Credit Rating: Some recent developments relating to US:

Credit Rating: Some recent developments relating to US

Meaning:
Meaning Credit ratings are one of several tools that investors can use when making decisions about purchasing bonds and other fixed income investments. Credit ratings are forward looking A rating agency evaluates available current and historical information and assesses the potential impact of foreseeable future events. For example, in rating a corporation as an issuer of debt, the agency may factor in anticipated ups and downs in the business cycle that may affect the corporations creditworthiness.

Process(of S&P):
Process(of S&P)

Scale of Major International Raters:

Scale of Major International Raters

Sovereign credit ratings :

Sovereign credit ratings The sovereign credit rating indicates the risk level of the investing environment of a country and is used by investors looking to invest abroad. Ratings are further broken down into components including political risk, economic risk. Credit ratings are not based on mathematical formulas. Instead, credit rating agencies use their judgment and experience in determining what public and private information should be considered in giving a rating to a particular company or government.

Current credit ratings of the governments around the world by S&P :

Current credit ratings of the governments around the world by S&P Green- AAA Purple BB Turquoise- AA Red B Lighter blue A Grey - not rated Darker blue BBB ,

Criteria of Rating(S&P) :
Criteria of Rating(S&P)

US Credit Rating Downgrade 2011:

US Credit Rating Downgrade 2011 Reuters reports The United States lost its top-tier AAA credit rating from Standard & Poor's on Friday in an unprecedented blow to the world's largest economy in the wake of a political battle that took the country to the brink of default S&P reports: We have lowered our long-term sovereign credit rating on the United States of America to 'AA+' from 'AAA' and affirmed the 'A-1+' short-term rating.

Some Stats of US:

Some Stats of US Total government debt - $14,343.1 billion Short-term maturity (1 year and less) - $1,713.4 billion Long-term maturity (greater than 1 year) -$12,613.6 billion Data from the balance of payments of United States- Exports of goods $342,659 million Imports of goods - $(501,904) million Exports of services - $142,088 million Imports of services-$(-101,592) million Receipts of income- $172,239 million Payments of income- $(-132,309) million Unilateral current transfers, net $(-33,360) million

Causes of Downgrading of United States Rating- :

Causes of Downgrading of United States Rating- The breakdown in the ability of the Democratic and Republican parties to govern effectively. This was shown by battle in Congress over the debt-ceiling. After the manner in which the deal was handled, S&P concluded that US governance and policymaking had become less stable, causing the downgrade. Policymaking and political institutions had weakened in the past few months .This has major implications for the nation's budget and debt problems.

Effect of US Downgrade on India :

Effect of US Downgrade on India India is likely to witness volatility over the next few days and the market may trade lower. However, the impact of US credit rating downgrade on the Indian market will not prolong beyond a day or two. At worse, we expect a 5-7% downward impact on the domestic market. US outstanding debt stands at US$ 15 trillion. Foreign countries own nearly US$ 4.5 trillion of this amount. Currently, Indias exposure to US debt stands at US$ 41 billion. We are ranked at 14th position in terms of country having exposure to US debt. China ranks first, having an exposure to the tune of US$ 1.15 trillion exposure. There could be a slowdown in the foreign direct investment, but it would be for a shorter period. The Indian companies may not be able to raise funds from United States because the borrowing cost will go up. While the foreign debt had been cheaper than domestic debt with the US treasury papers themselves now witnessing a higher rate, the borrowing cost will get expensive as international bonds are linked to US treasuries. This downgrade may lead to the pulling out the capital out of US Treasuries and perhaps, the US altogether. This would result in wholesale selling of US$ and declines in its exchange rates. Debt denominated in US$ would become easier to redeem because the INR would be able to buy a lot more US$ than it can now.

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Presentation Transcript

Introduction to Credit Rating :

Introduction to Credit Rating 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. A credit rating tells a lender or investor the probability of the subject being able to pay back a loan. A poor credit rating indicates a high risk of defaulting on a loan, and thus leads to high interest rates.

Introduction to Credit Rating :

Introduction to Credit Rating An assessment of the credit worthiness of individuals and corporations. It is based upon the history of borrowing and repayment, as well as the availability of assets and extent of liabilities. Credit is important since individuals and corporations with poor credit will have difficulty finding financing, and will most likely have to pay more due to the risk of default.

Introduction to Credit Rating :

Introduction to Credit Rating Moodys: Ratings are designed exclusively for the purpose of grading bonds according to their investments qualities. Australian Ratings: A corporate credit rating provides lenders with a simple system of gradation by which the relative capacities of companies to make timely repayment of interest and principal on a particular type of debt can be noted.

Introduction to Credit Rating :

Introduction to Credit Rating Credit rating is an assessment of the capacity of the issuer of debt security by an independent agency, to pay interest and repay principal as per the terms of issue of debt. The ratings are expressed in code numbers which can be easily comprehended by the lay investors. Credit rating, as exists in India, is done for a specific security and not for a company as a whole. A debt rating is not one time evaluation of credit risk, which can be regarded as valid for the entire life of the security. A credit rating does not create fiduciary relationship between the agency and the users

Functions of Credit Rating Agencies :

Functions of Credit Rating Agencies Superior information Low cost information Basis for proper risk, return & Trade off Healthy discipline on corporate borrowers Formulation of public policy guidelines on Institutional investment

Benefits of Credit Rating :

Benefits of Credit Rating Low cost information Quick investment decision Independent investment decision Investor protection

Benefits to rated companies :

Benefits to rated companies Sources of additional certification Increase the investor population Forewarns risk Encourages financial Discipline Merchant bankers job made easy Foreign collaborations made easy Benefits the industry as a whole Low cost of borrowing Rating as a marketing tool

Credit Rating Agencies in India :

Credit Rating Agencies in India Credit Rating Information Services Limited (CRISIL) Investment Information and Credit Rating Agency of India (ICRA) Credit Analysis and research (CARE) Duff Phelps Credit Rating Pvt. Ltd. (DCR India)

Credit Rating Information Services Ltd. :

Credit Rating Information Services Ltd. The first credit agency floated on January 1, 1988. It was jointly started by ICICI and UTI with an equity capital of 4 crores. CRISIL is India's leading rating agency, and is the fourth largest in the world. With over a 60% share of the Indian Ratings market, CRISIL Ratings is the agency of choice for issuers and investors. CRISIL Ratings is a full service rating agency that offers a comprehensive range of rating services. CRISIL Ratings provides the most reliable opinions on risk by combining its understanding of risk and the science of building risk frameworks, with a contextual understanding of business.

Credit Rating Information Services Ltd. :

Credit Rating Information Services Ltd. The principal objective of CRISIL is to rate the debt obligations of Indian companies.Its rating guides the investors about the risk of timely payment of interest and principal on a particular debt instrument. CRISIL's rating process and rating committee are designed to ensure that all assigned ratings are based on the highest standards of independence and analytical rigor. The rating committee comprises members who have the professional competence to meaningfully assess the credit analysis that underlies the rating, and have no interest in the entity being rated. A team of analysts carries out the credit analysis

Credit Rating Information Services Ltd. :

Credit Rating Information Services Ltd. A detailed flow chart of CRISIL's rating process is as under:

Credit Rating Symbols :

Credit Rating Symbols Debenture Rating Symbols High Investment Grades: AAA(triple A): Highest Safety AA (double A): High Safety Investment Grades: A: Adequate Safety BBB (triple B): Moderate Safety Speculative Grades: BB: Inadequate Safety B: High Risk C: Substantial Risk D: Default

Investment Information and Credit Rating Agency of India (ICRA) :

Investment Information and Credit Rating Agency of India (ICRA) ICRA Limited (an Associate of Moody's Investors Service) was incorporated in 1991 as an independent and professional company. ICRA is a leading provider of investment information and credit rating services in India. ICRAs major shareholders include Moody's Investors Service and leading Indian financial institutions and banks. With the growth and globalisation of the Indian capital markets leading to an exponential surge in demand for professional credit risk analysis, ICRA has been proactive in widening its service offerings, executing assignments including credit ratings, equity gradings, specialised performance gradings and mandated studies spanning diverse industrial sectors.

Investment Information and Credit Rating Agency of India (IICRA) :

Investment Information and Credit Rating Agency of India (IICRA) In addition to being a leading credit rating agency with expertise in virtually every sector of the Indian economy, ICRA has broad-based its services for the corporate and financial sectors, both in India and overseas, and currently offers its services under the following banners: Rating Services Information, Grading and Reasearch Services Advisory Services Economic Research Outsourcing

Investment Information and Credit Rating Agency of India (IICRA) :

Investment Information and Credit Rating Agency of India (IICRA) IICRA was set up by Industrial Finance Corporation of India on 16th January 1991. It is a public limited company with an authorized share capital of 10 crores. The initial paid up capital of Rs. 3.50 crores was subscribed by IFC, UTI, LIC, GIC SBI and others.

Investment Information and Credit Rating Agency of India (IICRA) :

Investment Information and Credit Rating Agency of India (IICRA) Long term Debentures Bonds and Preference shares-Rating Symbols LAAA: Highest Safety LAA: High Safety LA: Adequate Safety LBBB: Moderate Safety LBB: Inadequate Safety LB: Risk prone LC: Substantial Risk LD: Default, Extremely speculative

Credit Analysis and Research Limited (CARE) :

Credit Analysis and Research Limited (CARE) The CARE was promoted in 1993 jointly with investment companies, banks and finance companies. Services offered by CARE are Credit rating Information Service Equity Research etc

Credit Analysis and Research Limited (CARE) :

Credit Analysis and Research Limited (CARE) Long term debt instruments-Rating Symbols CARE AAA: Highest Safety CARE AA: High Safety CARE A: Adequate Safety CARE BB: Inadequate Safety CARE B: High Risk For medium term debt instruments CARE AAA: Highest Safety CARE AA: High Safety CARE A: Adequate Safety CARE BB: Inadequate Safety CARE C: High Risk Pp3