PUNJAB COLLEGE OF COMMERCE

Assignment#01

Group Members:

Reg. #

Junaid Subhani

L4F14MCOM0017

Muhammad Abubakar Saleem

L4F14MCOM2005

M.Iftikhar

L4F14MCOM0014

Course:
AFS

Section:
MA-04

Topic:
Credit Rating

Submitted To:
Prof. Abid Noor

Submission Date:
06/04/2016

Credit Rating
Introduction:
Globalization in the investment market with diversification in the types and quantities of
securities issued presents a challenge to institutional and individual investors to analyze risks
associated with investments. Credit ratings provide individual and institutional investors with
information that assists them in determining whether issuers of debt obligations and securities
will be able to meet their obligations with respect to those securities or not.
Credit rating agencies provide investors with analyses and independent assessments of
companies that issue such securities. Credit Rating as financial service has come a long way,
since John Moody first introduced the concept 1909. In Pakistan it started in 1994.
WHAT IT IS:
In common terms the term credit rating commonly refers to a score issued by some concerned
body. Like, a person's credit rating indicates how creditworthy he or she is.
In corporate finance, a credit rating is a "grade" assigned to a bond, bond issuer, insurance
company, or other entity or security to indicate its riskiness.

Definition:
A published ranking that is based on detailed financial analysis by a credit rating agency, of one's
financial history, specifically as it relates to one's ability to meet debt obligations. The highest
rating is usually AAA, and the lowest is D. Lenders use this information to decide whether or not
to approve a loan.

Need For Credit Rating:

Maintenance of investors confidence, since defaults shatter the confidence of investors
in corporate instruments.
Protect the interest of investors who cannot into merits of the debt instruments of a
company.
Motivate savers to invest in industry and trade.

Credit Rating Agencies in Pakistan:

Pakistan Credit Rating Agency, Ltd. (PACRA)
JCR-VIS Credit Rating Co. Ltd.

JCR-VIS Credit Rating Co. Ltd.

CR-VIS is Pakistans only data bank and financial research organization, operating as a Fullservice rating agency and known for providing high quality independent rating services in
Pakistan. JCR-VIS was established in 2001 as a joint venture between Japan Credit Rating
Agency, Ltd.(JCR), Vital Information Services (Pvt.) Limited (VIS), Karachi Stock Exchange
(KSE) and Islamabad Stock Exchange (ISE).
JCR-VIS Rating Process:

Client
JCR-VIS
Client
JCR-VIS
JCR-VIS
JCR-VIS
Client
JCR-VIS
Client
JCR-VIS

In preparing a rating, the JCR-VIS analyst would first review a companys reports and published
figures to determine what additional information was needed from the client. The analyst then
met with the clients senior management (CEO/CFO) to discuss the clients financial position,
earning trends, operating practices, competitive standing, future prospects, the economic
environment and other issues that might affect the clients credit worthiness.
The analyst would keep in contact with the clients for interim figures and other corporate
developments that might affect JCR-VISs assessment. A draft report was then sent to the client
for review to ensure the accuracy of information and that no confidential data was included. The
final report was then reviewed by a Rating Committee.
Once a rating is finalized, the client is under ongoing surveillance by JCR-VIS during which
interim and annual results are reviewed, at least on a quarterly basis, and other client
developments are monitored, based on which JCR-VIS may reevaluate the rating at any time if
such action is warranted. In addition, rated companies are subject to detailed review, normally on
an annual basis.
During and after the process JCR-VIS does not reveal confidential information obtained during
the rating exercise to anyone except the regulators, provided the request is made in writing. This
policy is based on exceptions for regulatory queries. Ratings are valid till withdrawn, suspended
or changed. The relationship with regulators is restricted to providing information and opinions
only when a specific query is referred to JCR-VIS.
Once a preliminary rating has been assigned, JCR-VIS communicates the rating decision to the
company, and explains in detail how JCR-VIS reached its opinion. It involves the key rating
factors driving the rating and perhaps most crucial expectations for the client and how these
expectations are factored into the rating.

The Pakistan Credit Rating Agency Limited (PACRA):

PACRA stands for Pakistan Credit Rating Agency. It was first credit rating Company established
in Pakistan. The primary function of PACRA is to evaluate companies willingness to fulfill its
debt obligations. PACRA is geared to provide a full range of credit rating services. The
ownership and management structure of PACRA ensures complete independence from any direct
or indirect control of the Government, any private sector business group or financial institution.

A rating assigned by the rating committee, which includes senior management of PACRA,
reflects PACRA's objectively formed opinion of credit risk.
Steps in Rating Process:

Mandate Letter:
Following a request from the entity / issuer for a rating, a mandate letter is sent to the client.
Usually the processing time for sending the mandate is 1-2 working days on receipt of the
request. Upon signing, mandate letter becomes a contractual agreement between the entity /
issuer to be rated and PACRA to undertake a rating assignment. It has two separate mandates i.e.
1. Entity Rating Mandate
2. Fee Mandate
Rating Assignment Allocation:
The entity is allocated to one of PACRA's rating teams, each headed by a Unit Head. The initial
introductory letter or email is exchanged briefing the time line for completion of the rating
assignment and other modalities. The respective sub team manager and analyst take care of all
aspects of the rating assignment as per the PACRA's guidelines.

Preliminary Analysis & Information Solicitation:

A Preliminary study is conducted with a careful review of an entity's published information.
From this review, analysts determine what additional information and data are needed. A detailed
questionnaire is sent to the client for soliciting the required financial & non-financial information
over and above that provided in their financial statements and the notes to their accounts. Upon
receipt of the information, an initial rating assessment is made and discussed internally based on
findings of the rating team.
Site Visit:
The respective rating team conducts entity's head office and/or plant visit. The objective of which
is to develop a better understanding of the organizational structure, and quality of the process,
and conduct interview of key department heads and establish a sense of control environment
prevailing in the entity. A detailed itinerary in advance is sent for the said visit.
Management Meeting:
The purpose of Management Meeting is to assimilate the strategic view of the entitys top
management. The participants of the meeting include the respective rating team, Unit Head and
members of apex rating committee from PACRA and the senior management of the client
including the Chief Executive Officer.
Draft Rating Report Review:
Subsequent to the management meeting, a draft detailed rating report is sent to the entity's
management for their feedback on completeness and accuracy of the information contained in
the report. If the report contains anything which is confidential, the client is also expected to
communicate the same. The feedback is expected from the entity within five working days.
Rating Committee:
In finalizing the rating, the relevant team prepares a rating proposal based on the information
gathered through the questionnaire and discussion at the Management Meeting and head
office/site visit.

Pre-Publication Review:
Subsequent to the Rating Committee, PACRA provides rated entities with draft press release and
one page summary report in advance for pre-publication review.
Rating Review Appeal Policy:
In case entity has disagreement with any of PACRA rating opinion, it has the option to appeal for
review of rating opinion within 5 working days of the intimation of the rating action. The appeal
process is covered by PACRAs publicly available Rating Review Appeal Policy.
Notification:
Once the rating has been finalized, it is formally notified to the entity / issuer. The rating
notification is usually accompanied by a final set of rating report and press release.
Public Dissemination:
In an initial rating assignment, the entity's management has the prerogative to make this rating
public or keep it confidential. The management is expected to take this decision within five days
of notification. In case, the entity decides to go for public dissemination. PACRA does so
through its website and other electronic media. It provides all the benefits of a publicly available
independent rating opinion of the entity.
In case of public rating, PACRA, in addition to respective press release, disseminates the
summary report through its website. However, the detailed report is made available against a
nominal fee.
Turnaround Time:
Through experience, we see a timeline spanning six-to-eight weeks to complete a rating
assignment. However, the cooperation of the entity's management with PACRA in terms of
expediting the response to our questionnaire and other requests for information (via timely and
quality information), whenever deemed necessary and sought during the course of the rating
process, aids greatly in facilitating the completion of the rating process within the planned
duration.