Rating methodology

Approach to Credit Rating

Company
Rating
Project Risk
Management
Risk
External
Risk
Financial
Risk
Business
Risk
Industry
Risk
Internal
Risk
Overall risk rating
Industry
Projected growth, demand - supply position
trends in consumption
anticipated addition of new capacities (Steel -
bunched capacities lead to over supply )

International competitiveness
increasingly becoming an important issue
leads to event risks such as drop in duties (duties
on Copper)


Industry (contd.)
Cyclicality
affects the stability of cash flows (Traffic on Toll Roads)
financial structure needs to be conservative
Level of consolidation of industry impacts amplitude of
cycle

Regulatory Uncertainty
Telecom industry
event risks

Identification of key success factors


Business Position
Objective is to determine the competitive position
of company in the industry
above EBIDTA level analysis
focus not on financial structure

Standing on key success factors
advantages should be sustainable

Focus on peer comparison


Financial Performance, Position
Financial ratio analysis (in addition to standard
ratios)
PBID/ Net Sales (peer comparison)
Debt/ Cash Accruals

Projected cash flows
free cash flow analysis

Financial flexibility
Debt equity ratio
Market standing

Financial Performance, Position (Contd)
Contingent liabilities (Guarantees,disputed
payments)
Amount
Likelihood of devolvement

Support to group companies
Low yield investments
Committed future investments

Ratings of quite a few flag ship companies are
lower due to the contingent liabilities
Management, Group
Past business, payment record
there is no better proxy than past payment/ credit
record
not just payments, overall credit discipline is
important

Strategic planning, project implementation record

Management structure, succession plans

Overall financial position of the group
Investment Plans
Nature of project

Size of the project (in relation to company
financials)

Financing plan

Implementation Risk
Approvals required
Financial closure
Implementation
Investment Plans
Post Implementation risks
Stabilisation risk, cash flow impact
Market risk
Projected cash flows
Framework similar to company rating

Blending of company, project risks
definition of projects
capping of project ratings

Need for structuring
Group rating concept
Strong linkages between group companies
flag ship gives guarantees/ advances etc
strong financial linkages between companies

Strong case for a group rating
merge financials of all companies
notching to obtain rating of each company

Other Issues
Single customer dependence (JFTC companies)

Strong linkage to another company/ project

EPC companies
bundle of contracts
order book position
receivables level

Parent company support (MNCs)
Other Issues
Importance of company to group/ flagship (group
finance companies)

Cyclicality - rate through the cycle


Other Issues (Contd)
Timely payment

Rating is an ongoing exercise

Incorporates information,expectations as on date

Consistency essential

Measurement of rating performance
Consistency in default rates across categories
Securitisation - Existing Receivables
Top down approach to rating
Start with obligor rating
Contract to be analysed for
Satisfaction of performance
Dilution risks (TDS, residual performance etc.)
Assignability
Set off risks
Legal confirmations
Bankruptcy remoteness
Ring fencing of assets
Approval of charge holders


Securitisation - Future Receivables
Bottom up approach

Start with company rating

Base debt servicing capacity is important

Enhancement based on the structure
Quality of cash flows
Sustainability of cash flows
Legal handle on the cash flows
Protective covenants
Key aspects of rating structured deals
Multi functional approach - credit, legal, taxation
and regulatory aspects

Covenanting is very important
Necessary covenants
Protective covenants
Rights in event of default

Monitoring/ exercise of triggers is very important
Thank You