IPO Grading Process

IPO Rating
Lecture Prepared By Dr. N S Bohra Assistant Professor Faculty of Management GEU

Importance of Credit Rating

Factors Affecting Assigned Ratings

The security issuers ability to service its debt. issuer The stability of the future cash flows and earning capacity of company. The interest coverage ratio i.e. how many number of times the issuer is able to meet its fixed interest obligations. Ratio of current assets to current liabilities (i.e. current ratio (CR)) is calculated to assess the liquidity position of the issuing firm.

Nature of Credit Rating

Rating is based on information Rating by more than one agency Publication of ratings Rating is for instrument and not for the issuer company. Right of appeal against assigned rating:

Instruments of Rating
Bonds/debentures issued by corporate, government etc. Commercial papers issued by manufacturing companies, finance companies, banks and financial institutions for raising short-term loans. shortFixed deposits raised for medium-term ranking as mediumunsecured borrowings

Rating Other than Debt Instruments

Country Rating (Morgan Stanlay, Moodys) Stanlay, Moodys) Rating of Real Estate Builders and Developers Rating of States Rating of Banks

Functions of a Credit Rating Agency

Provides unbiased opinion. Provides quality and dependable information Provides information at low cost: Provide easy to understand information: Provide basis for investment:

Advantages of Rating To Company

Advantages of Rating
For Investors
Safety of investments. Recognition of risk and returns. Freedom of investment decisions. Wider choice of investments. Dependable credibility of issuer.

Benefits of Rating to the Company

Easy to raise resources. Reduced cost of borrowing. Reduced cost of public issues. Rating builds up image. Rating facilitates growth.

Disadvantages of Credit Rating

Non-disclosure of significant information. NonRating is no certificate of soundness. Rating may be biased. Rating under unfavorable conditions. Difference in rating grades.

Rating Methodology
The following are the main factors that are analyzed into detail by the credit rating agencies.
Business Risk Analysis Financial Analysis Management Evaluation Geographical Analysis Regulatory and Competitive Environment Fundamental Analysis

Rating Methodology
1.Business Risk Analysis
Industry risk Market position of the company Operating efficiency Legal position Size of business

Rating Methodology
3. Financial Analysis 4. Management Evaluation
Accounting quality Earnings potential/profitability Cash flows analysis Financial flexibility

2. Fundamental Analysis liquidity management, profitability and financial position, interest and tax rates sensitivity of the company.

Goals Plans Strategies Corporate Governance

Rating Methodology
5. Geographical Analysis
Geographical Size Location 6. Regulatory and Competitive Environment Regulatory framework of the financial system in which it works. CRAs evaluate the impact of regulation/ deregulation on the issuer company.

Grading System
CRISIL has 4 main grades and a host of subsubgrades. grades
AAA,AA+, AA, AA-, A+, A, A-, AAABBB-, BBB, BBB+, BBBBB+, BB, BB-, BBB+, B, B-, C and D. B-