Dr.N.

Moogana Goud, Professor RITM, Bangalore

CREDIT RATING

An over view of Credit rating

By
Dr.N.Moogana Goud
 Introduction
In a market, financial markets Definition
play the role of efficient
intermediary. They act as a Origin
link between savers and
investors, mobilizing capital Features
on one hand, and efficiently
allocating them between The credit rating
competing users to the other system.
hand.In addition to this an
investor can also base the Major issues.
investment decision on the
grading offered by credit Regulatory
rating agencies. Framework.
Credit rating
symbols.
Dr.N.Moogana Goud, Professor RITM, Bangalore
 Definition
The process of assigning a symbol with specific
reference to the instrument being rated,that acts as an
indicator of the Current opinion on relative capability on the
issuer to service its debt obligation in a timely fashion, is
known as credit rating.

According to the Moody’s, “ A rating on the future ability

and legal obligation of the issuer to make timely payments of
Principal and interest on a specific fixed income security. The
rating measures the probability that the issuer will default on
the security over its life, which depending on the instrument of
the expected monetary loss, should a default occur.

Acc to Standard & poor’s, “ it helps investors by providing

An easily recognizable, simple tool that couples a possibly
Unknown issuer with an informative and meaningful symbol of
credit quality
Dr.N.Moogana Goud, Professor RITM, Bangalore
 Origin of Credit Rating
• Origin in 1840 following the crisis in 1837
• The First Merchantile Credit Agency was
set up in New York By Louis Tappan in
1841.
• First rating guide was published in 1859
• John Broad Street set up the similar
agency in 1849 which published its rating
books in 1857
• In 1900 John Moody founded “ Moody’s
Investors Services and in 1909 Published
his manual of “Rail Road Services”
Dr.N.Moogana Goud, Professor RITM, Bangalore
 IMPETUS

The credit rating system originated in the USA in

seventies.

The high levels of default, which occurred after

Great Depression, in the US capital markets, gave
the impetus for the growth of credit rating.
The default of $82 million of commercial
paper by Penn Central in he year 1970. and the
consequent panic of investor in commercial
papers, resulted in massive defaults and liquidity
crisis.
US made rating Mandatory for institutions
such as Govt Pension funds, and Insurance
companies Dr.N.Moogana Goud, Professor RITM, Bangalore
 IMPETUS

Reasons for the origin of credit rating

agencies
• the increasing role of capital and money markets
consequent to disintermediation.
• Increased securitizaton of borrowing and lending
consequent to disinitermediation.
• Globalization of the credit market.
• The continuing growth of information technology.
• The growth of confidence in the efficiency of the
market mechanism.
• the withdrawal of Govt safety nets and the trend
towards privatization

Dr.N.Moogana Goud, Professor RITM, Bangalore

 Growth of Credit Rating Agencies

1841- Merchantile Credit Agency (USA)

1900- Moody’s Investors Services(USA)
1916- Poor Publishing Company(USA)
1922- Standard Statistics Company(USA)
1924- Pitch Publishing Company(USA)
1941- Standard and Poor(USA)
1074- Thomson Bank Watch(USA)
1975- Japanese Bond Rating Institution (JAPAN)
1987- CRISIL by ICICI (INDIA)
1991- ICRA by IFCI (INDIA)
1994- CARE by IDBI (INDIA)

Dr.N.Moogana Goud, Professor RITM, Bangalore

 Features of Credit
ratings.
• Specificity.
• Relativity.
• Guidance.
• Not a Recommendation.
• Broad Parameters.
• No Guarantee.
• Quantitative and Qualitative.

Dr.N.Moogana Goud, Professor RITM, Bangalore

 The credit rating
system.
Credit rating has facilitated authorities around
the world to issue mandatory rating
requirements. For instance, specific rules
restrict the of new issues that are rated below a
particular grade.

Growth Factors :
• Credibility and Independence.
• Capital Market Mechanism.
• Disclosure requirements.
• Credit Education.
• Creation of Debt Market.

Dr.N.Moogana Goud, Professor RITM, Bangalore

 Major issues
• Investment Vs speculative Grades.
• Continuous Monitoring.
• Grade Surveillance.
• Rating Ceiling.
• Evaluation of Line.
• Ownership Consideration.

Dr.N.Moogana Goud, Professor RITM, Bangalore

 Investment Grade Ratings
S&P and Others

Rating Interpretation
AAA Highest Quality
AA+ High Quality
AA High Quality
High Quality
AA-
Strong Payment Capacity
A+
Strong Payment Capacity
A-
Adequate Payment Capacity
BBB+ Adequate Payment Capacity
BBB Adequate Payment Capacity
BBB-

Dr.N.Moogana Goud, Professor RITM, Bangalore

 Speculative Grade Ratings
S&P and Others Moody's Interpretation

BB+ Ba1 Ongoing uncertainty

BB Ba2 Ongoing uncertainty
BB- Ba3 Ongoing uncertainty
B+ B1 High Risk Obligations
B B2 High Risk Obligations
B- B3 High Risk Obligations
CCC+ Vulnerability to default
CCC Caa Vulnerability to default
CCC- Vulnerability to default
C Ca In Bankruptcy
Dr.N.Moogana Goud, Professor RITM, Bangalore
 Regulatory Framework
credit rating has been made mandatory in
India for issuance of instruments. Following are
some of the important regulatory agencies
connected with credit rating.

SEBI : As per the regulations of SEBI, a public issue of

debentures and bonds convertible/redeemable beyond a
period of 18 months, needs credit rating.
RBI : According to the guidelines of RBI, one of the
conditions for issuance of commercial paper in
India is that the issue must have a rating not
below the P2 grade from CRISIL/A2 grade from
ICRA/PR2 from CARE.

Dr.N.Moogana Goud, Professor RITM, Bangalore

 Rating Framework
Credit rating at providing an opinion on the relative
credit risk associated with an instrument.
while assigning ratings, all the factors that have a
bearing on future cash generation, and claims that
require servicing, are considered. The major factors
that determine the rating profile of a security issue
are discussed below :

Business Factors
1. Nature of industry
2. Market position
3. Efficiency of operation.
4. Project risk
5. Protective factors
6. Quality of management.

Dr.N.Moogana Goud, Professor RITM, Bangalore

Financial Factors :

1.Financing Policies.
2.Flexibility of financial structure.
3.Past track record.
4. Quality of accounting policy.
5.Financial performance indicators.

• Profitability.
• Gearing.
• Coverage ratios.
• Liquidity.
• Cash flow.

Dr.N.Moogana Goud, Professor RITM, Bangalore

 Advantages
1. To investors
. Information service.
. Systematic risk evaluation.
. Professional competency.
. Easy to understand.
. Low cost.
. Efficient portfolio management.
.Other benefits.

Dr.N.Moogana Goud, Professor RITM, Bangalore

2. To Issuers
. Index of faith.
. Bench mark.
. Wider investor base.

3. To Intermediaries
. Efficient practice.
. Effective monitoring

Dr.N.Moogana Goud, Professor RITM, Bangalore

 Drawbacks
• Guidance, not recommendation.
• Based on assumptions.
• Competitive ratings.

Dr.N.Moogana Goud, Professor RITM, Bangalore

 Thank you

Dr.N.Moogana Goud, Professor RITM, Bangalore