on the
ability and willingness of an issuer to meet debt-servicing obligations. It is an
opinion on future debt servicing capabilities given on the basis, inter-alia, of
past performance and all available information (from audited financial statements,
interaction with company management, banks and financial institutions, statutory
auditors, etc.) at a particular time. While rating agencies make all possible
efforts to project corporate business prospects, industry trends and management
capabilities, many events are unpredictable. Hence, such opinions may prove wrong
in the context of subsequent events. On the occurrence of such an event, a rating
agency can only review and make appropriate changes in the rating. Moreover, when
there are recessionary trends in certain segments of the economy, companies in such
segments or with large exposures to such segments are adversely affected and their
credit ratings get downgraded. Such downgradations are a natural consequence of the
recessionary trends. In other words, credit quality (and credit rating) is dynamic,
not static and all rating agencies review their ratings periodically and make
changes, wherever considered appropriate. Such changes are reported widely through
the media. It is the experience of all rating agencies that some instruments
initially rated as investment grade fall below investment grade or go into default,
over a period of time.##Further, it must be noted that there is no privity of
contract between an investor or a lender and a rating agency and the investor is
free to accept or reject the opinion of the agency. A credit rating is not an
advice to buy, sell or hold securities or investments and investors are expected to
take their investment decisions after considering all relevant factors and their
own policies and priorities. A credit rating is not a guarantee against future
losses. Please also note that credit ratings do not take into account many aspects
which influence investment decisions. They do not, for example, evaluate the
reasonableness of the issue price, possibilities for capital gains or take into
account the liquidity in the secondary market. Ratings also do not take into
account the risk of prepayment by issuer, or interest or exchange risks. Although
these are often related to the credit risk, the rating essentially is an opinion on
the relative quality of the credit risk, based on the information available at a
given point of time.##GLOSSSARY Intermediator:institution that provide
the # HYPERLINK "http://www.duke.edu/~charvey/Classes/wpg/bfglosm.htm" \l
"market" \t "_blank" ##market# function of matching # HYPERLINK
"http://www.duke.edu/~charvey/Classes/wpg/bfglosb.htm" \l "borrow" \t "_blank"
##borrowers# and # HYPERLINK "http://www.duke.edu/~charvey/Classes/wpg/bfglosl.htm"
\l "lender" \t "_blank" ##lenders# or # HYPERLINK
"http://www.duke.edu/~charvey/Classes/wpg/bfglost.htm" \l "traders" \t "_blank"
##traders# Disintermediation: Withdrawal of funds from a # HYPERLINK
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HYPERLINK "http://www.duke.edu/~charvey/Classes/wpg/bfglosi.htm" \l "investment" \t
"_blank" ##invest# them directly
Moody##############################################################################
###################################################################################

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#####M#c#G#r#a#w#-#H#i#l#l### #t#h#a#t# #p#u#b#l#i#s#h#e#s# #f#i#n#a#n#c#i#a#l#
#r#e#s#e#a#r#c#h# #a#n#d# #a#n#a#l#y#s#i#s# #o#n# ### #H#Y#P#E#R#L#I#N#K#
#"#h#t#t#p#:#/#/#e#n#.#w#i#k#i#p#e#d#i#a#.#o#r#g#/#w#i#k#i#/#S#t#o#c#k#"# #\#o#
#"#S#t#o#c#k#"# #\#t# #"_blank" ##stocks# and # HYPERLINK
"http://en.wikipedia.org/wiki/Bond_(finance)" \o "Bond (finance)" \t "_blank"
##bonds#. It is one of the top three companies in this business Audit : An
examination of a # HYPERLINK "http://www.duke.edu/~charvey/Classes/wpg/bfglosc.htm"
\l "company" \t "_blank" ##company's# accounting records and # HYPERLINK
"http://www.duke.edu/~charvey/Classes/wpg/bfglosb.htm" \l "book" \t "_blank"
##books# conducted by an outside professional in order to determine whether
the # HYPERLINK "http://www.duke.edu/~charvey/Classes/wpg/bfglosc.htm" \l
"company" \t "_blank" ##company# is maintaining records according to # HYPERLINK
"http://www.duke.edu/~charvey/Classes/wpg/bfglosg.htm" \l
"generally_accepted_accounting_principals" \t "_blank" ##generally accepted
accounting principles# Underwriting: To guarantee, as to guarantee the #
HYPERLINK "http://www.duke.edu/~charvey/Classes/wpg/bfglosi.htm" \l "issuer" \t
"_blank" ##issuer# of # HYPERLINK
"http://www.duke.edu/~charvey/Classes/wpg/bfgloss.htm" \l "security" \t "_blank"
##securities# a specified price by entering into a # HYPERLINK
"http://www.duke.edu/~charvey/Classes/wpg/bfglosp.htm" \l "purchase_and_sale" \t
"_blank" ##purchase and sale agreement#. To bring securities to # HYPERLINK
"http://www.duke.edu/~charvey/Classes/wpg/bfglosm.htm" \l "market" \t "_blank"
##market# RBI: Reserve bank of India SEBI: Securities and
exchange board of India CRISIL: Credit Rating and Information Services of
India Ltd. ICRA Ltd: Investment Information and Credit Rating Agency of
India Limited. CARE: Credit Analysis and Research Ltd. FITCH: JV
between Duff & Phelps, US and Alliance Capital Limited , Calcutta. Equity
Grading : A service offered by the credit rating agency, ICRA Limited, under which
the agency assigns a grade to an equity issue, at the request of the prospective is
IFCI Ltd.: The Industrial Finance Corporation of India, the first
Development Financial Institution in the country to cater to the long-term finance
needs of the industrial sector. SBI: State bank of India,the biggest PSU
bank in India. LIC: Life Insurance corp. of India, the biggest life
insurer in India and under control of govt of India. UTI: Unit trust of
India PNB: Punjab National Bank GIC: General insurance corp. a
psu and biggest insurer in india,formed for the purpose of
superintending,controlling and carrying on the business of general insurance
Forward integration: The expansion of a business' products and/or
services to related areas in order to more directly fulfill the customer's needs.
Switching costs: cost of # HYPERLINK
"http://www.duke.edu/~charvey/Classes/wpg/bfglosl.htm" \l "liquidation" \t "_blank"
##Liquidating# a # HYPERLINK "http://www.duke.edu/~charvey/Classes/wpg/bfglosp.htm"
\l "position" \t "_blank" ##position# and simultaneously reinstating a position in
another # HYPERLINK "http://www.duke.edu/~charvey/Classes/wpg/bfglosf.htm" \l
"futures_contract" \t "_blank" ##futures contract# of the same # HYPERLINK
"http://www.duke.edu/~charvey/Classes/wpg/bfglost.htm" \l "type" \t "_blank"
##type# Leveraging :Use of # HYPERLINK
"http://www.duke.edu/~charvey/Classes/wpg/bfglosd.htm" \l "debt" \t "_blank"

##debt# to increase the # HYPERLINK

"http://www.duke.edu/~charvey/Classes/wpg/bfglose.htm" \l "expected_return" \t
"_blank" ##expected return# on # HYPERLINK
"http://www.duke.edu/~charvey/Classes/wpg/bfglose.htm" \l "equity" \t "_blank"
##equity#. Financial leverage is measured by the ratio of debt to debt # HYPERLINK
"http://www.duke.edu/~charvey/Classes/wpg/bfglosp.htm" \l "plus" \t "_blank"
##plus# # HYPERLINK "http://www.duke.edu/~charvey/Classes/wpg/bfglose.htm" \l
"equity" \t "_blank" ##equit#y. Currency exposures: The part of a
portfolio that is denominated in a currency (or currencies) other than the base
currency and is not hedged. Currency risk arises from a combination of currency
exposure and currency volatility. Currency hedges reduce (direct) currency exposure
Gross operating margin What remains from # HYPERLINK
"http://www.investorwords.com/4365/sales.html" \t "_blank" ##sales# after a #
HYPERLINK "http://www.investorwords.com/992/company.html" \t "_blank" ##company#
pays out the cost of goods sold. To obtain this margin, divide # HYPERLINK
"http://www.investorwords.com/2249/gross_profit.html" \t "_blank" ##gross profit#
by sales. Gross operating margin is expressed as a percentage. Interest
coverage ratio(OPBIT/Interest) :The ratio of # HYPERLINK
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##earnings# before # HYPERLINK
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##interest# and taxes to annual interest expense. This ratio measures a # HYPERLINK
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##firm's# ability to pay interest Debt service coverage ratio: # HYPERLINK
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##Earnings# before # HYPERLINK
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##interest# and # HYPERLINK
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##income taxes#, divided by # HYPERLINK
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##principal# repayments divided by one # HYPERLINK
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##minus# the # HYPERLINK "http://www.duke.edu/~charvey/Classes/wpg/bfglosa.htm" \l
"average_tax_rate" \t "_blank" ##tax rate# Net cash accruals:???
Equity assessment:??? Great depression: The Great Depression (also known
in the # HYPERLINK "http://en.wikipedia.org/wiki/U.K." \o "U.K." \t "_blank"
##U.K.# as the Great Slump) was a dramatic, worldwide economic downturn beginning
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##security# interest in one or more # HYPERLINK
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##assets# that # HYPERLINK
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financing, additional # HYPERLINK
"http://www.duke.edu/~charvey/Classes/wpg/bfgloss.htm" \l "security" \t "_blank"
##security# pledged to support the project financing Securitization: the
process of conversion of financial assets into tradable securities.
Franchise value: franchise value refers to the popularity of a particular brand or
product with consumers. Capital adequacy : A measure of the financial
strength of a bank or securities firm, usually expressed as a ratio of its capital
to its assets. Enron debacle: After a series of revelations involving
irregular accounting procedures bordering on fraud perpetrated throughout the 1990s

involving Enron and its accounting firm # HYPERLINK

"http://en.wikipedia.org/wiki/Arthur_Andersen" \o "Arthur Andersen" \t "_blank"
##Arthur Andersen#, Enron stood on the verge of undergoing the largest bankruptcy
in history by mid-November 2001. Enron filed for bankruptcy on # HYPERLINK
"http://en.wikipedia.org/wiki/December_2" \o "December 2" \t "_blank" ##December
2#, # HYPERLINK "http://en.wikipedia.org/wiki/2001" \o "2001" \t "_blank" ##2001#.
In addition, the scandal caused the dissolution of # HYPERLINK
"http://en.wikipedia.org/wiki/Arthur_Andersen" \o "Arthur Andersen" \t "_blank"
##Arthur Andersen#, which at the time was one of the world's top accounting firms.
Volatility: A measure of # HYPERLINK
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"http://www.duke.edu/~charvey/Classes/wpg/bfglosv.htm" \l "volatility" \t "_blank"
##Volatility# is a # HYPERLINK
"http://www.duke.edu/~charvey/Classes/wpg/bfglosv.htm" \l "variable" \t "_blank"
##variable# that appears in # HYPERLINK
"http://www.duke.edu/~charvey/Classes/wpg/bfgloso.htm" \l "option_price" \t
"_blank" ##option pricing# formulas, where it denotes the volatility of the #
HYPERLINK "http://www.duke.edu/~charvey/Classes/wpg/bfglosu.htm" \l
"underlying_asset" \t "_blank" ##underlying asset# return from now to the #
HYPERLINK "http://www.duke.edu/~charvey/Classes/wpg/bfglose.htm" \l "expiration" \t
"_blank" ##expiration# of the # HYPERLINK
"http://www.duke.edu/~charvey/Classes/wpg/bfgloso.htm" \l "option" \t "_blank"
##option# Financial disclosure: A # HYPERLINK
"http://www.duke.edu/~charvey/Classes/wpg/bfglosc.htm" \l "company" \t "_blank"
##company's# release of all information pertaining to the company's business
activity, regardless of how that information may influence # HYPERLINK
"http://www.duke.edu/~charvey/Classes/wpg/bfglosi.htm" \l "investor" \t "_blank"
##investors# Differential: A small charge added to the purchase price and
subtracted from the selling pr Liquidation Occurs when a # HYPERLINK
"http://www.duke.edu/~charvey/Classes/wpg/bfglosf.htm" \l "firm" \t "_blank"
##firm's# business is terminated. # HYPERLINK
"http://www.duke.edu/~charvey/Classes/wpg/bfglosa.htm" \l "asset" \t "_blank"
##Assets# are sold, # HYPERLINK
"http://www.duke.edu/~charvey/Classes/wpg/bfglosp.htm" \l "proceeds" \t "_blank"
##proceeds# are used to pay # HYPERLINK
"http://www.duke.edu/~charvey/Classes/wpg/bfglosc.htm"
\l "creditor" \t "_blank" ##creditors#, and any leftovers are distributed to #
HYPERLINK "http://www.duke.edu/~charvey/Classes/wpg/bfgloss.htm" \l
"shareholders" \t "_blank" ##shareholders#. Any # HYPERLINK
"http://www.duke.edu/~charvey/Classes/wpg/bfglost.htm" \l "transaction" \t "_blank"
##transaction# that # HYPERLINK
"http://www.duke.edu/~charvey/Classes/wpg/bfgloso.htm" \l "offset" \t "_blank"
##offsets# or closes out a # HYPERLINK
"http://www.duke.edu/~charvey/Classes/wpg/bfglosl.htm" \l "long_position" \t
"_blank" ##long# or # HYPERLINK
"http://www.duke.edu/~charvey/Classes/wpg/bfgloss.htm" \l "short_position" \t
"_blank" ##short position# Financial engineering: Combining or carving up
existing # HYPERLINK "http://www.duke.edu/~charvey/Classes/wpg/bfglosi.htm" \l
"instruments" \t "_blank" ##instruments# to create new # HYPERLINK
"http://www.duke.edu/~charvey/Classes/wpg/bfglosf.htm" \l "finance" \t "_blank"
##financial# products ####
S.S. COLLEGE OF BUSINESS STUDIES#PAGE #1#
Mandate
Assign Rating
Team
Receive initial information
Conduct basic research

Meetings and visitsAnalysis and Preparation of Report

Purview Meeting
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